Effects of Supreme Court Judgement in the matter of Surya Roshini Ltd Dated 28-02-2019
Part -1 of 2
Kapish Saluja | Labour Law Consultant | Mumbai
Wages or Salaries are emoluments earned by an employee. It is paid either as a consolidated wage or bifurcated into various Allowances. Some for the popular or common allowances in the bifurcation of emoluments are special allowance,House Rent, Conveyance, City Compensatory, Education, Leave Travel, Washing, Attendance, Performance / Incentive, Cash Handling, Lunch, Overtime, etc.
Practically the emoluments are split into various allowances, without considering as to for what purposes it is being given. The purpose of bifurcating wage into several such allowances is largely to save the “Indirect Burden” on the pretext that the employee would be enjoying a better take home package.
In the recent past, the Employees Provident Fund Department has been insisting the employer to pay contribution on the Minimum Wages as notified under the Minimum Wages Act, and not on the amount shown as Basic and Dearness Allowance by the employer in the component of wage structure. The Department found employers showing the quantum of Basic Wage and Dearness Allowance, much less than that as otherwise notified under the Minimum Wages Act, even though the totality of the entire wage structure by inclusive of such of the aforesaid allowances (Conveyance, Education, City Compensatory) was more than the Minimum Wages.
The issue whether contributions under the Employees Provident Fund Act was payable only on the Basic Wage and Dearness Allowance as shown in the wage structure or also on the various other allowances, came to be decided by the Hon’ble Supreme Court in its order dated 28.02.2019. This order of the Hon’ble Supreme Court is in fact the confirmation of its earlier decision of Five Judge Constitutional Bench in the matter of Bridge and Roof Company (India) Ltd. Vs. Union of India 1963 III SCR Pg. 978
The Supreme Court held that any amount paid by way of any allowances which are variable or linked to incentive or performance in production for giving better productivity and that the said allowances are not paid across the Board universally to all the employees, are not Wages and therefore excluded from the definition of Basic Wage and thereby nor eligible for any contribution under the Provident Fund Act
Some of the discretionary Allowances which are neither universal nor common as well as not earned in accordance with the Contract of Employment are those such as Attendance, Production/ Incentive Allowance/ Overtime.These allowances are not earned by all the employees, in common and across the Board.
It therefore become more than necessary for an employer to justify that the allowances so given is firstly not universal, common, or across the Board to one and all in the Company, but more importantly justifiability of the payment of such an allowance. If allowances are paid to all the employees universally then they are emoluments earned by the employees in accordance with the terms of contract of employment which would qualify as the Basic Wage and thereby contributions on such allowances would be payable.
There are certain allowances, which were held not common and not part of the emoluments as per terms of contract of employment. They are
- Production / Incentive Allowance – It is given to meritorious employees who put in extra output. It has a direct nexus and linkage with the output. The employee on not achieving the target would be deprived of incentive allowance. Inventive allowance cannot be part of the Minimum Wage as held by the Gujarat High Court in Lubi Electricals Ltd. An employee failing to achieve a target would not earn an incentive allowance. But the nonpayment of incentive allowance should not result in depriving the Minimum Wages itself. Incentive Allowance is not earned by each and every workman. It will be given to those who will deliver an extra output within the normal working hours. Since Incentive / Production Allowance is earned for giving more output, it was held not to be Basic Wage, as it is not earned in common by all the employees, but only on fulfilling a target.
- Attendance Allowance – It is not earned by the each and every employee, but given to those who are found to be present on all the days of working. It is therefore not part of the contract of employment which the workman irrespective of his performance can claim it as a matter of right.
Similarly overtime wages, are also not earned by every employee but it is given to such of the employees, who work beyond the normal working hours. It is neither common, nor static nor universal. It cannot be claimed as a matter of right by each and every employee without having put in extra number of hours without normal statutory requirement.
Therefore all such Allowance, namely Conveyance, City Compensatory, Education, Washing if paid to all the employees in common is held to be in accordance with terms of employment. Such allowances are held by the Supreme Court to be Basic Wage and liable to contributions, unless however, the employee establishes by documents that the said allowances is not paid to one and all and that it is not part of the employment, but justifies the reasons for the payment of such allowance.
Thus, Allowances such as Conveyance, CCA, Education, Medical sp allowances and similar paid to all without there being any justification shall be held to be Basic Wage as per the judgment of the Supreme Court and therefore it shall be liable for contribution. These are the amount earned by the employee in accordance with the terms of contract of employment.
It shall be difficult for an employer to convince the Provident Fund Authority that Allowances such as sp allowances Conveyance, CCA. Educations, Washiing, Medical are not paid universally to each and every employee. If however, the employer chooses to distribute these allowances, amongst its employees, such as Conveyance and CCA be given to a select few, instead of Education and Medical which are paid to the remaining who would not be entitled to Conveyance and CCA, then it shall be upon the Employer to justify the necessity to pay such selective allowances to a select few and deprive the same to the others.
In my opinion it would not be advisable to deny payment of contributions under Provident Fund Act, on Allowances which are provided to all and common across the Board as well as not linked to the performance and productivity of employee.
Thus Attendance Allowance, Production / Incentive Allowance would be excluded, provided the employer has a scheme to this effect, whereby the earnings to the employee is neither the same for all the months nor necessarily enjoyed by him continuously nor it is thus earned nor as a matter of right, nor by all the employees in common. Besides these allowances, the definition as excluded House Rent Allowance for the purpose of contributions.
The judgment of Supreme Court is with retrospective effect. It is given to understand that Provident Fund Department can call for records of previous seven years and verify amount of contribution paid during this period. if the Department stands convinced that employer in past has not paid contributions on allowances, which are not linked to performance, productivity, excluding HRA, can determine the quantum and call upon employer to pay contributions including that of employee together with charges, penalties and interest. The decision of Supreme Court shall open flood gates of litigations. The Provident Fund Department would come heavenly and claim contributions on all such allowances excluding HRA, Attendance Incentive, Overtime, unless however the employer by cogent documents is able to prove and justify that said allowances were neither paid in common across the Board or pay the same as earned in accordance to terms of contract of employment but it was linked to better productivity or attendance or such other work which the other employees could not earn or claim as a matter of right
The employers are thus advised to pay contributions on all such allowances except those as mentioned hereinabove. Failing to deposit contributions on allowances would result in enquiry under Sec. 7A for determining amount of contributions. The Department as per past practice shall not at all be co-operative and would deem each of these allowances as wages and thereby determine the amount of contributions to be paid by employer. The order under 7A would become challengeable in Appeal under Sec. 7-I to Tribunal subject to employer depositing 75% of amount so determining in enquiry under Sec. 7A
In short all the allowances payable to the employees subject to cap of Rs15000/ the contributions will be payable Rs1800/ max
The allowances which will be excluded from PF are HRA, Incentive , overtime ,
To be continued in part 2 wherein I will give various calculations explaining impact of above decision
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