"Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under section 6 of the Act."
The Hon'ble Supreme Court of India vide its judgment dated 28/02/20193 (the "Judgment") held that all amounts, whether or not categorized as "allowances", if paid equally across the board to all employees, should be considered as part & parcel of the "basic wage" for the purpose of calculation of provident fund ('PF') contribution under section 6 of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 (the "Act").
The Hon'ble Supreme Court of India vide its judgment dated 28/02/20193 (the "Judgment") held that all amounts, whether or not categorized as "allowances", if paid equally across the board to all employees, should be considered as part & parcel of the "basic wage" for the purpose of calculation of provident fund ('PF') contribution under section 6 of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 (the "Act").
The Hon'ble Apex Court while hearing a bunch of Appeals had before itself quite a variety of allowances forming part of the salary structures applied by the parties to these proceedings respectively, namely
- travel / conveyance allowance
- canteen allowance,
- lunch incentive,
- management allowance,
- education allowance,
- food concession,
- medical allowance,
- night shift incentives,
- city compensatory allowance, and
- special allowance (collectively referred to as "Special Allowances")
The Hon'ble Court was to decide whether the Special
Allowances paid by an establishment / employer to its employees
would fall within the definition of basic wages in the context of
calculating contributions to PF!
The PF Authority before the Court submitted that Special
Allowances are nothing but camouflaged permissible allowance liable
to deduction as part of basic wage. And that the Act was a social
beneficial welfare legislation meant for protection of the weaker
sections of the society, i.e. the workmen, and was therefore,
required to be interpreted in a manner to sub-serve and advance the
purpose of the legislation. Under section 6 of the Act, the
employer was liable to pay contribution to the provident fund on
basic wages, dearness allowance, and retaining allowance (if any).
To exclude any incentive wage from basic wage, it should have a
direct nexus and linkage with the amount of extra output. Relying
on Bridge and Roof case (supra), it was submitted that whatever is
payable by all concerns or earned by all permanent employees had to
be included in basic wage for the purpose of deduction under
section 6 of the Act. It is only such allowances not payable by all
concerns or may not be earned by all employees of the concern, that
would stand excluded from deduction. It is only when a worker
produces beyond the base standard, what he earns would not be a
basic wage but a production bonus or incentive wage which would
then fall outside the purview of basic wage under section 2(b) of
the Act.
In response, the employer/establishments contended that basic
wages defined under section 2(b) contains exceptions and will not
include what would ordinarily not be earned in accordance with the
terms of the contract of employment. Even with regard to the
payments earned by an employee in accordance with the terms of
contract of employment, the basis of inclusion in section 6 and
exclusion in section 2(b)(ii) is that whatever is payable in all
concerns and is earned by all permanent employees is included for
the purpose of contribution under section 6. However, whatever is
not payable by all concerns or may not be earned by all employees
of a concern are excluded for the purposes of contribution.
Dearness allowance was payable in all concerns either as an
addition to basic wage or as part of consolidated wages. Retaining
allowance was payable to all permanent employees in seasonal
factories and was therefore included in section 6. But, house rent
allowance is not paid in many concerns and sometimes in the same
concern, it is paid to some employees but not to others, and would
therefore stand excluded from basic wage. Likewise, overtime
allowance though in force in all concerns, is not earned by all
employees and would again stand excluded from basic wage. It is
only those emoluments earned by an employee in accordance with the
terms of employment which would qualify as basic wage and
discretionary allowances not earned in accordance with the terms of
employment would not be covered by basic wage. The Act itself
excludes certain allowance from the term basic wages. The exclusion
of dearness allowance in Section 2(b)(ii) is an exception but that
exception has been corrected by including dearness allowance in
section 6 for the purpose of contribution. Basic wage, would
not ipso-facto take within its ambit the salary breakup structure
to hold it liable for provident fund deductions when it was paid as
special incentive or production bonus given to more meritorious
workmen who put in extra output which has a direct nexus and
linkage with the output by the eligible workmen. When a worker
produces beyond the base or standard, what he earns was not basic
wage. This incentive wage will fall outside the purview of basic
wage.
STATUTORY MANDATE
As per the Act, the Scheme made thereunder and as examined by
the Hon'ble Court, following provisions are noteworthy:
1. Basic Wages mean all emoluments which are earned by
an employee while on duty or on leave or on holidays with wages in
either case in accordance with the terms of the contract of
employment and which are paid or payable in cash to him, but does
not include- (i) the cash value of any food concession; (ii) any
dearness allowance that is to say, all cash payments by whatever
name called paid to an employee on account of a rise in the cost of
living, house-rent allowance, overtime allowance, bonus, commission
or any other similar allowance payable to the employee in respect
of his employment or of work done in such employment; (iii) any
presents made by the employer;5
2. The contribution which shall be paid by the employer to the
Fund shall be 10% of the Basic Wages, dearness allowance and
retaining allowance (if any), for the time being payable to each of
the employees (whether employed by him directly or by or through a
contractor)] and the employees' contribution shall be equal to
the contribution payable by the employer in respect of him and may,
if any employee so desires be an amount not exceeding 10% of his
basic wages, dearness allowance and retaining allowance (if any),
subject to the condition that the employer shall not be under an
obligation to pay any contribution over and above his contribution
payable under this section. Provided that in its application to any
establishment or class of establishments which the Central
Government, after making such inquiry as it deems fit, may, by
notification in the Official Gazette specify, this section shall be
subject to the modification that for the words 10%, at both the
places where they occur, the words 12% shall be substituted.
Provided further that where the amount of any contribution payable
under this Act involves a fraction of a rupee, the Scheme may
provide for the rounding off such fraction to the nearest rupee,
half of a rupee or quarter of a rupee. Clarified that dearness
allowance shall be deemed to include also the cash value of any
food concession allowed to the employee and "retaining
allowance" means an allowance payable for the time being to an
employee of any factory or other establishment during any period in
which the establishment is not working, for retaining his
services.6
In simple & concise words, the definition of basic
wage explicitly excludes cash value of food concessions,
dearness allowance, house-rent allowance, overtime allowance,
bonus, commission, presents made by the employer. Section 6 of the
Act states that the contribution to PF shall be a percentage of the
aggregate of basic wages, dearness allowance and retaining
allowance (if any) payable to each of the employees. Currently, the
contribution rate is 12% for establishments with 20 or more
employees, and 10% for establishments with less than 20
employees.
TEST OF UNIVERSALITY7
The test is uniform treatment or nexus underdependent on
individual work.8 In other words, where the employees
are free to avail or not to avail any of the allowance and/or the
extent of such allowance varies amongst employees, the test of
universality is, therefore, not satisfied at all. It is to be noted
that any amount of contribution cannot be based on different
contingencies and uncertainties.
BASIC PRINCIPLES - BRIDGE ROOF'S CASE (SUPRA)
(a) Where the wage is universally, necessarily and ordinarily
paid to all across the board such emoluments are basic wages,
(b) Where the payment is available to be specially paid to those
who avail of the opportunity is not basic wages. By way of example
it was held that overtime allowance, though it is generally in
force in all concerns is not earned by all employees of a concern.
It is also earned in accordance with the terms of the contract of
employment but because it may not be earned by all employees of a
concern, it is excluded from basic wages.
(c) Conversely, any payment by way of a special incentive or
work is not basic wages.
COURT'S VIEW
The Hon'ble Supreme Court while passing the Judgment
observed as under:
Basic wage, under the Act, has been defined as all emoluments
paid in cash to an employee in accordance with the terms of his
contract of employment. But it carves out certain exceptions which
would not fall within the definition of basic wage and which
includes dearness allowance apart from other allowances mentioned
therein. But this exclusion of dearness allowance finds inclusion
in section 6. The test adopted to determine if any payment was to
be excluded from basic wage is that the payment under the scheme
must have a direct access and linkage to the payment of such
special allowance as not being common to all. The crucial test is
one of universality. The employer, under the Act, has a statutory
obligation to deduct the specified percentage of the contribution
from the employee's salary and make matching contribution. The
entire amount is then required to be deposited in the fund within
15 days from the date of such collection.
Under the Judgment while applying the crucial test of
universality, the Hon'ble Supreme Court observed that only
those emoluments earned by an employee in accordance with the terms
of employment, would qualify as basic wages and any discretionary
allowances not earned in accordance with the terms of employment,
would not be included in the calculation of basic wages. Any such
payments, which are ordinarily not made universally, ordinarily and
necessarily to all employees, will not fall within the definition
of basic wages. Therefore, the calculation of basic wages would not
take into account any special incentive or bonus given which has a
direct nexus and linkage with the output of an eligible
workers.
PRECEDENTS
The Hon'ble Court relied upon the following case-laws while
passing the Judgment:
1) Bridge & Roof case (supra) - Despite the use of
the terminology "all emoluments" contained in section
2(b) of the Act, there were certain exclusions laid down in
sub-clauses (i) and (iii), to exclude those presents, which would
not be earned in accordance with the terms of the contract of
employment. Further, sub-section (ii) lies as an exception, the
payments which are earned by an employee in accordance with the
terms of his contract of employment. Hence, even though no logical
pattern can be determined for the basis of the exceptions in the
three sub-section of section 2(b) of the Act, it is conclusive that
they must be earned by employees in accordance with the terms of
the contract of employment. Further, section 6 includes dearness
allowance for purposes of contribution to the PF. Conclusively, the
basis of its exclusion under section 2(b) and inclusion under
section 6 is that whatever is payable in all concerns and is earned
by all permanent employees is included for the purpose of
contribution to PF;
2) Muir Mills Co. Ltd., Kanpur vs. Its Workmen (AIR1960
SC 985) - "any variable earning which may vary from individual
to individual according to their efficiency and diligence would
stand excluded from the term "basic wages";
3) Manipal Academy of Higher Education vs. Provident Fund
Commissioner ((2008) 5 SCC 428) - The emoluments which are
universally, ordinarily and necessarily paid to all employees are
basic wages. The payment specially availed by those who avail of
the opportunity is not basic wage. Any payment by way of a special
incentive or work is not basic wage;
4) Kichha Sugar Company Limited through General Manager vs.
Tarai Chini Mill Majdoor Union, Uttarakhand ((2014) 4 SCC 37)
- "when an expression is not defined, one can take into
account the definition given to such expression in a statute as
also the dictionary meaning";
5) The Daily Pratap vs. The Regional Provident Fund
Commissioner, Punjab, Haryana, Himachal Pradesh and Union
Territory, Chandigarh ((1998) 8 SCC 90) - the Act was a piece
of beneficial social welfare legislation and must be interpreted as
such in its judgment.
DECISION
The Hon'ble Court upheld the wage structure and components
of salary examined in the Appeals had been correctly determined by
the PF Authority under the Act and the respective High Courts as a
part of the basic wage camouflaged as part of an allowance so as to
avoid deduction and contribution to the PF account of the
employees. The Hon'ble Court held that the establishments
before the court had failed to demonstrate that the allowances in
question herein were being paid to its employees as an incentive
for production resulting in greater output and were not paid to all
employees across the board. The Hon'ble Court clarified that in
order for the amount to exceed beyond basic wages, it has to be
established that the workmen concerned had become eligible to get
this extra amount by working beyond his normal work that he was
required to put in. The Hon'ble Supreme Court concluded that in
accordance with the test of universality, the Special
Allowances formed part of the basic wage and had/are to be factored
in while making PF contribution.
CONCLUSION
The Judgment clarifies that the aspect of basic wages, ensuring
appropriate compliance of the provisions of the Act, which have
been subject to varied interpretation and challenge by several
organizations. Per Judgment, since most allowances will no longer
be excluded from basic wage, the amount of contribution to be made
by the establishment / employer and employee towards PF will
significantly increase. While this would result in a reduction of
the salary in-hand received by the employee, the accumulation in
the employees' PF account would increase. As always, the onus
remains on the establishment/ employer to ensure that it takes into
account the relevant components of salary, in ensuring compliance
with its obligations under the Act.
Footnotes
1 Bridge and Roof Co. (India) Ltd. vs. Union of
India, (1963) 3 SCR 978
2 Judgment passed by bench comprising of Hon'ble
Mr. Justice Arun Mishra
and Hon'ble Mr. Justice Navin
Sinha
3 h t t p s : / / w w w . s u p r e m e c o u r t o f
i n d i a . n i c . i n
/supremecourt/2008/2232/2232_2008_Judgement_28-Feb-2019.pdf
4 Civil Appeal no. 6221/2011, 3965-66/2013,
3969-70/2013, 3967-68/2013and Transfer Case no. 19/2019 (arising
out of TP(C) no. 1273/2013)
5 Section 2(b) of the Act
6 Section 6 of the Act
7 the quality or state of being universal ( existing
everywhere, or involving everyone )
8 Daily Partap v. Regional Provident Fund
Commissioner (1999)ILLJ1SC
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