Understanding PF Calculation: How Should I Structure Minimum Wage Components in Maharashtra?

Good Day All seniors and experts, I have one query. In Maharashtra, the minimum wage is as follows: Basic 10260 + DA (special allowance) 2444 = 12704.

Questions on PF Calculation and Wage Structure

1. On which amount do I calculate PF? (Only Basic or the whole Rs.12704)
2. If I have to pay this Rs.12704, do I need to follow the same Basic and Allowance structure, or can I organize it as per my convenience? Is it possible to divide this (₹12704) into various parts, for example, Basic 5000 + special allowance 6000 + Conveyance 1000 + other 704? If yes, then on which parts do I calculate PF?

Thank you.

You should pay PF on the gross salary, i.e., Basic and DA (Special Allowance). In whatever manner you bifurcate, the salary as per the minimum wages notification is the statutory salary on which PF will be payable. Not only PF but other payments like ESI, Bonus, Gratuity, Leave encashment, etc., should be based on that salary only.

The Basic mentioned in Minimum Wages is the basic rate of wages, and it is not BASIC WAGES as defined under the EPF Act. The two are different and are not a mirror image of each other.

Bifurcation of Minimum Wages
Bifurcation of Minimum Wages into components has been upheld by the Apex Court in the year 2019.

Basic and DA notifications in the notifications are the minimum wages on which statutory deductions are made, except for ESIC.

You have to calculate on ₹12704/-. You cannot lower the basic ₹10260/- and DA. Any bifurcation on Basic and DA under minimum wages is a crime.

Please refer to the judgment of the Supreme Court in the case of Hindustan Sanitaryware pronounced in the year 2019, where it is stated that there is no bar on the bifurcation of Minimum Wages. In this regard, also refer to the judgments of the High Court of Punjab and Haryana as well as the High Court of Delhi, where it is categorically mentioned that it is not mandatory for the employer to pay PF on Minimum Wages. These judgments forced the EPFO to issue circulars in 2011, where their directive to pay PF on Minimum Wages was put in abeyance. A similar judgment has been passed recently in January 2023 by the High Court of Madras. It may not be out of place to inform that an SLP filed by the EPFO in the Apex Court is pending since 2011-2012.

It is reiterated that in the Minimum Wages Act, it is the Basic Rate of Wages and not BASIC WAGES as defined under the PF Act.

Splitting is allowed where payment is made above the MRW notified but disallowed where payment is equal to MRW. Refer to the following:

Supreme Court Ruling on Minimum Wages Notification

On 29 April 2019, the Supreme Court of India (Supreme Court) in Hindustan Sanitaryware and Industries Limited and Ors v State of Haryana, Civil Appeal Nos. 2539 of 2010 and 4454 of 2019 (Hindustan Sanitaryware) ruled on the validity of the minimum wages notification dated 21 October 2015 issued by the Department of Labour, Government of Haryana (Notification). The ruling is significant when viewed from the standpoint of the powers of the appropriate government under Section 4 of the Minimum Wages Act 1948 (MW Act). In relation to the segregation of components of wages, the Supreme Court has reiterated its judgment in Airfreight, where it held that when an employer is paying a total sum that is equal to or higher than the minimum rates of wages fixed under the Minimum Wages Act, the employer would be in compliance with the Minimum Wages Act, provided that such wages are calculated in accordance with Section 2(h) thereof.

Non-Splitting of Minimum Wages

"Once rates of minimum wages are prescribed under the Act, whether as all-inclusive under Section 4(1)(iii) or by combining basic plus dearness allowance under Section 4(1)(i), they are not amenable to split up. It is one pay package. Neither the scheme nor any provision of the Act provides that the rates of minimum wages are to be split up based on the cost of each of the necessities taken into consideration for fixing the same."

In other words, if the remuneration paid to the employees is equal to or more than the minimum rates of wages, the employer has complied with the law in substance.

Gaurav, the Supreme Court has already ruled in 2019 that PF is to be paid on gross salary less HRA and certain allowances that are specific for the reimbursement of particular expenses and not paid to all employees (concept of uno component of wages). Everything else is a part of basic wages in PF.

Therefore, the splitting of the wage structure into various components is immaterial today. PF is to be paid on all allowances that are UNO (universal, normal, and obligatory). Whether you can split minimum wages or not is a different argument, but it will no longer affect PF computation.