Understanding Production Incentives: Should ESI and PF Be Deducted?

Dear friend,

In our industry, we do allow actual production incentives and deduct ESI on it, but not PF as it is considered a part of allowances. Let's see how others feel. I am eager to know the legal position.

Thanks,
Rahul Sethi

Dear Friends,

You all know that Overtime Wages attract statutory deductions like ESI and PF. Can you shed some light on whether productivity-based production incentives attract ESI and PF contributions? In reality, production incentives refer to Production-based incentives and not just a term used for Overtime to avoid ESI and PF contributions!

-Srinaren

Dear Srinaren,

Production-linked incentives - if this is disbursed separately (any gift vouchers, any articles), then PF and ESI are not attracted. If it is linked with salary, then PF and ESI will be attracted.

LK

Hi Friends,

This is an everyday problem/question. Please send in your views, rules, comments, etc., which are going to benefit all HR professionals. All senior members are requested to post their views.

-Srinaren

Hi,

PF is on Basic and DA. ESIC is to be deducted on all allowances, including incentives.

Regards,
Vijay

Hi,

This is an issue which can't be replied to in a straightforward formula. I humbly request all honorable members of this forum not to comment on any issue unless studied at length, especially in legal matters.

The production incentive scheme linked with productivity neither attracts ESI nor PF. The renowned case is that of Whirlpool decided by the Supreme Court of India.

Every production scheme has to be examined based on the facts and terms before reaching any conclusion.

PF is not attracted on payment of overtime. Moreover, overtime is not an allowance. Another aspect of this issue is that once you deduct ESI on production incentive, you accept the payment as part of wages. Then why not PF on such an amount?

In the end, your scheme and its drafting are the answers to your question. Simply naming a payment as a production incentive will not be out of the purview of ESI and PF. Authorities have all powers to lift the veil from such payments.

Regards,

Anil Kaushik

Chief Editor, BUSINESS MANAGER

Email: akaushikus@yahoo.com

Phone: 09829133699

Hi,

The question is only about ACTUAL PRODUCTION INCENTIVE, and hence I restrict my response to this.

The Act envisages all incentive payments within the definition of Wages, providing these payments are made monthly or once in two months. The Whirlpool case is about the payment where it is not made every month or once in two months. I have provided an extract of this judgment for you to read. The Supreme Court emphasizes "provided the periodicity of payment is more than two months."

Legal Position

All production incentives are covered under the definition of Wages provided that the periodicity of these payments is two months or less. Please see the brief of the Whirlpool Judgment below.

INCENTIVE BONUS:

As per the decision of the Supreme Court delivered on 8.3.2000 in the case of M/s. Whirlpool India Ltd. Vs. ESIC in civil appeal No.1903 of 2000, additional remuneration to become wages has to be paid at intervals not exceeding two months as distinguished from being payable. Thus, there has to be actual payment, and the payment of production incentive does not fall either under the 1st part or last part of the definition of the term wages as defined in Sec.2(22) of the Act, hence no contribution is payable on the incentive bonus, provided the periodicity of payment is more than 2 months. (Earlier instructions were issued by this office vide Memo No.T-11/13/53/19-84-Ins.IV dt. 19.9.84, Memo No.Ins.III-2(2)/2/69 dt. 26.12.73, Memo No.T-11/13/54/18/82-Ins.IV dt. 14.7.82 & Memo No.D/Ins.5(5)/68 dt. 18.9.88.)

Siva

Hi Friends,

I totally agree with Mr. Anil Kaushik. Definitely, this is not an issue that can be replied to in a straight jacket formula. We should understand that even before we join an organization as an HR professional, the organization will have formulated a few things, and that will be followed by all. Many times, even after realizing that it is wrong or marginally faulty, we tend to overlook and just follow. This is what is bothering!

Each law or rule can be interpreted in different ways by different people. Many times the law itself will be ambiguous, and every person on earth will interpret it in his own way. But ultimately, who is going to suffer? The management will ask the HR professional what you have done. I know instances where the complete onus falls on the HR.

In fact, I am surprised by the way our honorable members of this site are responding. They are so authentically saying that this is wrong or right! My only request to all the honorable members is to look at the issue thoroughly and then comment authentically. One member says Production Incentive does not attract ESI. Another member says no, it attracts ESI. This will definitely show that we members do not agree with each other, and what is followed in our organizations itself becomes authentic. If not, why should there be any confusion?

If you have gone through my posting, you would have noticed that this type of situation is being faced by our friends, and my only intention of posting this topic was to make aware of the actuals with postings from learned members like Mr. Anil Kaushik, Mr. T. Sivasankaran, etc.

Once the law is understood in letter and spirit, there will not be any confusion within the HR community, and life becomes easy. That was the intention of my posting.

Even if more members want to put in their views, they are welcome. If I am wrong anywhere during my posting, I stand corrected.

- Srinaren

I fully endorse the views expressed in the previous post regarding different opinion polls on PF/ESI from HR members scattered across India. Quite surprising!

To be frank, I am not following many of the rules strictly laid out for HR personnel. In my company, the management has already devised its own rules, allowances, deductions, exemptions, etc. Consequently, the HR policy prepared by me merely stands as a mute spectator.

Strictly speaking, I have pointed out many of these as gross violations. However, who bothers? Therefore, if the issue escalates beyond our control, it's better to jump off the boat for safety rather than trying to teach them a lesson or tame an unruly situation. For many issues, we may not have a solution as much of the damage would have been done before we even joined the job. It is futile to repair or rectify the massive errors since employees may revolt if changes are made.

Reality often differs from what we have learned and what rules and Acts dictate.

Regards, Chandru

Dear Srinaren and Chandrasekaran,

One of the most important qualities a professional should exhibit is courage.

Many times we show boldness and get into problems. The famous saying "once bitten twice shy" starts operating from here.

Just see the subtle difference between boldness and courage.

Courage

The ability to face danger, difficulty, uncertainty, or pain without being overcome by fear or being deflected from a chosen course of action

Bold

Willing and eager to face danger or adventure with a sense of confidence and fearlessness

To be courageous, one needs to develop abilities. Abilities include developing knowledge. That is precisely what Mr. Srinaren is talking about.

Just a bit of advice. We should never say, "My management is not listening" or "My management listens only to accounts" and the like.

Some of the legal issues I had to face internally and convince the organization where I worked include:

1. Leave encashment on resignation

2. PF for Trainees (Under certain circumstances)

3. Minimum wages - convincing the top management that incentives cannot be included for purposes of Minimum Wages.

4. Overtime wages

5. Compensatory holidays

I can list more. These issues keep coming. We need to do our homework well and keep highlighting instead of saying I can't help.

Probably Citehr can give you all the knowledge inputs to make you courageous.

To be courageous, it is not enough to have the willingness to face danger. We need to develop the ability to face.

Abhimanyu is known for boldness.

His father Arjun is known for courage.

Siva

I welcome the bold approach of Mr. Siva. This may be suitable for a person who has put in 30 years of experience. Whereas Srinaren and I may not have that patience to try to change things and teach a lesson to the employer.

At the threshold of taking the HR assignment from them, all we could do is prepare an action list and then list out the gross deviations and violations.

A suggestion may be made from our side for them to check the wrong procedure, but it depends on the management to implement or listen to you. We need not showcase our courage in trying to change them.

Instead, they may have to forcibly remove us due to dissatisfaction. Which management allows you to raise arms against it, follow anti-employer rules, trigger problems among the employees? Initially, our blood boils, our mails emit steam owing to the emotional turmoil that employer practices are not good. If we are summoned for the same reason, how many of us know under what circumstances such bad practices were advised for the management? Much damage would have been done when we take up the position there, and our role would become redundant to offer an explanation to labor authorities if summoned.

Working as staff or a consultant has to be our livelihood and not enter into a tug of war wherever we go. Reality is always bitter, and one has to be wise enough to sail across.

Regards,

Chandru

Dear Chandru and Siva,

I feel Chandru has become more emotional and is trying to impress upon the status that Management is overruling the HR community. It may be true in some cases wherein the Management least bothers about the ethics of business, does not care for the people who make them (the Management) earn money for their investment, and believe that without them, the Management cannot survive! Most of these types of industries/organizations are small in nature, and their only intention is to make/earn returns for their investment.

Probably, some medium-scaled companies also have this problem. This may be because of the wrong introduction of policies and procedures by our own HR community people! Not only this, because of the immaturity or lack of knowledge of laws, they formulate something which is lacking in all aspects and over a period that becomes a management policy. This will continue until a professional who is equipped with experience, sound knowledge, and conviction tells the Management that what is being followed requires a change.

I completely agree with Siva that one should have the courage and conviction to tell the Management that we need to honor the Law of the Land. Now, many of the buyers from abroad have brought in Social Compliance for the Exporters to be followed, which is based on the Law of the Land and International Labour Organization laws. If the Management does not follow the rules, they will be disqualified from doing business with them. However, many rules have a lot of flaws because these are the laws formulated in 1947 and are outdated. The Government of India has to review all these outdated laws in consultation with the Captains of the Industry.

I also have 30 years of industrial experience, wherein all these years, I have fought with many Managements and made them realize their wrong policies. While doing so, I never bothered about my job. I feel an HR person or, for that matter, a Manager should be PEOPLE CENTRIC WITH THE MANAGEMENT AND MANAGEMENT-CENTRIC WITH THE WORKERS. In my experience, workers will definitely be matured enough to understand if what you are doing is good for them or not when you impartially weigh the situations and make decisions.

My intention in posting this subject was to help our brothers and sisters of the HR Community understand what is law and what should be followed, with the inputs of Senior HR Professionals.

Any comments, you are welcome.

-Srinaren

Production Linked Incentive Scheme

We have to issue an office circular in a file, notice board, and CC to the labor inspector that we have started this kind of scheme. We cannot pay it every month. Yes, you can give a lump sum amount, meaning a round figure amount as an advance in production bonus. For example, if somebody has a bonus of Rs 8300 for the June month, then we can pay up to Rs 7500. If we pay the full Rs 8300, it will be considered as wages, and then you know ESI and PF will come into play.

We should pay it on a quarterly basis. Then no PF & ESI department will raise any questions on that.

Regards,
Pawan Darda

GM in MNC
Jaipur

Myself Sujay Rao, Sr. Manager HR in a reputed company in Goa, would like to intervene and say that we, in our company, are representing this issue at the ESIC Office in Goa. We have provided case laws such as Whirlpool vs. ESIC and Ramachandran vs. ESIC, reported in 1974 (46) FLR page 73. These cases state that the words 'additional remuneration' in the definition should be interpreted in context with the earlier part of the inclusive definition. Additional remuneration must be remuneration which, although not part of the wages, could be paid as part of the terms of the contract of employment.

Since the point is that incentives should not be part of the contract, i.e., no agreement in the appointment letter or in the Charter of Demand should mention it.

Secondly, the scheme will have to be frequently changed.

Thirdly, remuneration, if any, should be paid at intervals not exceeding two months.

If we succeed in this matter, we shall save a lot on paying ESIC on incentives.

Regards,
Sujay Rao