Note on the Hon’ble Supreme Court recent Judgement in a bunch of appeals on the scope of ‘Basic wages’ under section 2(b) of the Provident Funds and Miscellaneous Provisions 1952

Genesis of dispute:

The dispute in the bunch of appeals before the Hon’ble Supreme Court centers around the interpretation of Basic wages under Sec.2(b) of the P.F.& Misc. Provisions Act 1952. Before going into the details of the dispute, let us know what Sec.2(b) is all about. Sec.2(b) defines “Basic wages’. Why understanding ‘Basic wages’ is important? It is because Sec.6 of the Act states that contribution shall be computed on basic wages, dearness allowance and retaining allowance, if any.

The definition of basic wages under Sec.2(b) consists of two parts. One is the inclusive part and the second is the exclusion part. The inclusive part defines basic wages as 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.

The exclusion part contained in clauses(i) to (iii) excludes the following from basic wages;

1. Dearness allowance as linked to the rise in the cost of living;
2. other allowances like HRA, over time allowance, bonus, commission or any other similar allowance and
3. any other presents made by the employer.

However, though dearness allowance is excluded by Sec.2(b) from the definition of basic wages, Sec.6 of the Act includes dearness allowance and retaining allowance for the purpose of computing contributions.

Thus, the employers come to understand that the contribution is payable only on Basic + DA + retaining allowance if any as it is paid mostly in seasonal establishments. Thus they excluded many other special allowances like conveyance allowance, lunch allowance, night shift allowance or educational allowance etc., from taking into account for computing P.F. contribution. In short, the employers are not considering them as part of basic wages.

The P.F department on the other hand contends that these special allowances shall be construed as part of the basic wages based on decisions of some High Courts in cases like Gujrat Cypmromet etc. and has been demanding contribution on all such special allowances. The dispute was agitated in PF Tribunal and in various High Courts and finally it reached the Hon’ble Supreme Court  to settle the law on the question of interpretation of the ambit of Sec.2(b)of the Act.

The hon’ble Supreme Court relied essentially on the following cases to explain the ambit of sec.2(b).

1. Bridge and Roof Co (India) Ltd vs. Union of India, 1963(3) SCR 978(S.C)
2. Muir Mills co. ltd, Kanpur vs. It’s workmen AIR 1960 SC 985
3. Manipal Academy & Higher Education vs. P.F Commissioner 2008 (5) SCC 428.

The following principles can be extracted from the Judgment of the hon’ble Supreme Court in these appeals.

1. The test adopted to determine whether any payment of such special allowance is to be included or excluded from basic wages is the test of universality. If any payment or the special allowance is not commonly paid to all employees, such special allowances are to be excluded from basic wage. Contrarily it means if any payment is made universally to all employees across the board, they have to be included in basic wages.
2. Variable payments are to be excluded. Those payments which vary from individual to individual as per their efficiency, diligence, working conditions and rate of supply of raw materials etc. are to be excluded from basic wages. Examples are payments like bonus which are linked to production are to be excluded as they may vary from individual to individual.
3. Similarly, payments made for work beyond normal output are to be excluded. For example, over time allowance might fall under the exclusion category.

Since the appellant employers did not produce any evidence to show that the payments made to their employees are either variable or linked to any incentive for production resulting in greater output or for work done beyond normal output by an employee or that the allowances in question were not paid to all employees across the board, the Hon’ble Supreme Court dismissed all appeals by employers while allowing Civil Appeal 6221 of 2011.

The following observations can emanate from the above.

1. It may impact the take home pay rendering it lesser now in case of employees whose wages are below 15000/- per month as in their case, contribution may have to be paid on other allowances unless they satisfy the above tests. However, it affords greater financial cushion to them at the time of retirement by increasing the quantum of their PF corpus.
2. Similarly, the employer’s liability may increase in case of employees falling under this segment.
3. It may not impact the take home pay of employees whose wages are 15000/-or above as they are already contributing on the maximum of the wage limit.
4. Similarly there may not be any change in employer’s liability for the employees under this segment as the employer can restrict his liability can restrict his liability to pay contribution to Rs.15000/-p.m as per the provisions of the P.F. scheme 1952 and as held in Marathwada Gramin Bank Karmachari Sanghatana & anr vs. The Marathwada Gramin Bank  & others, 2011 III CLR 374 SC.
5. The employers be more pragmatic in designing salary structures that is compliant to law as well as attractive to employees.

Team Multicare