India: Whether Perks Made Under Productivity Bonus, Incentive Schemes Will Attract Employees Provident Fund Act?

Last Updated: 4 December 2002
Article by Shivaji Rao

At the first instance let us read the definition of ‘basic wage’ provided under the EPF, Act, 1952, which is pivotal to calculate the contributions as specified under sec.6 of the Act:

Section 2 (b) of the Act defines : "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 term 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 allowances, overtime alliances, bonus, commission or any other similar allowance payable to the employee in respect of his employment or work done, in such employment;

(iii) any present made by the employer;

Section 6 of the Act however states that for the purpose of calculation of contributions the dearness allowance and retaining allowance if any shall form part while calculating the employer contribution.

Report of the National Commission on Labour dealt with this aspect of the matter under the heading "Wage Incentive or Production Bonus". This is what was stated by the said Commission :

"The incentives given to the labour by their employees for achieving higher productivity, are generally known as incentive bonus or production bonus. In other words the incentive for increased production is generally known as 'production bonus'. Broadly the basis of remuneration for work in industry is based on two fundamental arrangements, viz. (i) payment by time and (ii) payment by output. In the former case, a worker is paid a predetermined amount for a specified unit of time which may be an hour, a day, a week or a month. Under this arrangement, there is no direct control on the amount of work done by the workers except perhaps to a certain extent through supervision so long as he is engaged on tasks specified by the employer. In the latter arrangement, the worker is remunerated according to his output or the output of the group to which he belongs. It may assume complex forms such as 'differential piece work' wherein rates of remuneration per unit of output may be either progressive or regressive. There are also other types of remuneration that are not directly dependent on production, like bonuses for regular attendance, length of service, quality of production and elimination of waste, all constituting an area of wage incentive."

Emphasis added (AIR 2001 SC 3465)

The First and the Second Five year Plans also recommended the introduction of incentive to promote more efficient work in industries with due safeguards to protect the interests of the workers through the guarantee of minimum or fall-back wage and protection against fatigue and undue speed up. In the Second Five year Plan, it was further made clear that earnings beyond the minimum wage should be necessarily related to results and workers should be consulted before a system of payment by results was introduced in such an establishment. The Third Five Year Plan emphasized the need for higher productivity and reduction in the unit cost of production and put the responsibility on the management to provide the most efficient equipment, correct conditions and methods of work, and adequate training and suitable psychological and material incentives for the workers. One thing is clear from the report and the recommendations made in the various Five Year Plans that there is a base of standard above which extra payment is made for extra production in addition to basic wages.

Emphasis added (AIR 2001 SC 3465)

The above question under the context was subjected judicial examination very often. Some of the observations made by the law courts in this regard are dealt here under:

In the case of Bridge & Roof Co., Vs. Union of India, AIR 1963 SC1474, the question raised before the Supreme Court is whether production bonus is included within the term "basic wages" as define in S. 2 (b) of the Employees Provident funds Act, 1952. The Company has a production bonus scheme in force which provides for payment of production bonus over and above the wages fixed by the major engineering award of 1958, published in the Calcutta gazette dated November 5, 1958, which governor 74 major engineering concerns in that region including the Company that award is still in force and has fixed basic wages and dearness allowance on time rate basis for the entire major engineering industry. In addition to basic wages and dearness allowance payable under the award the Company has two production bonus schemes, one for the hourly rated workers and the other for the rest. The main feature of the two schemes is that production bonus begins to be paid on certain rates specified in the two schemes when the output reaches 5,000 tons per year and that no production bonus is paid when the output is less than 5,000 ton per year. In this case the Court held that the scheme and the word bonus falls under the exception clause of sec.2(b) and it outside the definition of the term "Basic Wage" as it is earned as production bonus is payable beyond base or standard and it cannot be for part of the ‘basic wage

Again the similar question was raised before the Apex Court in the case of Jaya Engineering case (AIR 1963 SC 1480) whether in the Scheme, production bonus could be said to start immediately after the first base (namely the quota) or it could only start after the second base (namely the norm. Their lordships took note of the fact that in a typical production bonus scheme, the worker is not bound to produce more than the base or standard even though they may do so in order that his earning capacity may go up and held : "The real base of the production bonus scheme in force in the petitioner company is the norm and not quota and therefore, payment up to the norm whether made in one form the other is basic wage for the purpose of the EPF, Act.

The same view was reiterated by the Rajasthan High Court in the case of D.C.M. Ltd., Vs. R.P.F. Commissioner,(1998) 1 LLJ 979 that "normally, the good work reward could be the good work done during the normal factory hours or during over time hours. In the farmer case the reward would partake the character of basic wage and the latter case the would part of overtime. If it was neither in respect of normal working hours nor in respect of overtime, it would be covered by the definition of wages in section 2 (b). In the instant case, since the employer had not incorporated the amount paid as ‘good work reward’ in the registers required to be maintained in respect of overtime work under the Factories Act and the Rules made there under, the HC held that the said amount was not in the nature of overtime allowance".

Apex Court in the case of Daily Pratap Vs. R.P.F.C (1998) 8 SCC 90, AIR 1999 SC 2015 has dealt - - Employees' Provident Funds and Miscellaneous Provisions Act (19 of 1952), S.2(b), Exception (ii) Applicability Production Bonus Scheme and ingredients necessary for getting it covered under Exception (ii) of S. 2(b) and the Supreme Court laid down as under:

"In order to become a genuine Production Bonus Scheme so as to get covered by exception (ii) to the definition of "basic wages" as found under S. 2(b) of the Act, it must be shown that the scheme in question seeks to offer production bonus to the workmen concerned who put in extra output wherein either collectively bonus be fixed to all of them on the basis of total extra output on a sliding scale or may be paid individually to a given number of workmen who by their own efforts earn such bonus. Thus in each case payment of bonus cannot be of a fixed or proven nature having no nexus with the quantity of extra output produced by them. Payment to be made to meritorious workmen who put in extra output, has to have a direct nexus and linkage with the amount of extra output produced by the eligible workmen so that the scheme can work as a real incentive scheme equally to them to make extra efforts. Such distributable bonus cannot be a static figure.

Emphasis added (AIR 1999 SC 2015)

A mere look at the scheme of the company, which is styled as Production Bonus Scheme, shows that so far as the first category of cases envisaged by the scheme is concerned, it contemplates a situation where at a given point of time the required number of staff may not be available with the likelihood that the production for the day might fall and in order to ensure maintenance of the same level of production other workmen available in the given shift may be required to carry on the extra work than what is normally required to be done by them. In such cases, an extra amount is contemplated to be offered to the remaining employees who are present and who take extra load of work which otherwise would have been discharged by their absentee colleagues. The category of cases contemplated by the first part of the Scheme necessarily indicates that any extra effort undertaken by the workmen discharging extra load of work over and above the usual work expected of them normally is to ensure maintenance of the requisite normal level of production. This situation is entirely different from the one wherein more than normally expected out-turn of work is being made available by the workmen who would get Production Bonus by way of incentive to yield total production beyond its normal level. Consequently, the first category of cases contemplated by the Scheme cannot be said to be introducing any Production Bonus Scheme in the real sense of the term. It in substance is a scheme of insurance against shortfall in normal production per shift due to shortage of available staff at a given point of time.

Emphasis added (AIR 1999 SC 2015)

Moreover the scheme of Production Bonus envisaged by category 2 of the scheme in substance has no nexus or connection with the extra production effort by the workman. In other words, by way of Production Bonus he will not get any extra amount in proportion to the extra output put up by him beyond the norms as compared to his fellow workmen. The payment of Production Bonus as envisaged in category 2 cases under the scheme is not directly linked up with the amount of extra output furnished by the workmen. Consequently, the aforesaid scheme said to be granting Production Bonus to the employees is in substance not a scheme which is directly linked up with extra production nor it is commensurate with the extra production workman-wise or even establishment-wise. It only carves out a category of more efficient workmen or more enthusiastic workmen for being given a flat rate of extra remuneration for discharging their duties more efficiently under the contract of employment. Thus excepted category (ii) as envisaged by definition S. 2(b) would not be available for being invoked by the employer.

Emphasis added (AIR 1999 SC 2015)

The extra payment made under the said scheme cannot also be treated as an incentive allowance. In order to become an incentive allowance, it has to be shown that those eligible workmen who had put in extra output as per para 2 of the scheme would be entitled by way of an incentive to do more work to get additional amount directly linked up with extra output given by them. No such linkage is found from Cl. 2 of the scheme".

In nutshell, the test adopted by the SC in the case ((1998) 8 SCC 90) is that in order to be excluded from 'basic wages' the payment under such a scheme must have a direct nexus and linkage with the amount of extra output. On an examination of the scheme in that case, it was found that less than normal number of workmen doing normal work of a shift, production bonus was given according to the deficiency in the numerical strength of workmen and extra output given by any workman in any shift, output of different types of workmen being measured according to the prescribed norms but production bonus not directly linked with the amount of the extra output furnished by the workman concerned but paid at a uniform rate of his normal wages was held to be not bonus at all and the scheme was not a genuine one. It was not the same as incentive bonus scheme.

It, therefore, becomes clear that in order to become a genuine Production Bonus scheme so as to get covered by exception (ii) to the definition of "basic wages" as found under Section 2(b) of the Act, it must be shown that the scheme to offer production bonus to the workmen concerned who put in extra output wherein either collectively bonus be fixed to all of them on the basis of total extra output on a sliding scale or may be paid individually to a given number of workmen who by their own efforts earn such bonus.

In the light of the above judicial interpretation, unless the item of payment expressly comes under the purview of section 2 (b) read with section 6 of the EPF, Act, each and every case is to be dealt, understood on the ratio laid down by the law courts. Therefore, any kind of incentive norms of any Project clearly specify normal work and extra work to be under taken by the employee to be eligible for the incentive, it may partake the definition of the term ‘basic wage’ under sec.2(b) and may attract section 6 of the Act for deduction of EPF contributions.

This article is not intended to be a definitive analysis of legislative or other changes and professional advice should be taken before any course of action is pursued.

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