APEX COURT RULING
In a batch of appeals preferred by certain establishments, the Supreme Court of India vide judgement dated 28th February 2019 took a view that allowances which are universally, ordinarily and necessarily paid to all employees shall be considered as a part of ‘basic wages’ and hence, should be considered when making provident fund contributions.
The issue raised before the Apex Court was whether the special allowances paid by an establishment to its employees would fall within the expression of ‘basic wages’ as defined under Section 2(b)(ii) read with Section 6 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“Act”) for computation of deduction towards provident fund contributions.
FACTS
The brief facts of the Appeals are as under:
1. Civil Appeal No. 6221 of 2011
This appeal relates to an unaided school giving special allowance by way of incentive to teaching and non-teaching staff which was subject to enhancement from time to time. The Authority under the Act (“Authority”) held that the special allowances were to be included in ‘basic wages’ for deduction of provident fund. The order was set aside by the Single Judge of the Calcutta High Court. However, the Division Bench allowed the appeal and held that the same was liable for deduction, which was later recalled by another Bench of the Calcutta High Court and set aside on the ground that since the allowance was not linked to the consumer price index, the same did not fall within the definition of ‘basic wages’ and thus not liable to deduction.
2. Civil Appeal No. 3965-66 of 2013.
In this appeal, the appellant was paying various special allowances such as house rent allowance, canteen allowance, lunch incentive, etc. without including them under the head of ‘basic wages’ for the purposes of provident fund deductions. The Authority held that only washing allowance should be excluded from basic wages, however, on appeal, the Madhya Pradesh High Court partially allowed the petition by excluding only lunch incentive from ‘basic wages.’
3. Civil Appeal No. 3967-68 and 3969-70 of 2013.
The appellants failed to make provident fund deductions on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from ‘basic wages.’ The Authority held that the special allowances formed part of the ‘basic wages’ and was liable for deductions, which was later confirmed by the High Court of Madhya Pradesh.
4. Transfer Case (C) No. 19 of 2019
A petition was filed against the show cause notice issued by the Authority calling for records to determine if conveyance allowance, education allowance, food concession, special holidays and night shift incentives, etc. constituted part of the ‘basic wages.’ The writ petition was dismissed on the ground of ‘alternate remedy’ being available under the Act. A writ appeal was filed challenging the order, which stood subsequently transferred to the Hon’ble Supreme Court for adjudication of liability.
ANALYSIS AND REASONING
The Apex Court in its judgement, placed reliance on the following propositions as laid down by it in various earlier decisions, namely:
a. Only those emoluments earned by an employee in accordance with the terms of employment, would qualify as basic wages;
b. Discretionary allowances not earned in accordance with the terms of employment, would not be included in the calculation of basic wages;
c. Any such payments, which are not made universally, ordinarily and necessarily to all employees, will not fall within the definition of basic wages;
d. The calculation of basic wages would not consider any special incentive or bonus given which has a direct nexus and linkage with the output of an eligible workman; and
Keeping the above tests in mind, the Supreme Court in the present case held as under:
“The test adopted to determine if any payment was to be excluded from basic wage is 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. The crucial test is one of universality.”
The Court further observed that none of the establishments have demonstrated that the allowances in question being paid to their employees were variable or were linked to any incentive resulting in greater output by an employee.
Based on the above observations, the Supreme Court held that, “the allowances in question were essentially part of basic wages camouflaged as part of an allowance so as to avoid deduction of provident fund contribution.”
The Apex Court, therefore, explained that in accordance with the test of universality, they formed part of the ‘basic wages’ and had to be factored in while making provident fund contribution.
CONCLUSION:
In substance, the Supreme Court of India has upheld the principles laid out in the earlier case of Bridge and Roof Co. (India) Ltd. vs. Union of India reported in (1963) 3 SCR 978 in which the Court observed that all universal allowances should be treated as part of ‘basic wages’, and hence should be considered when computing provident fund contributions. The ruling shall have a significant financial impact on organisations, since it lays to rest a long-standing controversy as to which components of salary are required to be considered when reckoning provident fund contributions. As a result, employers will have to review their existing compensation structure and determine any increased provident fund liabilities in respect of its employees.
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