Confused About EPF Contributions and Minimum Wage Compliance in A.P.? Let's Discuss Your Options

Understanding EPF Contributions and Minimum Wages in A.P.

One of the officers in the A.P. Labour Department has been considering the payment of contributions deducted by the management under the EPF Act from the ECR statement and preferring claims under Sec. 20 of the Minimum Wages Act. Fortunately, the gross wage is higher than the minimum rates of wages payable to the workers in the State of A.P. Upon seeking clarification, the officer refers to Sec. 6 of the EPF Act and states that the EPF department's activity is confined only to the extent of recovery shown as basic and special allowances in the records. If the recovery is congruent with the sum total shown in the records, their action ceases. It is not their duty to verify whether the management is deducting EPF based on the A.P. State declared minimum wages.

Clarification on Minimum Wage Components

However, it is asserted by the Labour official that the extent to which the management has considered the contribution from the wages of the workers under EPF can be taken by him for the extent of the minimum rate of wage the management is paying to each of the workers. He is not required to consider whether the gross wage is more than the minimum rate of wage, as it contains many more components that cannot be considered as components of minimum wages. These components are meant to defray expenses that do not help in maintaining the sustenance and efficiency of the worker and his family.

In his calculation of minimum wages, he considers the components illustrated under Sec. 4 of the Minimum Wages Act but not Sec. 2(h) of the said Act. He also provides clarification on the difference between the two provisions of the Act. When approaching some other officers of the same department, they consider the whole gross wage and do not prefer a claim if the gross is found to be more than the minimum wages. Referring to the landmark judgment provided by the officers of the same department, i.e., Air Freight Courier Vs. Govt. of Karnataka of 1991, it is interpreted that this judgment does not consider the whole wage as the minimum rate of wage, thereby exempting the management from preferring a claim under Sec. 20 of the Act if the whole wage is greater than the minimum rate of wage of the State.

Judgment and Its Implications

The judgment emphasizes that the components of minimum wages shall not be considered separately as basic and VDA but as one pay package. They should not be split up, and if the sum total of the two is more than the minimum rates of wages, no claim is required. Furthermore, it is stated that the components not considered for computing wage under Sec. 2(h) should also not be considered for the calculation of minimum wages. The reason explained is to consider the component of the recovery of EPF of employees, as Sec. 6 of the EPF Act mentions the components of Basic, DA, Retaining Allowance, and Cash Value of Food Concession.

Since the latter two are not applicable to my establishment, I was demanded to cover at least the entire Basic and DA revised by the Govt. of AP under the EPF Act, which are the primary components of Sec. 4 of the Minimum Wages Act, but not the whole gross wage. According to him, the component covered under the EPF enactment is less than the minimum rate of wage, i.e., Basic and DA revised by the Govt. of AP, even though the gross is more than that, which includes the components stated to be excluded under Sec. 2(h) of the Act. What should I do? Should I face the proceedings instituted by the Labour department for non-payment of minimum rates of wages, even though I pay more than the minimum rates of wages in terms of gross?

Dear Kesavapanda, I am sorry that your post confuses me.

Definition of Wages Under the Minimum Wages Act, 1948

Section 2(h) of the Minimum Wages Act, 1948 defines the term wages as all remuneration that can be converted into terms of money payable as per the contract of employment and includes house rent allowance. At the same time, the definition specifically excludes the value of certain amenities mentioned in clauses (a) and (b) of item (i) and the amounts paid towards certain heads mentioned in items (ii), (iii), (iv), and (v) of Section 2(h).

Components of Minimum Wages

Section 4 of the Act deals with the components of the rates of minimum wages to be fixed under Section 3 of the Act as follows:

It may comprise of:

(i) A basic rate of wages and cost of living allowance (D.A) linked to the Cost of Living Index

OR

(ii) A basic rate of wages WITH or WITHOUT the cost of living allowance AND the cash value of the concessions in respect of supplies of essential commodities at concessional rates where so authorized.

OR

(iii) An all-inclusive rate comprising all of the above three.

Juxtaposing the definition under Section 2(h) and the componential structure under Section 4 of the Act, we can conclude that statutory minimum wages would mean all remuneration including basic, D.A, H.R.A, and all other allowances payable as per the terms of the contract of employment minus the excluded items. That's why the Honorable Supreme Court held that the parity between the statutory minimum wage and the industry wage should be ascertained by deleting the excluded items of Section 2(h), if any, from the industry wages. It is clear that any contribution made by the employer on behalf of the employee to any Pension Fund, Provident Fund, or any scheme of Social Insurance will not form part of the wages for the purpose of the computation of minimum wages under the MW Act, 1948. But if you deduct the employee's contribution from his Gross wages and pay it over to the concerned authority, it becomes an authorized deduction. Whether the officer objects to such deduction under the pretext it reduces the gross?

Expecting your clarification with a copy of any inspection order received from the officer.

Understanding Minimum Wages and Allowances

The officer depends on the components of minimum rates of wages as defined in Sec. 4 of the Minimum Wages Act. He is not considering the HRA under Sec. 2(h) of the Act. The gross salary of the worker is divided into the following components:

Pay + DA + HRA + Commission on sales + Transport allowance + Medical allowance + Washing allowance, etc. Out of these, the Pay and DA comprise less than the minimum rate of wage set by the Government of A.P., and I also accept it. The government revised the minimum wage for a salesman to Rs. 9200/- (Basic pay and DA), whereas it is 2000/- less than that in my establishment, though the gross is 10,300/- including the remaining five components. I am deducting EPF and ESI contributions only on 7200/-. Therefore, he is considering that 7200/- as minimum wages as per Sec. 4 of the Act and not considering even HRA and other components, stating that they are defray expenses and should not be considered for the calculation of minimum wages. Consequently, he concluded that I am paying 2000 less than the minimum rates of wages and sent a notice under Sec. 12 of the Minimum Wages Act.

Possible Solutions and Compliance

One way he is suggesting is that, in order to meet the government-fixed minimum rate of wages, it can be done by adding the lesser amount from other allowances and starting to deduct the EPF and ESI contributions from 9200/- so that no additional remuneration would be necessary to pay to the workers to keep the gross intact. The additional expenditure that is to be met from my exchequer is the difference of EPF and ESI to that extent of Rs. 2000, i.e., 240/- P.M. and 75/- respectively. Can I accept it and make necessary modifications in other allowances so that I do not need to change the gross and also to show that I am complying with the government's minimum rates of wages by meeting the additional expenses as he stated? Am I not allowed to pay lesser pay and DA, i.e., 7200 instead of 9200, since my gross is more than 9200?

The Honorable Supreme Court in the case of Airfreight v. State of Karnataka in the year 1999 has categorically held that the total pay package, excluding the components as provided in the definition of wage in the Minimum Wages Act 1948, would be considered. It is perfectly legal if the total pay package is not less than the rate of the minimum wage. Notice from the Labour Department can be replied to accordingly.

Understanding the Minimum Wages Act and Industry Wage Structure

Had you furnished the exact amounts of all the components of your industry wage structure, it would have been more convenient for us to make a comparative analysis with the structure of the minimum wages. If there is any difference between the industry wages and the statutory minimum wages, any enforcement authority under the Minimum Wages Act, 1948, has to follow the ratio decidendi of the Supreme Court laid down in its judgment in the Airfreight Corporation Ltd case [1999 Supp (1) SCR 22] only. There is no scope for any other interpretation in excess of enthusiasm for Article 141 of our Constitution explicitly lays down that the law declared by the Supreme Court shall be binding on all Courts within the territory of India.

In this judgment, the Supreme Court categorically held that minimum rates of wages fixed under the Act are remuneration payable to the worker as one package of fixed amount. Earlier also, in its judgment in Unichoyi vs State of Kerala [AIR (1962) SC 12(17)], the Apex Court held:

"Further, the definition of the word 'wages' and the manner prescribed under sections 3 and 4 of the Act fixing the wages would make it clear that 'minimum wage' is one unit of a fixed amount..."

In the Airfreight judgment, the S.C held further as follows:

"In cases where the employer is paying a total sum which is higher than the minimum rates of wages fixed under the Act, including the cost of living index (VDA), such employer is not to pay VDA separately. However, for determining whether they are paying minimum rates of wages or not, the amount paid for the value of items which are excluded under section 2(h) of the Act is not to be taken into consideration." Therefore, the comparison has to be compulsorily on this line only. Hence, I am not able to understand your statement that he is not considering HRA.

Leaving out HRA and Medical Allowance, the other components viz., (i) Commission on Sales (ii) Transport Allowance, and (iii) Washing Allowance would certainly fall under the excluded items of section 2(h) for sales commission is variable and the remaining are special expenses to be defrayed by the employee. Your own calculation of ESI subscription on Rs. 7200/= pm confirms this fact. If excluding the last three, the industry gross wages are equal to or more than the revised minimum wages of Rs. 9200/=, certainly there is unquestionable parity between the two. Check it, please.

Deductions of ESI and PF subscriptions are covered by separate legislations about which an inspector under the MWA, 1948, is not concerned with. Particularly, the amendment carried out by the Central Government to the definition of the term 'wages' in conformity with the Code on Wages, 2019, and the judgment of the Supreme Court in Vivekananda Vidyalaya Mandhir case (2019), replaces the concept of basic wages and it cannot be a point of reference for statutory minimum wages.

Therefore, you may recheck the nature of the components in the industry wage structure and decide its parity with the statutory minimum wages. As long as the sum total of your industry wages excluding Sales Commission, Transport Allowance, and Washing Allowance is equal to the sum total of the basic and V.D.A fixed and revised under the MWA, 1948, there is compliance. If it happens to be so, you can explain it to the Officer and inform him that the claim if any filed u/s 20 of the Act would be resisted accordingly.

Understanding Salary Components and Allowances

The Labour Officer has taken the fixed portion of the salary only. He can do so because the commission is based on sales and is like an incentive, not part of the salary. Traveling expenses are also a reimbursement (unless otherwise provided in the contract of employment). Similarly, a medical allowance is an allowance to defray a specific expenditure. For both of these, one has to produce bills in support or give a declaration that they have met expenses.

Housing Rent Allowance (HRA) and Its Implications

HRA per se is an allowance paid to an employee to pay rent for the house they reside in for the purpose of their employment. Nowadays, most companies pay it universally to all employees, including those who reside in their own houses. Even the EPF verdict on basic wages clarifies this point.

Inclusion of Allowances in Total Wages

If you say that all these allowances are universally available to all employees, you can club all these components together to get total wages. Therefore, you have to submit that HRA is a component of salary and is available to all employees, including those who reside in their own houses. Traveling expenses are not a reimbursement but are also fixed and available to all employees irrespective of their place of residence. The same is the case with medical allowance. Though the commission, which is a variable component, will be left out, you will be able to include HRA, traveling allowance, and medical allowance in the salary.

Labour Officer's Authority on PF and ESI Payments

Now, the Labour Officer cannot direct you on which amount you should pay PF and ESI. Even otherwise, you are expected to pay it on gross salary only.

Great response from the participants. I express my heartfelt thanks to all of you who have responded to my post. As required by Shree Umakanthan sir, I furnish hereunder the breakup of the emoluments in rupees I used to pay to the salesman, which is the core issue of this post.

Breakdown of Emoluments

Basic 5000 + DA 2200 + HRA 1200 + Commission 500 + TA 1000 + Medical allowance 300 + Washing allowance 100.

According to Shree Umakanthan, the HRA can be added to the 7200, which reaches a total of Rs. 8400/- P.M. The said officer argued that unless there is a difference between Sec. 4 and Sec. 2(h), there would not be a separate prescription of Sec. 4 in the Act. He argues that in many of the establishments, the managements show only gross but do not split up the components of wages. All his officers generally take that gross into consideration but he does not. In the cases where there were no breakups provided by the employers, he has to invariably demand the ECR statements under the EPF Act from which he segregates the coverage of the quantum of PF as a contribution from each of the employees, which provides him an estimation of the coverage of the components of the Minimum rate of wage. He derives from the two components of Basic and VDA from Sec. 6 of the EPF Act, which, according to him, are the exact components under Sec. 4 of the Minimum Wages Act on what basis the Government fixes or revises Minimum wages, which is statutory.

He adds that the exclusion of the contents in Sec. 2(h) as stated in the Supreme Court judgment does not mean the inclusion of HRA, a component under Sec. 2(h), which was added only in 1957, which was not a component prior to 1957. Further, he is not desisted from finding out the fact of contributions of the employees under EPF for the estimation of the extent of coverage of Minimum rate of wage the employer has extended, though it is not the lookout for the department of Provident Fund. He also adds that the proviso to Sec. 12 also emphasizes that any statutory deduction is allowed on it, and therefore, he considers the statutory deduction of EPF as per Sec. 12(2) of the Act.

He also adds that my firm is not entitled to give lesser coverage of statutory minimum wages fixed by the Government of AP, which contains the two components of Sec. 4 of the Act, which he terms as exploitation as my firm deducts lesser contribution under EPF Act and the same equivalent lesser amount is added as a contribution of the employer side. By thus, a lot of amount to each employee is held back by my firm. He also adds that though it is the subject matter of the Provident Fund department from the lesser coverage, it is evident that my firm is not paying minimum wages as the remaining components, including HRA, are not helpful to secure the capacity of a person as a worker. I need some more help from all to give a fitting reply.