Introduction
The Supreme Court decision in Union of India v Heavy Vehicles Factory Employees’ Union and Another Civil Appeal Nos.5185-5192 of 2016 wherein it was held that, in calculating the overtime payments under Section 59 of the Factories Act, 1948 (hereinafter referred to as the “Act”) compensatory allowances are to be included has not only drawn attention on its own merits, but also on the questions it raises in the post-Labour Codes era. Even though the ruling is based squarely on the statutory framework of the Act, it comes around a time when Indian labour law has experienced a massive restructuring in the form of the Occupational Safety, Health and Working Conditions Code, 2020 (hereinafter referred to as the “OSH Code”) and the Code on Social Security, 2020 (hereinafter referred to as “CoSS”). When the Act was repealed and the new definition of the term “wages” was unified and made more restrictive, however, an important question arose as to whether, and to what extent, the thinking of the Supreme Court can be applied to the calculation of overtime wages in the new dispensation. This problem has become particularly topical in the context of growing the dependence of salaries on allowances across industries. Although the statutory text has undoubtedly been altered, the protective philosophy underlying overtime regulation continues to exist. It is against this background marked by the tension between legislative restructuring and judicial principle that the present debate must be contextualized.
Supreme Court’s interpretation of the Overtime Wages in the Act
Section 59 of the Act required payment of overtime wages at twice the ordinary rate of wages. Judicial interpretation of this provision has historically adopted an inclusive approach, encompassing basic wages as well as allowances that are regularly paid, while expressly excluding bonus payments and previous overtime wages. The case before Supreme Court specifically examined whether compensatory allowances such as heat allowance or dust allowance could be excluded on the ground that they were contingent or situational in nature. The Court rejected this argument and held that compensatory allowances which are paid regularly and ordinarily, in accordance with the nature of work and prevailing working conditions, form part of the normal wage structure of the worker. The Court emphasized that overtime provisions are not intended as a mechanism for mere additional remuneration, but as a legislative safeguard designed both to compensate workers for the additional burden of extended working hours and to deter employers from imposing excessive hours of work. The omission of compensatory allowances, the Court observed, would lead to overtime being cheaper specifically in the most gruelling working conditions, hence nullifying the protective value of the law. Importantly, the Court’s reasoning was not confined to a literal interpretation of the provision. It reaffirmed the settled principle that labour welfare legislation must be interpreted purposively, with emphasis on economic reality rather than the formal structure of contracts or artificial segmentation of wages. The decision thus reinforces the judiciary’s longstanding resistance to wage-structuring practices that dilute statutory entitlements.
Redefinition of “Wages” under the Labour Codes
The Labour Codes identify a calculated break with the labour structure of wages in the Act. The CoSS provides an integrated and standardized definition of the term “wages” , under which only basic pay, dearness allowance, and retaining allowance are included, while other allowances such as special allowances and compensatory allowances are expressly excluded, subject to a cap of fifty per cent of the total remuneration The OSH Code effectively regulating the working conditions and hours of work, connects the overtime wages with this definition and regulates them by recommending their payment in proportion to twice the rate of wages. This redefined definition on a plain meaning seems to score highly in limiting overtime computation in terms of compensatory allowance. The Codes also lack the comprehensive definition of the Act, which can easily be used to expand judicial authority. Employers can thus contend that any compensatory allowance, which is explicitly outside the CoSS provisions cannot be incorporated in overtime payables due under the OSH Code. But this kind of construction, though attractive in the text, does not entirely work with the logic and protective mechanisms entrenched in the definition of the new wage.
Continuing Relevance of Supreme Court Rationale
However, despite the change in the statutory language, the nature of overtime has not changed. The Labour Codes do not re-conceptualize the overtime as a commercial or contractual right. Overtime still serves as a statutory safeguard, to correct the natural disparity of bargaining power within employment relationships. Moreover, the definition of the wages in CoSS is supplemented by a clear anti-evasion rule, the fifty percent rule. It is indicative of such a level of risk as perceived by the legislation that employers can undo the statutory wage-related entitlements through excessive recourse to allowances. Where allowances such as compensatory allowances form a large, routine and consistent part of remuneration, the Code requires reclassification to prevent the use of artificially low wage component. In this context, the Supreme Court’s emphasis on substance over form retains persuasive value. Courts can be approached to investigate the reality of compensatory allowances to be variable or contingent, or they may be inherently attached to the nature of work and be representative of the normal earnings of the worker. Such a strict prohibition on such a case may be subject to some criticism provided that it serves to compromise the protective nature of the overtime provisions.
Restriction to Direct Application of Pre-Code Jurisprudence
Simultaneously, it would be theologically inappropriate to propose that the judicial decisions in the Act can be transplanted into the Labor Codes system. The shift from an inclusive wage definition to a calibrated, exclusionary framework reflects a conscious legislative choice. Courts are therefore unlikely to simply extend pre-Code interpretations without regard to this restructuring The actual applicability of the decision of the Supreme Court is not that it was directly applicable but that it expressed some core principles that will overtime and computation of wage. It emphasizes the economic reality, fairness, and statutory circumvention that the judiciary is still worried about, even in a reformulated legislative system.
Emerging Controversies Under the Labour Codes
With the Labour Codes being currently shifted to full operationalization, the issues of overtime wages are bound to push the limits of the new wage definition. A key area of conflict is expected to arise in relation to compensatory allowances, particularly in sectors involving hazardous, arduous, or environmentally adverse working conditions The formal exclusions of the CoSS and the protective purposes of the OSH Code might have to be harmonized by the courts, particularly when the effect of the exclusion is a disproportionately low overtime payment.
These conflicts can also be subjected to wider constitutional questioning in instances where depressed overtime remunerations can actually force employees to work extended hours without corresponding remuneration. While overtime jurisprudence under the Labour Codes remains nascent, such debates underscore the continuing evolution of labour welfare law in India.
AMLEGALS Remarks
The Supreme Court’s ruling on compensatory allowances under the Act cannot be dismissed as anachronistic merely because of subsequent legislative repeal. Although the Labour Codes have narrowed the statutory definition of wages, the protective rationale underlying overtime regulation persists. The decision serves as a reminder that wage structuring must accord with statutory purpose and economic reality. To the employers, it is an indication that they should be careful when formulating allowance-based heavy remuneration systems. To practitioners and courts, it is both a reminder that the future course of overtime jurisprudence under the Labour Codes will come not just to rely on statutory text, but to strike a thoughtful balance between legislative intent, worker protection and judicial principle. The reasons behind the Supreme court decision remain useful in this changing legal environment to provide some insight as to how over-time pay should be interpreted as a limited calculation exercise, but rather as part and parcel of labour welfare law.
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