Suspension and Subsistence Allowance: Should We Deduct ESI, PF, and Labour Welfare Fund?

When a workman is placed under suspension pending inquiry as part of disciplinary action, we pay subsistence allowance as per the Act during such suspension period. Do we have to deduct ESI, PF, and Labour Welfare Fund contributions from such subsistence allowance payable?

Dear Ranganathan, Contribution to ESI is akin to an insurance premium. The Supreme Court had already held in Regional Director, ESIC v Popular Automobiles Ltd [AIR 1997 SC 3956] that a suspended employee and his employer are liable to remit ESI contributions from the subsistence allowance paid. Quoting the ratio decidendi of the above judgment, the ESIC also issued a clarification treating the subsistence allowance as wages as defined under section 2(22) of the ESI Act, 1948.

However, under the EPF Act, 1952, subsistence allowance is not considered as wages. Hence, there is no need to deduct EPF contributions for the period of suspension pending an enquiry. Contribution to the Labor Welfare Fund should not be deducted from the subsistence allowance as it is not classified as wages.

Subsistence Allowance as Wages: A Controversial Issue

I would like to add that the treatment of subsistence allowance as wages remains an unresolved controversy due to two schools of thought based on the interpretation of the concept of wages concerning the contract of employment.

One view is that wages are the consideration, either monetary or capable of being expressed in terms of money, payable by the employer after the fulfillment of the terms of the contract by the employee. However, during suspension, the employee is not allowed to work and therefore loses the right to wages.

The counterpoint is that the contract of employment still subsists during the entire phase of suspension, and the non-performance of work by the employee is not voluntary or willful but simply imposed by the employer. Therefore, subsistence allowance should also be treated as wages.

My personal view is that the very name "subsistence allowance" indicates that it is only an allowance to keep the employee surviving and enable him to defend himself against the charges imputed against him. At the end of the day, if he is exonerated or awarded any punishment other than dismissal, he is going to be paid his normal wages after adjusting the subsistence allowance received so far. In this backdrop, for the purpose of deductions towards certain obligations under the law, the failure of which for the time being is not going to deprive him of certain benefits out of such contribution, they need not be deducted from the subsistence allowance.