Encumbrance is a physical penalty that will lower both your character's mobility and also, temporary, his/her mastery of any physical skills. If the encumbrance penalty is -20% and his/her sword skill level is 42%, the effective skill level is 22%. Due to this, it is suggest that player should drop their heavy stuff when doing activities such as hideworking.
The encumbrance penalty is 2× weight carried / Endurance, that is to say, every Endurance/2 lbs. of weight will increase it by one percent. As long as even a single item is held in your inventory that is not worn clothing totaling less than 1/10 of your weight, encumbrance will always be at a minimum of 1%.
Everything your character carries and wears contribute to this penalty, so while more layers of clothing will keep him/her warmer during winter he/she will also be slowed down. Skiing while wielding a Ski stick will counter the mobility issue, but the physical skills will still suffer.
As of version 3.17, worn armours and clothes cause an encumbrance penalty only after their total weight exceeds one tenth of the character's weight. For example: a 160 lbs character can wear 16 lbs worth of armours and clothes without any penalty from them.
In addition to an encumberance penalty percentage based on endurance, characters have a total carried weight limit, which is a function of the character's body weight (not physique). When this limit is reached, the penalty immediately becomes 100%.