Analysis of judgment dated 28.02.2019 of the Supreme Court regarding the inclusion of special allowance in Basic Wage for Provident Fund
The Supreme Court vide its common judgment dated 28.02.2019, in the matter of Civil Appeal No. 6221/2011- RPFC, West Bengal Vs. Vivekananda Vidyamandir; Civil Appeal No. 3965-3966/ 2013- Surya Roshni Ltd. Vs. EPFO; Civil Appeal No. 3969-3970/2013- U- Flex Ltd. Vs. EPFO; Civil Appeal No. 3967-3968/2013- Montage Enterprise Pvt. Ltd. Vs. EPFO and Transfer Case No. 19/2019- The Management of Saint Gobain Glass Ltd. Vs. RPFC dealt with the issue of what constitutes Basic Wages under the EPF & MP Act, 1952.
The issue before the Supreme Court was “Whether special allowance paid by an establishment to its employees would fall within the expression ‘Basic wages” under Section 2 (b) read with Section 6 of the Act for computation of deduction towards PF.”
S.2 (b) defines the term “basic wages” as under:-
“basic wages” means 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 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 allowance payable to the employee in respect of his employment or work done in such employment; (iii) Any presents made by the employer;
From the above definition, it is clear that all emoluments which are earned by an employee other than those specifically excluded components given under clause (i), (ii) & (iii) would be basic wages for the purposes of contribution under the Act.
Section 6 deal with "Contributions and matters which may be provided for in Schemes"
The contribution which shall be paid by the employer to the Fund shall be ten percent 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 exceeding ten percent 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 "ten percent”, at both the places where they occur, the words "12 percent” 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 rounding off of such fraction to the nearest rupee, half of a rupee, or a quarter of a rupee.
Explanation I - For the purposes of this section, dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee.
Explanation II. - For the purposes of this section, "retaining allowance” means an allowance payable for the time being to an employee of any factory or other establishments during any period in which the establishment is not working, for retaining his services.
While deciding the issue, the court placed reliance on the judgment on the following judgments:
In Bridge & Roof Co.(India) Ltd. Vs. Union of India reported in AIR 1963 SC 1474/ 1963 SCR (3) 978/ 1962 II LLJ 490 which was decided by a Constitution Bench held as under:-
“It seems therefore that the basis for the exclusion in clause (ii) of the exceptions in S.2 (b) is that all that is earned in all concerns or by all employees of concern is excluded from basic wages. To this the exclusion of dearness allowance in clause (ii) is an exception.”
The Court laid down the basic principle on a combined reading of S.2 (b) and S.6 as under:
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 specifically paid to those who avail of the opportunity is not basic wages.
c) Conversely, any payment by way of a special incentive or work is not basic wages.
In Muir Mills Co. Ltd., Kanpur Vs. Its Workmen reported in AIR 1960 SC 985, the Supreme Court observed as under:
“11. Thus understood "basic wage" never includes the additional emoluments which some workmen may earn, on the basis of a system of bonuses related to the production. The quantum of earning in such bonuses varies from individual to individual according to their efficiency and diligence; it will vary sometimes from season to season with the variations of working conditions in the factory or other places where the work is done; it will vary also with variations in the rate of supplies of raw material or in the assistance obtainable from machinery. This very element of variation excludes this part of workmen's emoluments from the connotation of "basic wages"…”
In Manipal Academy of Higher Education vs. Provident Fund Commissioner reported in 2008 LIC 1763 / 2008, II LLJ 666/ 2008(5) SCC 428 relying upon Bridge Roof’s case it was observed:
“10. The basic principles as laid down in Bridge Roof's case (supra) on a combined reading of Sections 2(b) and 6 are as follows:
(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.”
After analyzing the above judgments, the Court after considering the submissions of the parties held that the test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have 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 Court stated.
The Court held that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.
Thus the court decided that special allowance would be covered under the term ‘basic wages’ under the Act.
The ratio of the judgment:
Universal component of wages, which means the component being paid to all employees of the establishment, irrespective of cadre, level, and designation.
Example: Special allowance, transportation allowance etc.
The components of wages which are earned by putting extra efforts availing the opportunity available under the contract of employment, hence being paid to those who avail the opportunity and fulfill it as per the terms. It is obvious that such components would not be universal.
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