In my point of view what I have observed mentioning below;
The most awaited verdict by the Hon’ble Supreme Court in the matter whether the allowances that are earned and paid, as part of Gross Wages/CTC required to be considered as part of Basic Wages or Otherwise was decided on 28-02-2019.
• The RPF Commissioner vs. Vivekananda Vidyamandir & Others vide Civil Appeal No. 6221 of 2011
• Surya Roshni Ltd. Vs. EPFO & Others vide Civil Appeal No. 3965-3966 of 2013
• U-Flex Ltd. Vs. EPFO & Others vide Civil Appeal No. 3969-3970 of 2013
• Montage Enterprises P. L. vs. EPFO & Others Civil Appeal No. 3967-3968 of 2013
• The Management of Saint-Gobain Glass India Ltd. Vs. The RPFC, EPFO vide Transfer Case [C] No. 19 of 2019 (arising out of T.P. [C] No. 1273 of 2013)
All the above matters has been decided on dated 28.02.2019 and immediately the print media has flashed the news that, while calculating the Provident Fund contributions the Allowances are required to be considered. Divergent views were expressed by the legal luminaries / Advocates Legal firms etc., and have ventilated the views as they understood.
Coming on Point of each mention case the Hon’ble Supreme Court has found that;
1. Civil Appeal No. 6221 of 2011: In said matter School is giving Special Allowances to Teaching as well as Non-Teaching Staff by way of incentive pursuant to an agreement entered in between the Staff & the Management. The said incentive was reviewed from time to time upon enhancement of tuition fees of the Student. [RPFC has preferred the appeal]
2. Civil Appeal No. 3965-3966 of 2013: In said matter M/s. Surya Roshni was paying Basic Wage + Variable Dearness Allowance (VDA) + House Rent Allowance + Travel Allowance + Canteen Allowance + Lunch Incentive. The Special Allowances not having been included in Basic Wage.
3. Civil Appeal No. 3969-3970 of 2013: In said matter M/s. U-Flex Ltd. was not deducting PF on House Rent Allowance, Special Allowance, Management Allowance & Conveyance Allowance by excluding it from Basic Wages.
4. Civil Appeal No. 3967-3968 of 2013: In said matter M/s. Montage Enterprises P. Ltd. was not deducting PF on House Rent Allowance, Special Allowance, and Management Allowance & Conveyance Allowance by excluding it from Basic Wage.
5. Transfer Case [C] No. 19 of 2019 (arising out of T.P. [C] No. 1273 of 2013: The Management of Saint Global Glass India Ltd. where they filled W.P. No. 25443 of 201 against the Show Cause Notice issued by the Authority under the Act as they are been called for records to determine whether Conveyance Allowance, Education allowance, Food Concession, Medical Allowance, Special Holidays, Night Shift Incentives & City Compensatory Allowance constitute the part of Basic Wage.
[If you go through above cases the common issue raised before the Hon’ble Supreme Court was whether the Allowances earned and paid to all employees of the establishment falls within the definition made under Section 2 (b) of the Act, 1952. The Hon’ble Apex Court considering the verdicts already delivered with reference to the basic wages as defined upon consideration of the recorded evidences placed before them has declared the said above allowances as part of basic wages.]
Statutory of Minimum Wages & Employer’s liability in r/o PF, Bonus & Gratuity Act.
In Globe Detective Agency (P) Ltd vs. Presiding Officer, Industrial Tribunal No. III and Anr (2011- LLR 236)the Delhi High Court has held that, Bonus should be paid to all eligible workers at least on the statutory minimum wages applicable.
It has been a practice of establishments to split up the total/gross salary into components like Basic wages/pay, House Rent Allowance, Conveyance Allowance, Washing Allowance etc. There is nothing wrong in doing so with respect to employees drawing higher salaries whose salary incomes are subject to income tax deduction, but not in respect of low paid or those who are paid statutory minimum rates of wages. If any establishment has been paying wages to employees after splitting the gross salary in to basic + HRA+ Conveyance+ etc., and whereas the sum of these heads make equal to or more than minimum wage fixed by the government, the employer is said to comply with the requirements under the Minimum Wages Act as was penned inter alia in the judgment in Airfreight Ltd Vs. State of Karnataka (AIR 1999 SC 2459).It appears that the decision has been interpreted as a license to split the total salary into components like HRA, Conveyance etc., which do not form part of statutory salary.
What is the Statutory Wage/Salary?
Statutory wage means wage as defined under various labour enactments. Different Acts have defined wages/salary differently. But almost all Acts have included the Basic Wage and Dearness allowance as part of wages/ salary. For instance, section 2(h) of the Minimum Wages Act, 1948, wages means an all-inclusive remuneration payable to a worker as per the terms of contract of employment and includes house rent allowance.
However, wage as per the said Act does not include any other facilities or amenity like rental value of house accommodation, electricity or water bills, medical attention, special allowance paid to defray special expenses entailed on an employee or a class of employees by the nature of his or their nature of employment including travel allowance/concession paid.
Certainly, the contribution payable by the employer towards Provident or Pension Fund, Employees State Insurance, bonus gratuity etc., at the time of separation cannot be counted as part of basic wages. The latter part is common under all legislations whereas under the CTC concept all contributions payable by the employer in respect of an employee are also included in the Cost To Company.
Definition of Basic Wages / Wages under various Labour Laws:-
Section 2(iv) of the Payment of Wages Act, 1936, also defines the wages in the similar manner by including all amounts payable as per contract of employment. Section 2(rr) of the Industrial Disputes Act, however, includes in wages the value of house accommodation, supply of water and electricity, medical attendance or other amenity like value of concessional supply of food grains, travelling concession and any commission payable on the promotion of business.
Section 2(s) of the Payment of Gratuity Act, 1972, excludes all allowances like HRA, travelling allowance etc from wages. Section 3(n) of the Maternity Benefit Act, 1961, includes HRA and value of food grains in wages. However, section 2(21) of the Payment of Bonus Act, 1965, excludes all allowances other than dearness allowance from wages.
Section 2(b) in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952:
“Basic Wages” means 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 and which are paid or payable in cash to him, but does not include;
(i) The cash value of any food concession;
(ii) Any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) Any presents made by the employer;
With Section 2(b) of the EPF & MP Act, 1952 we must also to look into Section 6 of the EPF & MP Act, 1952 which mention that:
Section 6 in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952:
Contributions and matters which may be provided for in Schemes.—The contribution which shall be paid by the employer to the Fund shall be ten percent of the basic wages, dearness allowance and retaining allowance if any for the time being payable to each of the employees whether employed by him directly or by or through a contractor, and the employees’ contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten per cent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:
Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ten percent”, at both the places where they occur, the words “twelve percent.” shall be substituted:
Provided further that where the amount of any contribution payable under this Act involves a fraction of a rupee, the Scheme may provide for the rounding off of such fraction to the nearest rupee, half of a rupee or quarter of a rupee.
[Explanation 1]—For the purposes of this section, dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee.
[Explanation 2]— For the purposes of this section, “retaining allowance” means an allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services.”
(f) "Excluded Employee" means —
I. An employee who, having been a member of the Fund, withdraw the full amount of his accumulations in the Fund under clause (a) or (c) of sub-paragraph (1) of paragraph 69;
II. An employee whose pay at the time he is otherwise entitled to become a member of the Fund, exceeds [fifteen thousand rupees] per month;
Explanation: -'Pay' includes Basic Wages with Dearness Allowance, Retaining Allowance (if any) and cash value of food concessions admissible thereon;
The scheme 29(3) of the Employees Provident Funds Schemes, 1952, requires that provident fund contributions shall be on basic wages, dearness allowances, retaining allowance and value of food concessions payable to the employees. At the same time, section 2(22) of the Employees State Insurance Act, 1948, includes in wages, all allowances which are paid in intervals of not exceeding two months; the treatment of travelling allowance has been a subject matter of dispute, its inclusion for coverage and contribution are being regulated by court ruling and by separate notifications. However, the frequency of its payment and the nature of its payment as to whether as part of contract of employment or as reimbursement are also determining factors.
In short the two basic components of salary which should be treated as salary for the purpose any Act concerned are the Basic wage and the Dearness Allowance. It is accordingly that the appropriate authorities under the Minimum Wages Act fix the minimum rates of wages. As such there is expected to have a basic rate of wage and a dearness allowance variable according to changes in the consumer price index. However, in many establishments the practice of paying variable dearness allowance (VDA) is not present. They pay under different heads like, Basic, HRA, and Conveyance etc. Under such pay scales, the only component which qualifies all the tests of a statutory salary would be basic salary. This is often done with a view to reducing the employer’s burden of payment of bonus, gratuity, provident fund contribution etc.
However, the stand taken by the EPFO and the position stated in the clarification, does not appear to be consistent with law and may be tested in a court of law, leading to more litigation on this issue. This is in view on some of the points as mentioned below;
a. The EPF Act, being a standalone law, does not prescribe in section 2(b) that the basic wages should be equal to the minimum wages. Moreover, if that was indeed the intention of the legislature, instead of providing a separate definition of basic wages under the EPF Act, it would have cross referred to the definition of wages under the MWA, since the EPF Act was enacted much after enactment of the MWA.
b. The EPF Act is silent on the issue with regard to the percentage of the salary that may be deemed to be basic wages. As a matter of fact, there is no statute in India that prescribes the percentage of basic wages and/or of any allowance. Accordingly, an employer can under the employment contract indicate the amount of basic wages (besides the other allowances) that shall be payable, as long as the employer ensures that the employee receives at least the minimum amount of wages as prescribed under the MWA.
c. The MWA does not contain a separate definition of basic wages. Infact, while the definition of wages under the MWA includes House Rent Allowance (“HRA”), the definition of basic wages under EPF Act specifically excludes HRA - therefore there does not appear to be any co-relation between ‘wages’ under the MWA and ‘basic wages’ under the EPF Act.
d. The judgment on this subject, being that on the Punjab and Haryana High Court in the case of Assistant Provident Fund Commissioner, Gurgaon vs. G4S Security Services (India) Ltd & Anr. (2011 LLR 316 (P&H HC) has permitted the employer to split the minimum wages for the purposes of PF contributions. Unless the superior Court decision in future overturns this judgment, this judgment shall continue to prevail for the present in respect of Minimum wages. This judgment also makes necessary references to some of the earlier judgments as have been referred in the Clarification. It is surprising to note that this judgment has not been referred to in the Clarification.
While concluding the contentious issue it can be stated that, if an allowance(s) is paid universally to all employees employed, such allowance (s) shall be treated as part of basic wages. The allowances provided must be justified and documented.