How to Structure Salaries in Unregistered Companies Without PF and ESIC?

Subject: Salary Components for Unregistered Company

I am working in an outsourcing company, and I want to prepare the salary structure of the employees. However, the company is unregistered for PF and ESIC. In this case, which components should be included in the salary structure? Kindly provide an explanation of these components.

Thanks and Regards,
Chetan Thorat

If you are covered by the ESI and PF Acts, you have to obtain their code numbers and make deductions from basic and DA. You must pay employees' salaries according to their categories in the scheduled employment as per the Minimum Wages Act. If you have more than 50 employees, a minimum house rent allowance of 5% is required to be paid if the establishment is located in Maharashtra. The special allowance declared by the government every 6 months will be applicable. Additionally, you have to make a provision for gratuity if the worker works beyond 5 years. Bonus payments must also be earmarked at a minimum of 8.33% or above. If you wish to provide more perks, you can offer an attendance allowance or conveyance allowance for days attended.

Nowadays, 18 people are working. If I am paying HRA, medical allowance, LTA, and conveyance, is it mandatory to show proof of house rent, travel bills, and other related expenses? My manager told me that we can't pay these components without company registration. Is it right or wrong? If wrong, then suggest proper components.

Basic Components of Salary

The salary should provide a standard family with a wage that meets the needs of the family. This wage was termed as a fair wage by the Apex Court in the Express News Papers' case. The Apex Court in All India Reserve Bank Employees' Association V. Reserve Bank of India & anr 1965 II LLJ 175 defined a fair wage as one that shall be able to provide a standard family with food, shelter, clothing, education, and health care. Therefore, the basic components of salary shall consist of the following:

• Basic pay
• Dearness allowance
• House rent allowance
• Conveyance allowance

Apart from this, a company may provide schemes for the reimbursement of medical expenses and educational expenses to enable an employee to meet his needs on this front, and this may not be part of the salary.

Then the question arises as to how much the basic pay and dearness allowance will be for a particular category of employees. The following guidelines may be of help in this regard:

1) As DMC123 has suggested, the state governments notify basic pay and special allowances (D.A) under the Minimum Wages Act for each category of employees employed in different categories of establishments like shops, commercial establishments, factories, etc. You can take it as a basis for fixing the quantum of various components of salary.

2) The second alternative will be to fix wages on a Region-cum-industry principle. For this, collect the data about the salary structure of the employees employed in industries or concerns comparable to yours in the region in which your industry is located, so as to arrive at a basis.

3) If there is no industry or concern comparable to yours existing in the region, you can fix the wages on the basis of the Industry-cum-region principle. In this, you will collect data on the salary structure of all the industries located in your region to arrive at a prudent structure for your company.

Regards,
B. Saikumar
HR & Labour Law Consultant
Chipinbiz Consultancy Pvt Ltd.
Mumbai

Sub: Salary Components

What needs to be understood is that once you become covered by P.F/ESI, you need to register your company under the respective Acts. So far as the P.F is concerned, once the company is registered, you need to pay contributions under Sec. 6 of the P.F Act on the basic wages + D.A + Retaining allowance + cash value of food concession, if any, given by your company. Even though the definition of basic wages under Sec. 2(b) of the P.F Act excludes HRA, bonus, commission, or any other similar allowance and thus excludes them from being counted for contribution, the Hon'ble High Court of Gujarat in Gujarat Cypromet Ltd V. Assistant P.F. Commissioner, 2004 III CLR 485 held that the 'basic wages' under Sec. 2(b) of the Act include various allowances like lunch, medical, and conveyance allowance except HRA. Thus, the position is that except HRA, bonus, or commission, many other allowances may count for the contribution of P.F.

So far as ESI is concerned, the law is more liberal, and contribution is payable on all emoluments that are payable on fulfilling the terms of employment. Thus, it is payable on Basic Pay, Dearness Allowance, House Rent Allowance, Night Shift Allowance, Heat, Gas, and Dust Allowance as laid down in Harihar Polyfibres v. ESIC 1984 II LLJ (S.C).

This apart, contribution is also payable on overtime wages as laid down in Indian Drugs Pharmaceuticals Ltd v. ESIC, 1997 II LLJ 475 (S.C) or on Traveling or Conveyance Allowance if it is paid under a settlement (Dy. Director ESIC v. Amrutanjan Ltd & Ors. (APHC) 2009 LIC 2354).

Regards,
B. Saikumar

HR & Labour Law Consultant

Chipinbiz Consultancy Pvt Ltd.

Mumbai

Before the registration, can I include the following components in the salary structure:

1) Basic
2) HRA
3) Conv.
4) Medi. All.
5) CCA
6) Other Allow
7) Bonus

Thank you.

Dear Mr. Chetan,

What do you mean by an unregistered company? Under labor laws, you should obtain a shop and commercial establishment license, pay the minimum wages of your area (based on the location of your establishment in the zone of scheduled employment), and provide special allowances as declared by the government. The bare minimum requirement is mandatory, and if your workforce exceeds 50 employees, 5% HRA is also mandatory. However, with this low salary structure, recruiting manpower may pose a significant challenge for you.