Confused About Minimum Wage Compliance: Does Basic Pay Need to Match Minimum Wages?

Our salary structure, including all components, ensures that the Minimum Wages prescribed by the Government are being paid to the employees. Recently, we encountered a scenario where this was disallowed by one of the visiting officers, who stated that our Basic plus DA (we do not have a DA component, though) should be equal to or greater than Minimum Wages, irrespective of the Gross being paid.

Request for Clarity on Salary Structure Compliance

Please help me in getting clarity on this issue. Kindly provide some supportive definitions or rulings, if any, to confirm if what we are doing is correct.

Thank you.

Regards

Understanding Minimum Wages Act Requirements

The requirement in the Minimum Wages Act is very clear. When reading the notifications published by the state governments providing the minimum wages list, it is evident that the sum of basic pay and dearness allowance (DA) or basic pay and special allowance should be at least equal to the minimum wages. The other allowances provided are additional benefits, not included in minimum wages. Companies often use such structures to save money on PF contributions.

There are companies engaged in legal battles over this issue, including the PF department. Recent Supreme Court decisions suggest that they are likely to rule in a consistent manner. It is then up to you to decide whether to take the risk of being on the losing side, facing penalties and interest, or adjusting your salary structure to ensure compliance.

In addition to Saswata Banerjee, I would like to add the following:

Minimum Wages Components

The Minimum Wages components are (i) Basic Wages and (ii) DA or VDA. All establishments must pay the Minimum Wages to all their employees. Only statutory deductions (PF, ESI, and TDS) are authorized in the Minimum Wages. Except for the above, nothing else can be deducted.

PF Circular on Minimum Wage Bifurcation

I am enclosing herewith the PF circular indicating that bifurcation in Minimum Wage is not allowed. It will help you for your reference.

Thanking you,

Regards,
Ashish

Dear Ashish,

In fact, the Cost of Living Points (CPI) of a certain year will be considered as the Base Year, and the Points derived will be considered as Basic Wages, with the escalation occurring every six months/year being added as Variable DA/DA. Both are to be added together, and thus the Minimum Wages are calculated.

The PF Department has mentioned that the bifurcation for calculating the PF is not accepted, and the entire Minimum Wages must be considered for calculating the PF. Some companies are adopting the bifurcation system of basic wages and DA to save a minimal amount, calculating the PF only on Basic Wages, which is an incorrect practice.

This is the message the circular intends to convey, without arguing about the non-existence of the bifurcation of minimum wages.

Regards,

Temporary Stay on Circular Applicability

The ministry has temporarily stayed the applicability of the circular. However, political pressure cannot suppress the matter forever, and at some time, it will come back with a vengeance. The fact that it is supported by a high court decision, giving detailed reasoning for not allowing PF on gross wages, makes it more likely that the decision will ultimately prevail.

Banerjee & Bhasker are right. Go through the judgment of Airfreight Ltd. vs State of Karnataka; more clarity will come.

Thanks & Regards,

Sumit Kumar Saxena