8 March 2019

LEGAL UPDATE | SUPREME COURT CLEARS THE AIR FOR INCLUSION OF SPECIAL ALLOWANCE WITHIN THE AMBIT OF DEFINITION OF BASIC WAGES

Introduction:

The Supreme Court of India on 28 February 2019 delivered a landmark judgment in Regional Provident Fund case which has a significant impact on the lower salaried class. Currently, as per the salary structure, employees are supposed to contribute 12 per cent of their basic salary or wages (10 per cent for certain establishments) towards their provident fund. The Hon`ble Supreme Court has ruled that certain allowances paid by an employer to his employees whose salaries do not exceed Rs.15,000/- (Rupees Fifteen Thousand only) per month were essentially a part of the basic wage and were being camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

Facts of the Case:

The appellants were establishments covered under the Employees` Provident Fund and Miscellaneous Provisions Act, 1952 (Act). The respondent was an unaided school giving special allowance by way of incentive to teaching and non-teaching staff pursuant to an agreement between the staff and the management. The incentive was reviewed from time to time upon enhancement of the tuition fees of the students. The authority under the Act held that the special allowance was to be included in basic wage for deduction of provident fund.

Issue:

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.

Decision of Calcutta High Court:

The Division Bench of the Calcutta High Court held that the special allowance was not linked to the consumer price index and therefore did not fall within the definition of basic wage and was, thus, not liable to deduction towards provident fund.

Arguments put forth in Supreme Court:

• It was argued on behalf of the appellant that that the special allowance paid to the teaching and non-teaching staff of the respondent school was nothing but camouflaged dearness allowance liable to deduction as part of basic wage.

• Section 2(b)(ii) defined dearness allowance as all cash payments by whatever name called paid to an employee on account of a rise in the cost of living. The allowance shall therefore fall within the term dearness allowance, irrespective of the nomenclature, if it is paid to all employees on account of rise in the cost of living.

• The special allowance had all the indices of a dearness allowance. Relying on Bridge and Roof judgement 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.

• Basic wage, would not include special incentives 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 as a result of such extra output is not a basic wage.

Decision of the Supreme Court:

• Supreme Court observed that the test adopted to determine if any payment was to be excluded from basic wage is that the payment should not be common to all employees. The crucial test is one of universality.

• Further, the Supreme Court laid down the principle that basic wage would include payments made to all employees and would exclude those payments made to a select group of employees based on identified criteria.

• The Supreme Court also held that no material has been placed before the court by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work he was otherwise required to put in.

MHCO COMMENT:

Due to the above decision of the Supreme Court, employers will be required to calculate the amount of contribution to be made to the provident fund account of employees whose salary does not exceed fifteen thousand rupees per month by taking into account the amount of special allowance paid to the employee. The provisions of the employment contract of such employees will have to construed carefully to determine the nature of allowances and hence their inclusion or exclusion from basic wages. Thus care must be taken while inserting such special allowance clauses in employment contracts.

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