"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."1
The Hon'ble Supreme Court of India2 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").
MATTER BEFORE THE HON'BLE COURT
The Hon'ble Apex Court while hearing a bunch of Appeals4 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.
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.
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.
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.
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.
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.
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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