Legal Dilemma: Should Back Wages Be Treated as Compensation or Wages? Seeking Expert Advice on PF and ESI Contributions

In view of the High Court directions through an interim order, we have deposited 50% of the back wages for 15 employees for their non-employment period, in accordance with the relief granted by the Labour Court in an Industrial Dispute raised by the Union on behalf of its members.

Upon receipt of the writ, the High Court upheld the Labour Court's award and directed the Union to withdraw the amount deposited as 50% back wages for the 15 employees. Now, my query pertains to whether the relief granted by the Labour Court should be treated as compensation or wages, considering the High Court's directive for the Union to withdraw the amount.

Legal Implications and Management Responsibilities

Is the management liable to remit PF and ESI contributions on the deposited amount, which has been received directly by the employees from the Court? What are the legal implications that the Management needs to address? Your expert opinion, supported by case law references in this context, would greatly assist me in advising my management appropriately.

In my view, PF will not be attracted to Back Wages. The reasons are as follows:

1. Award of Back Wages is not considered wages as defined in the EPF & MP Act.
2. Award of Back Wages is compensation and not a wage.
3. In the case of Swastik Textile Engineers v. Virjibhai Rathod, Gujarat HC, the same principle is stated as above.
4. According to Universal Brakes v. Presiding Officer, EPF Appellate Tribunal 2011 III CLR 662 Mad. HC, the EPFO cannot claim contributions for the period during which the workman neither worked nor agreed to be treated as on duty.

The same principle applies to ESI contributions. ESI is not applicable on arrears.

Regards

Query on PF and ESI Contributions on Arrears

In one case, due to the non-acceptance by some of the workmen of the wage settlement reached between the Management and the recognized union under Section 18(1) of the Industrial Disputes Act, the workmen were not given the increase in wage and other benefits. This was because the group of workmen had not come forward to provide the required undertaking in writing as a token of acceptance, as required in the said settlement. The Union filed a CP claiming arrears of wage differences as per the settlement. The Labour Court dismissed the CP. However, the decisions of the High Court and the Apex Court orders are in favor of the Union. The settlement claim was for a period of 3 years from 1989 to 1991.

In view of the interim direction of the Apex Court, 50% of the arrears claimed by the workmen are deposited in the Labour Court. Since no workmen in the said claim petition are in service, we have opted to deposit the remaining amount in the said Labour Court, citing the reason mentioned, for which the Labour Court allowed the petition for remitting the said remaining amount.

My query now is whether PF and ESI contributions on the said arrears amount are payable by the Management even in the case where the said workmen are not in service. I request expert views with citations, if any, please.

Regards

1. Sir, the issue regarding the payment of contributions on "settlement claims" or back wages under the ESI Act, 1948, as raised by you above, is an important issue. However, I think no relevant court judgments appear to be readily available. The Honorable Supreme Court in the cases of Kerala State Drugs & Pharmaceuticals Limited (1995, SC) and Hotel Kalpaka International (SC, 1993) decided the issue of payment of contributions by stating that once the Act is applicable to an establishment, the employer becomes liable to pay the contribution in respect of the employees in his employment, directly or indirectly. The court further said that the liability of the principal employer is not absolved even if a deduction is not made from the wages of employees. However, these judgments appear to be not relevant in your case.

2. However, I have found the following departmental instructions issued by ESIC about four years back in one of its publications (which is strictly for OFFICE USE only):

"Contribution on the wages paid to a terminated employee on his reinstating as a result of a Court Order:

No contribution should be deducted from the wages paid to the reinstated employee for the past period, and the contribution should be payable only from the month in which the Court Order was pronounced."

3. Keeping in view the above, if you consider it necessary, it may be seen if you approach the appropriate Regional Director of ESIC to which your unit is attached to seek guidance and directions on the issue. You may submit to the said authority the full facts of your case along with copies of judgments of the Honorable Court(s). I hope you will get appropriate instructions from the above department on the issue. Similarly, on the same lines, if considered suitable, you can also seek clarifications from the appropriate authority of EPFO to which your unit is attached.