Is It Legal to Deduct from Basic Salary for a New Special Allowance? Let's Discuss!

My company has started a special allowance on the payslip. I want to know if there are any laws regarding deductions from the basic salary because they have been showing a lower basic salary since last month, and that amount has been added under a new category, i.e., special allowance.

This is the general tendency of some companies (specifically construction companies) to reduce basic wages by giving the same amount in different heads just to avoid PF liability. But in your case, if your basic wages are more than the Minimum Wages under your category even after creating a new head as Special Allowance, then you have no remedy available under the PF Act except under Section 12. If vice versa, then a recent clarification has come from the PF Office regarding this, which you may show to your office (if you think of doing so). The PF office clarification is attached herewith for your purpose.

Regards, Jawed Alam

Dear Shah & Jawed, let me add a few more points. Even Special Allowance attracts PF contribution as per the new notification by the Madhya Pradesh High Court on 24.03.2011.

Rationalization of Pay Scale and Special Allowance

A company can reduce the basic pay while carrying out the rationalization of the pay scale. Sometimes, a formal pay structure in a company is absent when it was a small organization (less than 10-15 employees and does not attract statutory compliances like EPF). As the company grows, the need for the rationalization of pay becomes necessary and is carried out.

However, the following should be borne in mind:

- There should be no reduction in the company's statutory liabilities as far as EPF, ESI, or Gratuity for an individual.
- The CTC/Gross/Net should be more or equal to the present pay packet—not less.
- The basket of "Special Allowance" is introduced in the pay structure and includes HRA, LTC, Medical Allowance, CCA, Education Allowance, etc. Normally, this 'Special Allowance' is left to the individual employee to inform HR/Accounts of the heads for which this money should be allocated for the Financial Year so that maximum IT exemptions are availed of.
- HR plays a crucial role in this salary rationalization so that the Management and the Employees are satisfied with the new structure.

Regards,
Rajusiachen

Dear JAWEDALAM, Find enclosed herewith the judgment of the Punjab & Haryana High Court regarding the split of wages, which is self-explanatory. As per the query of Mr. HMShah, the base wage cannot be reduced.

Regards,
Tirlok Dhir

Dear Tirlok Dhir, Thank you for the attachment. If you have a copy of the original order, please attach it herewith for this discussion. I request you to please go through the comments which I have made in this discussion topic; it will be better for other contributors to understand the subject.

In the first comment I had written:

"This is the general tendency of some companies (specifically construction companies) to reduce basic wages by giving the same amount in different heads just to avoid PF liability. If your basic wages are more than the Minimum Wages under your category even after creating a new head as Special Allowance, then you have no remedy available under PF Act except under Section 12. If it is vice-versa, then a recent clarification has come from the PF Office regarding this which you may show to your office (if you think of doing so). The PF office clarification is attached herewith for your purpose."

And in the 2nd comment I had written:

"Any notification issued by the High Court of a particular state may not be applicable for all states. Decisions taken by the Supreme Court are applicable for all states. If the employer of West Bengal does not adhere to the decision given by the MP High Court, then will it be illegal on the part of the West Bengal employer? References may be taken from that judgment but are not mandatory."

So, Mr. Tirlok Dhir, I don't find any reason from your end to refer the attached judgment to me since my comments were not against any order issued by the Punjab and Haryana High Court or MP High Court. What I suggested is that basic wages cannot be reduced for the purpose of PF (Section 12) and basic wages cannot be less than Minimum Wages (recent clarification issued by the RPFC). I hope you understand my point now.

Regards, Jawed Alam.

LABOUR LAW UPDATE

SUPREME COURT ON EPF CONTRIBUTIONS ON ALLOWANCES

It may be recollected that in a Review Petition by Surya Roshni Limited vs. Employees' Provident Fund and Another, 2012 LLR 42, the Division Bench of the Madhya Pradesh High Court held that Section 2(b) and 6 of the Employees' Provident Funds & Miscellaneous Provisions Act define basic wages. HRA, overtime allowance, bonus, commission, or any other similar allowance are not covered in the definition of basic wages. However, when special allowance, dearness allowance, conveyance allowance, and other allowances are paid universally to all the employees, they would be treated as part and parcel of basic wages.

A special leave petition to appeal was filed and came up for hearing on 13.7.2012, in which the following order was passed:

ITEM NO.MM-128 COURT NO.12 SECTION XV

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

I.A. NOS.4-5 in

Petition(s) for Special Leave to Appeal (Civil) No(s).8781-8782/2012

(From the judgment and order dated 24-3-2011 in WPC No.1891/2011 and dated 22-11-2011 in RP No.117/2011 of the High Court of M.P. at Gwalior)

SURYA ROSHNI LTD. Petitioner(s)

versus

EMP. PROVIDENT FUND & ANR. Respondent(s)