Is "Notional Wages" Limited to Basic and DA for ESI Coverage? Seeking Insights and Case Laws

Dear Sir,

In one of my earlier companies, they were following the "NOTIONAL WAGES" for the determination of coverage under ESI, which is also as per the Act. The Act states that, for coverage under the Act, Wages Paid/Payable should be taken.

However, one of the ESI Inspectors is interpreting that for the determination of coverage, consideration of "Notional Wages" should be restricted to Basic and DA only. Is this correct? If so, is there any Case Law for this? If wrong, is there any Case Law in support of this?

Further, the ESI Act nowhere mentions 'Notional Wages'; it only refers to Paid/payable WAGES. Payable is nothing BUT the total salary irrespective of his attendance.

I would like to have the views of the learned stalwarts of CITE HR on this for my benefit as well as the benefit of others.

With Best Regards,

R BALAJI

Dear Balaji,

It includes all the components paid in cash at the end of the month but does not attract any incentives or bonuses. In general, the gross monthly salary is considered for ESI contribution. Basic and DA are considered in the case of PF contribution only.

Regards,
Amit Seth.

Dear Sir,

I have gone through your email, and I agree with your comments.

Example: An employee is drawing a monthly salary as detailed below: Basic: Rs.5,000/- HRA Special Allowance and Incentive Rs.1,000/- Gross Earnings are Rs.10,500/-. As per the Act, he is exempt from ESI as his salary exceeds Rs.10,000/-.

Query: If the above employee takes 5 days of leave without pay, does he still need to be covered by ESI, considering that his Gross Earnings have decreased?

As per the Act, the Definition of Wages is as follows:

Wages mean all remuneration paid or payable in cash to an employee, provided the terms of the employment contract, whether express or implied, are met. This includes any payment to an employee for authorized leave, lockout, or non-illegal strike, as well as any additional remuneration paid at intervals not exceeding two months. However, it does not include:

- Any contribution made by the employer to a pension fund or provident fund, or under this Act;
- Any travel allowance or the value of any travel concession;
- Any amount paid to the employee to cover specific expenses related to the nature of their employment;
- Any gratuity due upon discharge.

The above definition consists of three parts:

1. All remuneration paid or payable in cash to an employee, provided the terms of the employment contract, whether express or implied, are fulfilled.
2. Includes any payment to an employee for authorized leave, lockout, or non-illegal strike.
3. Additional remuneration, if any, paid at intervals not exceeding two months.

However, it does not include:

- Any contribution made by the employer to a pension fund or provident fund, or under the ESI Act.
- Any travel allowance or the value of any travel concession.
- Any amount paid to the employee to cover specific expenses related to the nature of their employment.
- Any gratuity due upon discharge.

My query is whether the above employee needs to be covered due to reduced wages or if we should consider NOTIONAL WAGES. If so, could you please provide any relevant case laws or judgments to support this?

Thank you in advance.

Best Regards,
R BALAJI

Dear Balaji,

While calculating ESI, all the components are to be taken into consideration, whether it is HRA, conveyance, Special Allowance, overtime, etc. Any allowance (normally incentive) paid after an interval of two months is not covered for the deduction of ESI. ESI returns are to be filed twice a year, i.e., for the periods of April to September and October to March. If any employee crosses the limit of Rs 10,000/- per month anywhere in between these periods, ESI contributions still have to be paid until the completion of the return period.

In the case of overtime, it is not fixed and depends on the requirements of the company, so overtime does not make any difference. However, ESI is payable on overtime if an employee falls under the ESI limit with all other components.

If an employee has remuneration exceeding Rs 10,000/- but receives wages less than Rs 10,000/- due to being absent for a few days in any particular month, then it does not attract ESI deduction. Please keep in mind all these points while calculating the ESI contribution.

Regards,
Manjeet Singh
Tarn Taran (Amritsar)

If I am daily rated at ₹700 per day, my payable salary is ₹21,000 per month. I will not be considered an employee if it is ₹15,000 per month from 1-5-2010. The Act defines an employee as someone whose wages are paid or payable. Please clarify.