SUPREME COURT OF INDIA ON WHAT SHALL CONSTITUTE ‘BASIC WAGES’
SUPREME COURT OF INDIA ON WHAT SHALL CONSTITUTE ‘BASIC WAGES’ UNDER THE EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952
“Emoluments that are universally, ordinarily and necessarily paid to all shall be considered as a part of a Basic Wages”
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QUESTION OF LAW
The common question of law before the Apex Court was:
“Whether special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund?”
The brief facts of all the Appeals are as under:
Civil Appeal No. 6221 of 2011:
It was regarding an unaided school giving special allowance (SA) by way of incentive to teaching and non-teaching staff which was reviewed from time to time upon enhancement of tuition fee.
Civil Appeal Nos. 3965-66 of 2013:
In this appeal, the Appellant was paying basic wage along with variable dearness allowance (VDA), house rent allowance (HRA), travel allowance (TA), canteen allowance and lunch incentive. Deductions for PF were not made from the SA aforementioned.
Civil Appeal Nos. 3969-70 of 2013:
The Appellants were not deducting PF contribution on HRA, SA, management allowance and conveyance allowance by excluding it from basic wage.
Civil Appeal Nos. 3967-68 of 2013:
The Appellant Company was not deducting PF contribution on HRA, SA, Management allowance and Conveyance Allowance by excluding it from basic wage.
Transfer Case (C) No. 19 of 2019 :
The Petitioner filed a writ petition against the show cause notice issued by the authority under the Act calling for records to determine if conveyance allowance, education allowance, food concession, medical allowance, special holidays, night shift incentives and city compensatory allowance constituted part of basic wage.
RELEVANT PROVISIONS OF THE ACT
The relevant provisions of the Act which are required to be necessarily referred to are as under:
Section 2(b) of the Act:
“(b) ‘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 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;”
Section 6 of the Act:
“6. Contributions and matters which may be provided for in the Scheme
The contribution which shall be paid by the employer to the Fund shall be [ten per cent] 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 [ten per cent] 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 per cent], at both the places where they occur, the words [twelve per cent] 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 of such fraction to the nearest rupee, half of a rupee or quarter of a rupee.
Explanation [11 : 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 2 : For the purposes of this [section], “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.]”
REASON OF JURISPRUDENCE
This Hon’ble Court held that the Act had defined “Basic Wage” under Section 2(b) to exclude dearness allowance and a few allowances mentioned therein. However, dearness allowance finds inclusion in Section 6.
The Hon’ble Court observed that the crucial test adopted to determine if any payment was to be excluded from basic wage, was one of Universality.
To elaborate on this point, the Hon’ble Court opined as follows:
“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.”
This Bench took aid of the interpretation adopted by this Hon’ble Court in Bridge & Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR 978.
In the aforementioned Judgment, it was explained that despite the use of the terminology “all emoluments” contained in definition clause 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-clause (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-clauses 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.
This Hon’ble Court further referred to its judgment in Muir Mills Co. Ltd., Kanpur vs. Its Workmen, AIR1960 SC 985 wherein it was held that “any variable earning which may vary from individual to individual according to their efficiency and diligence would stand excluded from the term “basic wages”.
Additionally, this Hon’ble Court referred to Manipal Academy of Higher Education vs. Provident Fund Commissioner (2008) 5 SCC 428, wherein it was summarized as follows:
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.