Are Leave with Wages and Statutory Bonuses Included in PF and ESI Calculations for Contract Workers?

Dear Seniors and Colleagues,

Please help me with the reply to the following queries:

Leave with Wages and PF/ESI Calculation

1. We have engaged around 1,300 contract laborers through various vendors. For these contract workers, we are paying the Leave with Wages amount through vendors on a monthly basis along with their salary. Our query is whether this Leave with Wages amount has to be considered for PF calculation and ESI calculation.

Statutory Bonus and ESI Calculation

2. We are paying a Statutory Bonus (Advance Bonus) for 1,300 contract workers through vendors on a monthly basis along with their salary. Our query is whether this Statutory/Advance Bonus amount has to be considered for ESI calculation.

Thanks in advance.

Regards, Tonmoy Duta

Dear Tonmoy Dutta,

As you are well aware, contributions to social security schemes under the Employees' State Insurance Act, 1948, and the Employees' Provident Fund Act, 1952 are computed based on the definitions of the term 'wages' respectively under section 2(22) and 2(b) of both Acts.

Analysis of Wages Under ESI Act, 1948

If we critically analyze the definition of wages under section 2(22) of the ESI Act, 1948, we can conclude that all the components forming part of the remuneration, which is paid at intervals not exceeding two months other than the excluded components, should be taken into account for the purpose of calculating contributions payable towards the insurance scheme.

I am not, therefore, able to think, to the best of my understanding of the statutory leave provisions, that payment of leave with wages on a monthly basis can be excluded from the calculation of contributions. Every law providing the benefit of Earned Leave or Annual Leave with Wages lays down the method of calculating such leave linked to the attendance of the employees during a 12-month period, its accumulation to a certain ceiling, and its encashment only in the event of termination of employment. Compliance with a legal provision, in its true sense, means doing the thing only in the manner the law has specifically provided and cannot be otherwise. Paying off salary for the leave earned during the same month would certainly defeat the very purpose of such a leave provision, which enables the employee to peacefully enjoy his leisure or discharge his family/social commitments as and when required. If perceptions of financial burden and uncertainty of continued employment overwhelmingly influence both the benefactor and the beneficiary, annual sanction of encashment of a certain portion of the accumulated EL may be tolerated as a measure of expediency.

Leave Encashment and EPF Contribution

Regarding the question of adding the amount of leave encashment to the contribution to EPF, the legal controversy had already been settled once and for all by the Honorable Supreme Court of India in its judgment in Manipal Academy of Higher Education v. Provident Fund Commissioner [AIR 2008 SC 1951], which held categorically that surrender leave salary does not form part of basic wages under section 2(b) of the EPF Act, 1952, for the purpose of contribution under section 6 of the Act.

Statutory Bonus and Wage Computation

Similarly, in my considered opinion, the monthly payment of statutory bonus by way of bonus advance cannot be treated as forming part of wages for the purpose of computation of contribution under both the enactments.