Salary Bifurcation and Legal Implications
There is no rule that mandates salary bifurcation, nor that only a certain amount should be treated as basic pay. According to the law, the salary as per the employment contract is considered wages/salary. This is the basis for contributions to ESI, EPF, Bonus, Gratuity, etc. However, each Act prescribes certain threshold limits, and employees earning more than these amounts are excluded from coverage. For instance, an employee whose wages exceed Rs 21,000 per month is not covered by ESI and Bonus. Similarly, an employee whose wages exceed Rs 15,000 at the time of joining is not required to receive PF. Nonetheless, the entire amount is considered wages for gratuity computation.
Unwritten HR Practices
HR professionals often adopt unwritten practices by categorizing some salary elements as 'allowances.' This involves showing a minimal amount as Basic Wages and a larger portion as allowances to reduce statutory contributions towards PF, Bonus, Gratuity, etc. However, this practice lacks legal sanctity, and employers may still be held responsible for statutory contributions based on gross salary. Allowances not fixed by amounts and paid based on employee category or location are not part of the salary. Yet, many HRs disregard this rule, categorizing components as allowances outside the scope of wages.
Understanding Remuneration
Legally, all earnings by an employee are considered remuneration. Salary increases occur for two reasons: to compensate for the rising cost of living and to reward performance. The former is reflected in dearness allowance, and the latter in basic wages. Unfortunately, many private companies do not pay DA, and increases are often added under allowances. If brought to the authorities, it can be established that these allowances are part of wages.
Establishing a Clear Salary Structure
To avoid future confusion and risks, it's advisable to have a salary structure with basic salary, dearness allowance, and other allowances varying by employee category and location. The basic pay and dearness allowance should always exceed the minimum wages set by the state government, protecting the employer to some extent.
Conclusion on Bifurcation
In short, bifurcation is merely an artificial arrangement. Numerous judgments state that the total salary per the employment contract represents the legal wages for calculating gratuity, PF, or other benefits. Any attempt to treat the least amount as basic wages is arbitrary. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha noted that allowances were essentially part of the basic wage, camouflaged as allowances to avoid deductions and contributions to the Provident Fund.
Therefore, bifurcating the salary offers no real advantage. However, when an employer is bound only to pay statutory wages, the minimum wages set by the state, they can bifurcate remuneration into basic wages, which should be equal to or more than the minimum wages, and allowances of their choice.