Confused About Minimum Wage Compliance? Seeking Clarity on Legal Salary Structuring

Hello everyone,

This is my first post on this forum, although I have been a long-time member, learning a lot from your valuable discussions. I am seeking clarity on the topic of minimum wages, particularly regarding certain technicalities where I have encountered varying opinions but have not yet reached a satisfactory conclusion.

Understanding Minimum Wage Notifications

As we know, the government regularly issues Minimum Wage notifications that adjust for the Cost of Living across different types of employment. The notification specifies Basic and Variable Dearness Allowance (VDA), which together make up the minimum wage for each employment type and skill grade in a given state.

According to Section 2(h) of the Minimum Wages Act, 1948:

“Wages means all remuneration, capable of being expressed in terms of money, which, if the terms of the contract of employment (express or implied) were fulfilled, would be payable to a person employed in respect of his employment or of work done in such employment, and includes house rent allowance...”

From this, I understand that "wages" is a summation of Basic + Allowances, including HRA, with certain exclusions.

Salary Structure Example

Now, considering a salary structure for a private company, for example:

Basic: ₹13,500/-
HRA: ₹1,000/-
Other Allowances: ₹1,000/-
Gross Salary: Basic + HRA + Other Allowances = ₹15,500/-

Here, is the "Gross Salary" equivalent to the "Wages" as defined in the Act? (Question 1)

Government Notification and Compliance

Further, let’s assume that the Government Notification for the relevant industry specifies:

Basic: ₹11,500/-
VDA: ₹2,500/-
Total Minimum Wage: ₹14,000/-

I’ve come across two different interpretations regarding compliance with the minimum wage requirements:

Opinion 1: Since the Gross Salary (i.e., ₹15,500/-) is higher than the Total Minimum Wage (₹14,000/-), everything is in order and can be processed.

Opinion 2: The Basic component must be at least equal to Basic + VDA specified in the notification, i.e., ₹14,000/-. Only then can we add a minimum of 5% for HRA, with the remaining amount allocated to other allowances, in order to be legally compliant.

Could you please help me understand which opinion is legally correct, with reference to the relevant Acts, rules, or any judicial precedents?

NOTE: PF amount is calculated on Basic + Other Allowances (For the scenario)

Your insights and guidance would be highly appreciated.

Thank you.

Best Regards,
Azhar

Understanding the Scope of Wages for Remuneration

For the purpose of payment of remuneration, wages mean the total amount agreed upon. In your example, it is Rs. 15,500. Legally, an employer is bound to pay only the statutory minimum wages notified. Any amount paid over and above the notified minimum wages, i.e., Rs. 14,000 in your example, can be considered as remuneration falling outside the scope of wages.

Depending on the scope of wages under various Acts, you have to consider which wages to take for deciding the qualifying wages. For example, for the calculation of a bonus, you can take the notified minimum wages. For deciding the contribution payable to ESI, you have to take the gross pay as per the contract of employment. The same is applicable for EPF also. However, under EPF, there is a component called HRA which is excluded from the scope of wages. Though the same should be interpreted as house rent allowance paid as a compensatory allowance to those who reside in leased houses, most employers exclude it from EPF qualifying wages. The EPF authorities also do not interfere in it.

Computation of Gratuity

In the case of computation of gratuity, what is relevant is the gross salary. The Payment of Gratuity Act defines wages as the total amount with the exemption of commission, overtime allowance, house rent allowance, and similar other allowances. Please understand that there is no allowance called "other allowance," but there can be allowances to meet certain objectives, like education allowance (an allowance paid to an employee to compensate for the cost of education of their children), hill allowance (an allowance paid to an employee posted in hill areas to compensate for some costs in hilly terrain where the climate may be very cold and without blankets or sweaters one cannot survive, or the transportation would cost high in such places, etc.), city allowance (to compensate for the additional costs of living in cities), etc.

The HRA is also a compensatory allowance paid only to those who reside in leased houses. If you see the exclusion part of wages (like commission, overtime, bonus, HRA), you will find that these are based on some conditions like commission is based on some results, overtime depends on overtime working, bonus depends on profitability, etc., and the amounts of which are not fixed in the appointment or contract of employment. Simply, what will qualify for gratuity is the amount of wages agreed upon as per the appointment order/contract of employment.

Hi @Madhu T K, so to summarize what you have mentioned: (Please correct me if I am wrong)

Gross salary is considered for determining compliance with the Minimum Wages Act as long as it meets or exceeds the statutory minimum. As long as the total remuneration (gross pay) exceeds the statutory minimum, it's compliant, regardless of how allowances are distributed. For statutory contributions like PF and ESI, different interpretations of "wages" are applied based on what components are included or excluded by the respective Acts.

Interpretation of Wages Under Different Acts

The interpretation of "wages" changes based on the specific Act.

1. For PF (EPF) Contributions: Gross pay is taken, but HRA is usually excluded from the scope of wages for PF calculations. This exclusion happens even though HRA is not explicitly recognized by authorities, and employers generally exclude it without much interference.

2. For ESI Contributions: The gross pay (as per the contract) is considered, meaning everything except statutory exclusions is included.

3. For Gratuity Calculation: The Payment of Gratuity Act excludes certain components, including HRA, commission, overtime, etc. It considers the wages as agreed upon in the employment contract, excluding allowances that are compensatory or not fixed.

House Rent Allowance (HRA)

HRA is specifically meant to compensate for rented housing costs and is excluded from PF and gratuity calculations. It's not considered a fixed part of the salary that counts towards these calculations.

Exactly. Wages shall mean the total amount agreed upon as per the contract of employment. It is with reference to certain contributions and payments by the employer that we have different treatment. Allowances, which are fixed and mentioned in the contract of employment, shall also be part of wages, whereas those allowances which do not have a specific/quantifiable amount shall only be outside the scope of wages.

Hi Azhar, I would suggest that if you are located in Maharashtra, simply adopt the structure notified in the Notification of the Maharashtra government published from time to time and increase marginally whenever the notification stipulates increases in components. I hope this will satisfy the statutory obligation with respect to Basic Pay and Dearness Allowance (DA).

In case your contracted total emoluments (as per the offer letter) of the employees concerned are well covered within, then let it be like Basic Pay, Variable Dearness Allowance (VDA), etc. If the notified Minimum Wage is less than the contract total emoluments, then add additional allowances (like special pay, special allowance, etc.) to arrive at the total agreed emoluments. I think this approach would satisfy the legal obligations and other norms. Accordingly, you can define your policy framework.