Madhu T K

ESI qualifying wages under Social Security Code, 2020

2025-12-15T01:08:00.000-08:00

Under the earlier rules, the ESI was contributed on gross salary. The only components which could be excluded were Travelling allowance and washing allowance (on condition that the employer has provided Uniform to the workers). Under the Social Security Code, only the Basic wages and Dearness allowance will qualify for ESI. Yes, if the employee’s salary includes allowances like house rent, amount paid for the special skill put in for the work or special allowance, commission, wages for overtime work performed, conveyance or travelling allowance or any amount payable following a settlement or award by Tribunals, bonus and contributions payable by the employer towards EPF, then that amount will also be taken for deciding the amount payable to ESI scheme. If the total amount payable as allowances listed above exceeds 50% of the total salary including Basic and DA, then the amount which exceeds 50% should be added to Basic and DA portion in order to decide the amount payable as ESI.

Therefore, there will be two parts in the salary, ie:

1. Basic and DA

2. Allowances

Suppose an employee’s salary is as follows:

Components	Amount
Basic Wages	18000
VDA (as per CPI)	2500
Retaining allowance	0
Sub Total (A)	20500
HRA	3000
Conveyance allowance	1000
EPF (Employer)	1800	12% on Rs 15000
Overtime allowance	1000
Commission	5000
Sub Total (B)	11800
Total Remuneration (A+B)	32300
1/2 of all remunerations	16150
Allowances which exceed 1/2 of total	0	Amount of allowance which exceeds 50% of total remuneration
Wages which will qualify for ESI	20500

Since the total of allowances (subtotal (B)) is less than 50% of the total remuneration, we need not take anything of the allowances but just take the first part of the salary, ie, Subtotal (A) only for contribution to ESI. In such cases, the 50% principle will not be applicable.

Another example with the same fixed wages but with different variable allowances:

Components	Amount
Basic Wages	18000
VDA (as per CPI)	2500
Retaining allowance	0
Sub Total (A)	20500
HRA	3000
Conveyance allowance	1000
EPF (Employer)	1800	12% on Rs 15000
Overtime allowance	8000
Commission	12000
Sub Total (B)	25800
Total Remuneration (A+B)	46300
1/2 of all remunerations	23150
Allowances which exceed 1/2 of total	2650	Amount of allowance which exceeds 50% of total remuneration
Wages which will qualify for ESI	23150

Since the subtotal (B) exceeds 50% of the total wages by Rs 2650 (25800- 23150), that amount should be added to subtotal (A). Then the wages will become Rs 23150. Then he will become an excluded employee even though his fixed part of wages is within the threshold limits.

In another scenario where an employee whose First Part of wages (basic wages and dearness allowance) is Rs 16000 but whose second part of wages (allowances including commission and overtime wages) is Rs 34000 will be out of ESI coverage just because his wages as per the definition of the Code would become Rs 25000.

In short, the variable part of the salary will decide the coverage. An employee working for more overtime hours will be out of the scheme. This will prevent him from working overtime. Similarly, an employee earning more amounts by way of commission or incentive will lose the benefits of ESI. In majority of the cases, it is the benefits extended to the old parents which will keep the workers alive under ESI. When they lose it, naturally, they will rethink, whether to work hard and earn commission or to lose the benefits under the ESI Scheme……..!!

Threat for Personnel Officer/ HR Officer:

The variables will decide the coverage of workers under ESI Scheme. Earlier, it was the fixed part of salary which would decide whether an employee should be covered or not. But under the new Rule, we cannot just give coverage based on the fixed part of salary, the First part in the above examples. Whereas an employee has to be covered in the first day of his joining, and at the same time, we cannot foresee how much would be the variables, the only thing that we can do is to cover the employee just on the basis of the first part of wages.

Since the allowances will keep on changing every month, you have to find the contribution payable every month using this formula. For establishments which pay PF on actual salary instead of Rs 15000, the contribution to PF will also influence the calculation of ESI.

It is accepted that an employee once covered will continue to be covered till the end of the contribution period. Again, in the month of October or April, if the employee’s salary comes under the threshold limit of Rs 21000 on account of lesser amount of overtime wages or commission, then he cannot be excluded. Coverage shall also take place in any month in which the allowances is short of 50% of the total remuneration.

The existing theory of allowances which are paid in an interval of more than two months will not apply under the SS Code. Similarly, the treatment of overtime wages for coverage and contribution has come to an end.

Madhu T K

Principal Consultant

DefusIR Solutions Pvt Ltd

Kannur

www.defusir.com

Mail: madhu@defusir.com

Phone: 0497 3570162, 9847583239, 9400683239

Gratuity Qualifying Salary- Some observations

2024-04-21T21:33:00.001-07:00

Since there has been a shift in the concept of remuneration for service from the Salary to the Cost to Company, the old theory of computing Gratuity on Basic Salary alone would require a replacement…….

Gratuity is payable to those entitled on the basis of the last drawn salary. It is also found that in almost all private companies only basic salary will qualify for gratuity calculation. A very few companies, like companies which have a proper Personnel department to take care of payroll and those who have very effective Trade Unions, may have a component, viz, dearness allowance as part of their gratuity qualifying salary. This is a practice followed by the companies on an impression that gratuity is payable only on the basic pay and dearness allowances, if any. Unfortunately, you cannot find the term “basic wages” anywhere in the legislation governing payment of gratuity to employees, ie, Payment of Gratuity Act, 1972.

Section 2 (s) of the Payment of Gratuity Act, 1972, defines the term “wages” as “ all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance”.

When the definition makes it very clear that wages mean the total emoluments that an employee earns why should it be calculated on basic wages alone. Certainly, if you have a dearness allowance as part of salary, that would also be included because the definition makes it clear that wages shall include dearness allowance also. But nowhere in the Payment of Gratuity Act it is said that the amount of gratuity should be calculated on Basic salary and Dearness allowance alone.

Basic Salary and Emoluments

The only place where the word basic wages appears throughout the Act is in the Statement of Objects and Reasons for enactment of the Act. In the Statement of Objects and Reasons of the Payment of Gratuity Act, 1972 it shows that the term wages mean basic wages and dearness allowances only. But it cannot be accepted as part of the Act. In Gujarat University Vs. Shri Krishna, (AIR 1963 SC 703), State of West Bengal Vs. Union of India (AIR 1963 SC 1241) and S. C. Prashar, Income Tax Officer Vs. Vasantsen Dwarakadas and Others (AIR 1963 SC 1356) the Courts have observed that the Statement of Objects and Reasons accompanying a Bill, when introduced in Parliament, cannot be used to determine the true meaning and effect of the substantive provisions of the statute. They cannot be used, except for the limited purpose of understanding the background and the antecedent state of affairs leading up to the legislation....".

In the absence of a definition to basic wages/ salary under the Payment of Gratuity Act, it is good if we refer to the other enactments and judicial observations wherein the same is defined. “When an expression is not defined, one can take into account the definition given to such expression in a statute as also the dictionary meaning” is an observation by Justice C K Prasad and Justice Jugdish Singh Kheher while delivering the verdict in Kichha Sugar Company Limited through General Manager Vs. Tarai Chini Mill Majdoor Union, Uttarakhand, [(2014) 4 SCC 37].

The Industrial Disputes Act, 1947 defines the term “wages” without any reference to “basic” as wages means all remuneration...... payable to a workman in respect of his employment.

Section 2(b) of the Employees Provident Fund and Miscellaneous Provisions Act 1952, defines "basic wages" as “all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include (i) the cash value of any food concession, (ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment (iii) any presents made by the employer”. Similar definitions of wages to include all remuneration are also available in the Payment of Wages Act 1936 and the Minimum Wages Act 1948.

In Bridges and Roofs (India) Ltd Vs Union of India (1963 (2)LLJ 490, (1963) 3 SCR 978) the Apex Court has clarified that an “allowance paid to all the employees would be part of Basic Salary and only those allowances which are paid to some employees considering the nature of their duties or purely out of management's own interests or pleasure, can be excluded from the scope of Basic Wages.”

With regard to the term “emoluments” as used in the definition of wages in section 2(s) of the Payment of Gratuity Act, we shall refer to its directory meaning and some of the interpretations of the Learned Judges. The directory meaning of the term “emolument’ is salary, fee, or profit from employment or office. The Merriam Webster Dictionary defines the term emolument as “the returns arising from office or employment usually in the form of compensation or perquisites”. It corresponds to the definition of salary as given in section 17(1)(iv) of the Income Tax Act 1961, which says that salary includes "any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages”. In Gestentner Duplicators Pvt Ltd Vs Commissioner of Income Tax (1979 (2) SCC 354, 1979 SCR (2) 788, 1979 AIR 607) it was clarified that the commission paid to the salesmen would fall under ‘salary’ as it was paid as per terms and conditions of employment. In Bennett Coleman & Co P Ltd Vs Punya Priya Das Gupta (1970 AIR 426, SCR (1) 181)it was observed that car allowance and telephone allowance were part of remuneration which would qualify for gratuity. As such, emolument is an advantage arising out of employment. Apart from salary, it shall consist of house rent allowance, medical allowance.

Straw Board Mfg. Co Ltd case

The Supreme Court in Straw Board Mfg. Co Ltd Vs The Workmen (1977 AIR 941, 1977 SCR (3) 91) has said that “We clarify that wages will mean and include basic wages and dearness allowance and nothing else”. This is the only available interpretation to support the act of the employers paying the gratuity on basic pay and DA. But before accepting the same in the current scenario, certain important points should also be analysed.

The Strawboard case pertains to a dispute over payment of benefits (gratuity) raised in 1958, long before the payment of Gratuity Act was passed in 1972. The case of 1958 was all about the length of service and the amount on which the gratuity was payable in the backdrop of a gratuity scheme framed by the Industrial Tribunal, Allahabad. The Company claimed it should be available to those who had worked for ten years and the amount of gratuity should be calculated on the basic salary alone. But the Tribunal framed a gratuity scheme allowing all employees who have completed five years of service and the basis of calculation at basic pay and dearness allowance. It was observed that “the determination of gratuity is not based on any definite rules and each case must depend upon the prosperity of the concern, the needs of the workmen and the prevailing economic conditions examined in the light of the auxiliary benefits which the workmen may get on determination of employment”. That means that even though the verdict from the Apex Court was delivered in 1977, that is after the enactment of the Payment of Gratuity Act 192, the decisions were based on the gratuity scheme framed by the Tribunal. The Court had even said that “we are not called upon to interpret an Act since, in this area of law, the Payment of Gratuity Act came in on a later date”. That was why in Ti Cycles Of India, Ambattur Vs M.K.Gurumani & Ors (2001(7) SCC 204) the Apex Court mentioned that “ this Court, in Straw Board Mfg. Co. Ltd. vs. Its Workmen, was concerned with the gratuity scheme formulated prior to the Act”. In Harrisons Malayalam Ltd., Vs C. Mohammed Kutty And Ors [2004 (101) FLR 115, (2004) ] the Kerala High Court has said that “the Straw Board Manufacturing Company's case (referred in T I Cycle's case by the Supreme Court), reveals that it related to the period before the enactment of the Payment of Gratuity Act,1972”. Thus, it is very clear that the Supreme Court had not considered the impact of Section 2(s) as contained in the Payment of Gratuity Act, 1972 but was analyzing whether the Gratuity Scheme of the Tribunal considered justice or not. That was why the Court had to say “determination of gratuity is not based on any definite rules” and the computation of gratuity was a matter depended on prosperity of the concern, the needs of the workmen and the prevailing economic conditions.

It is to be noted that in the Straw Board case, the Apex Court has said that “Decisions have been brought to our notice some of which refer to basic wages and others to consolidated wages as the foundation for computation of gratuity. These are matters of discretion and the “feel” of the circumstances prevalent in the industry by the Tribunal and, unless it has gone haywire in the exercise of its discretion the award should stand. We see that in the Payment of Gratuity Act also, not basic wages but gross wages inclusive of dearness allowance; have been taken so as the basis. This, incidentally, reflects the industrial sense in the country which has been crystallised into legislation.” The Apex Court has only said that decision as to whether the consolidated salary or basic salary alone should be taken for computation of gratuity is the discretion of the authority and the circumstances prevailing in the industry as they ‘feel’, and if no disorder is noticed, the decision of the authority would stand. On the other hand, if the authority has not understood the feel of the circumstances prevailing in the industry, his decision should only be regarded as a haywire decision.

When the Straw Board case was discussed, the industrial scenario was different and the concept of wages was also different. The industrial sense then was to include basic wages and dearness allowance alone as part of wages. Over the years, there has been a shift from it and now the remuneration means cost to company and the offer letters do not contain salary but only CTC, means, Cost To Company. When the employer started considering the payment of salaries, allowances and statutory contributions payable in respect of each employee who works for him as COST only, without reference to the BENEFITS or revenue that the employee adds, a new concept, viz, Cost To Company (CTC) came in to picture. This shall include all current as well as future payouts, the maximum incentives that can be earned, the performance based variables, and also the retirement benefits. There has been a misinterpretation of basic wages to mean the amount of wage that would qualify for various contributions payable by the employer. The ruling in Airfreight Ltd. Vs State Of Karnataka & Ors. AIR 1999 SC 2459, (1999) IILLJ 705 SC), the land mark judgment which observed that as long as the total remuneration paid is equal to or more than the minimum wages, there is no need to pay dearness allowance as an additional component of salary, has been misused by the employers for structuring a total remuneration in such a way that the minimum amount is put as basic wages, no amount is paid as dearness allowance and the maximum sum is put in allowances like HRA, Conveyance, Education, Medical etc. The employers also took the basic wages as the base for calculation of various contributions like PF, Bonus and Gratuity. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha has stated: “The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, which have arrived at a factual conclusion that allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the Provident Fund account of the employees.

The Supreme Court also observed that “While gratuity is usually related to the basic wage, a departure by relating it to the consolidated wage may be made if there be some strong evidence or exceptional circumstance justifying that course.” There are a lot of evidences which justify that, under the salary structure prevailing in the industry today, allowances are part of wages. These are allowances camouflaged as allowances.

4.1 House rent allowance: House Rent Allowance (HRA) is not defined in the Payment of Gratuity Act. HRA is a component of wage given by employers to employees to cover costs associated with leasing a home. It is very important to note that it is payable to those who are staying in leased residential accommodation. HRA would be covered by the definition of “compensatory allowances”. It is a compensation in lieu of accommodation. It is given only to those who has not been provided with residential accommodation. The moment the accommodation is provided or offered, the employee would lose to get it. ( Director, Central Plantation Corps research Institute, Kasaragod Vs M Purushothaman (1994 SUPPL. (2) SCR 267)

The House Rent Allowance excluded from the scope of Wages under The Payment of Gratuity Act is such allowance which is paid to recompense the cost incurred by the employee to take a house on lease. It is available only to those who are staying in leased accommodation. If both husband and wife are working, HRA is paid to either of these two. It is payable even if the employee is on leave. HRA is payable during the suspension period as well. But in most of the cases in private establishments the HRA is a component of salary which is proportionately reduced during leave days and days during which the employee is on suspension. It is paid to both husband and wife in the same organisation or without reference to whether the spouse is getting it from his/ her employer. That means HRA is not a compensatory allowance for most of the employees but part of salary camouflaged as house rent allowance.

4.2 Conveyance allowance: It is another compensatory allowance to compensate the cost of travel to and from the office. At the same time, if the same is paid to all employees, and if it is paid without relevance to distance travelled, or paid disproportionate to the actual cost, it should be part of salary only. The Hon’ble Supreme Court of India, in case of Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir & Others[(2020)17 SCC 643)] has said that “…..transport/conveyance allowance was similar to house rent allowance, as it was reimbursement to an employee. Such payments are ordinarily not made universally, ordinarily and necessarily to all employees and therefore will not fall within the definition of basic wage.” Conversely, conveyance allowance paid universally, ordinarily and necessary to all employees should be part of basic wages.

4.3 Education Allowance: This is an allowance paid to take care of cost of education of the children of the employees. Obviously, it will not be available to those who do not have children pursuing any course of study. If it is paid to all employees, then it would be construed as part of Basic Wages as observed in Bridges and Roofs (India) Ltd Vs Union of India (Supra).

4.4 Special Allowance: This is an allowance payable to those employees who use some special skill for discharging their duties. But, in many cases, this is the residue left after allocating different allowances under each head, and obviously, it would be a component of salary available to all the employees. Again, if it is universally paid, it would come under the basic salary following the Bridges and Roofs case.

4.5 Other allowance: Some companies use “other allowance” to put all the amounts left after putting the amounts under Basic salary, HRA, Conveyance, Education allowance, hill allowance, city allowance etc. The use of “other allowance” as a component of salary has a clear intension. That is, other allowance is an allowance which can be found in the exclusion part of the definition of wages under the Payment of Gratuity Act. Unfortunately there is no allowance called “other allowance”. There can be allowance like house rent allowance, conveyance allowance, special skill allowance, city (compensatory) allowance, hill allowance, heat allowance, education allowance and many more, but there is no allowance called “other allowance”.

The above are circumstances which would justify that these allowance are not actually allowances but are camouflaged as allowances with a view to avoiding statutory contributions payable by the employer. Therefore, the Straw Board case has no relevance in the present industrial scenario. Moreover, what the Court looked into were the computation of gratuity and the period of service, and these “ are matters of discretion and the “feel” of the circumstances prevalent in the industry”, and what made the Court to say so then was that, there was no law enforced to govern the payment of Gratuity.

Other Allowance/ Allowances as a component of salary and exclusion part of definition of wages

Section 2(s) of the Payment of Gratuity Act defines wages as “wages mean all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance”. The “other allowance” in the exclusion part of wages means ‘any’ allowance similar to bonus, commission, house rent allowance and overtime wages. But it is misinterpreted as a separate item of allowance to be excluded.

It may also be noted that there is no allowance called ‘other allowance’. An Allowance is a fixed amount given regularly by employers to meet certain specific requirements of their employees. It is different from perquisites. While the money received by an employee for any objective is known as allowance, perquisites are facilities offered by employers. The former are part of salary whereas the latter are not. There can be allowances to compensate certain costs. It may be to compensate the increasing cost of living, it may be to compensate the cost of residing in a leased house for employment purpose, it may be to compensate cost of travel involved, it may be to take care of the education of the children of the employees, it may be to use some special skill that a particular employee shall possess, it may be for the subsistence of an employee placed under suspension and so on. All these ‘allowances’ are identified by means of words like, dearness (allowance), house rent (allowance), conveyance (allowance), education (allowance), special (allowance), subsistence (allowance)etc. But what does ‘other allowances” stand for?

The exclusion part of definition is like “.....does not include any bonus, commission, house rent allowance, overtime wages and ‘any’ other allowance” and not like “.....does not include any bonus, commission, house rent allowance, overtime wages and other allowances”. There is a basic difference between the words “any other allowance” and “ other allowances” because using “any” before ‘allowance” should mean to understand it as allowance ‘similar to’ or ‘related to’ the one said in the preceding text whereas ‘other allowances’ standing alone without ‘any’ prefixed to it would not mean that it should have characteristics of words used in the preceding texts.

A careful perusal of the characteristics of allowances excluded from the wages also reveals that these are variable allowances and are accrued based on some conditions. Bonus is an based on the profitability of the establishment. It is payable to those employees whose salary is within certain limits, ie, Rs 21000 at the present rate. It is not paid to those who have worked for less than 30 days in a year. Commission is based on generation of certain results by the employee. House Rent Allowance is payable when the employee resides in a rented/ leased accommodation. It is not payable to those who stays in a house owned by him or his spouse. HRA is payable on one condition that either husband or the wife can get it. Overtime allowance is paid when the employee works overtime. In short, these allowances are payable depending upon the happening of certain things, like, the establishment making profits, the employee generating some results, the employee residing in leased accommodation and the employee doing overtime work. Similarly, these allowances are not paid to all the employees or are not allowances ‘universally’ paid. If there is any other allowance similar to these allowances, then that can be excluded from the purview of salary. For example, education allowance is an allowance payable to employees to meet expenses relating to education of their children. Naturally, it is not paid to those who have no child pursuing any education. Newspaper allowance is an allowance payable to employees to purchase newspapers. Night shift allowance is an allowance payable to employees who work in the night shift. Medical allowance is an allowance payable to take care of medical expenses. In a month in which the employee did not spend any amount by way of medical expenditure, he would not be paid this allowance. Hill allowance is an allowance payable to an employee who is posted in hill area for work. These will not qualify for gratuity because these are allowances similar to the “other allowance’ excluded from the scope of wages. At the same time, the ‘other allowance’ included in the salary of many employees in the private establishments is a fixed component and the payment of which is not dependent on any condition. It is also interesting that the “other allowance” will always be higher than the “basic salary”. A judicial horse sense approach would make it very clear that the exclusion part will never be higher than the inclusion part.

The Doctrine of Ejusdem Generis

The term ‘other allowance’ in the exclusion part of the definition of wages, viz, “but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance” should be subjected to principle of ejusdem generis. The Doctrine of Ejusdem Generis provides that when a list of specific words are being followed by the general words, the general words are interpreted in a way so as to restrict them to include the items or things which will be of same type as those of the specific words. What is excluded from the scope of wages under Payment of Gratuity Act is “allowance” similar to overtime wages, bonus, house rent allowance or commission. The expression, ‘any other allowance’ clearly establishes it.

Salary for deduction for absence from work

The salary considered for deduction for absence from work should be the salary agreed upon as per contract of employment. Under normal circumstances, if an employee is absent without leave, his salary for the day will be deducted, and it will be in proportion to his total emolument loss on account of absence from work will be deducted. If allowances are separate from salary, then why the leave day’s salary is computed on the gross salary and not on basic salary alone? This is because the remuneration for service or labour is the whole amount inclusive of allowances. Therefore, allowances should be considered as part of wages/ salary.

Constant Basic salary and absence of Dearness Allowance in the salary

It is also observed that the basic salary not only kept at the minimum but kept constant. They will certainly give salary increment every year. But the same is not reflected in the basic salary and dearness allowance. Most of the companies do not have dearness allowance as a component of salary. It is true that so long as the salary paid is more than the statutory wages payable as notified by the government, there is no need to pay dearness allowance. Airfreight Ltd. Vs State Of Karnataka & Ors.(Supra) validates this stand. But the basic reason why an employee should get increase in the salary remains unanswered.

An employee is given salary increment for two reasons, one, to reward his performance and, two, to compensate increasing cost of living. The former is evidenced by an increase in the basic salary and the latter is evidenced by an increase in the dearness allowance. Most of the employers do give salary increase every year, but the increase would be reflected in “allowances” and not in Basic salary or Dearness allowance. This is intentional because they are advised that increase in the basic salary would cost them more because the contributions to PF, gratuity etc are on the basic salary only. If ‘allowances’ are not part of salary, why should they increase it every year? If allowances are supplementary to basic salary, why should no increase is given in the basic salary?

On perusal of the salary structures of supervisory and managerial personnel of various companies, what I have found is that they do not have dearness allowance as a component of salary. They defend that it is not required by law. Under which law is it said that managers should not be paid DA? If the intension was that managers should not be paid DA, why should there be a component, viz, dearness Allowance in the Minimum Wages notifications?

Conclusion

So long as the payment of Gratuity Act is silent about the term ‘basic wages’, and in the absence of any rule under the Payment of Gratuity Rules which provide for computation of gratuity based on the basic salary alone, the entire salary should be deemed to be the salary qualifying gratuity calculation. Simply, the gross salary is:

· The salary as per contract of employment

· The salary paid to the employee on duty or on leave

· The salary which is deducted for any leave without pay

Therefore, the gross salary should qualify for calculating the amount payable as Gratuity.

Madhu T K
Principal Consultant
DefusIR Solutions Pvt Ltd
Your Confidence in HR Matters

Maternity Benefits can be extended beyond the term of Contract of Employment

2023-12-12T21:36:00.000-08:00

An employee on fixed term contract is entitled to the full 26 weeks’ maternity leave with salary and the medical bonus, as applicable, even if her term of employment comes to an end during the maternity leave period.

The Supreme Court of India in Dr. Kavita Yadav Vs The Secretary, Ministry of Health and Family Welfare Department and Others ( 2023 LLR 1299) has said that any attempt to enforce the contract duration term during the maternity leave period would be constitute “discharge” and attract section 12(2(a) of the Maternity Benefits Act.

In the instant case, Dr Kavita Yadav was employed in the respondent organisation under a fixed term contract. The term was till 11^th June 2017. She applied for maternity leave from 1^st June 2017. Since the term of employment was to come to an end on 11^th June, the employer approved 11 days maternity leave as against 26 weeks leave as per the Maternity Benefits Act, 1961. She was unsuccessful before the Central Administrative Tribunal as well as the High Court. Both of them relied on the “contract of employment” and said that the employer- employee relationship had come to an end automatically on 11^th June 2017, the day prefixed as per the contract of employment.

The Apex Court observed that a woman employee who has worked for 80 days in the 12 months immediately preceding the expected date of delivery is entitled to maternity leave. This was not disputed by the employer because the employer had approved her 11 days leave, ie, from 1^st June 2017 till the employee employer relationship existed. But the Court did not accept the contention that maternity benefit beyond the contract of employment could not be given. The kernel of the observation by the Supreme Court are the second and third provisios to section 5(3) of the Maternity Benefits Act, 1961, as under:

“The maximum period for which any woman shall be entitled to maternity benefit shall be twenty six weeks of which not more than eight weeks shall precede the date of her expected delivery.

Provided that the maximum period entitled to maternity benefit by a woman having two or more than two surviving children shall be twelve weeks of which not more than six weeks shall precede the date of her expected delivery:

Provided further that where a woman dies during this period, the maternity benefit shall be payable only for the days up to and including the day of her death:

Provided also that where a woman, having been delivered of a child, dies during her delivery or during the period immediately following the date of her delivery for which she is entitled for the maternity benefit, leaving behind in either case the child, the employer shall be liable for the maternity benefit for that entire period but if the child also dies during the said period, then, for the days up to and including the date of the death of the Child”

The above provisio makes it very clear that the benefit extends beyond cessation of employment for whatever reasons. The Court also cited Municipal Corporation of Delhi Vs Female Workers (Muster Roll) & Anr ( (2000 3) SCC 224) in which the same principle of notional extension was applied to the daily rated casual workers.

The Apex Court also ruled that not extending the maternity leave and or paying the medical bonus, as applicable, would mean that the employee has been dismissed from service which is against section 12(2)(a) of the Act.

Madhu T K

13-12-2023

Applicability of Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act to Factories

2021-10-29T21:47:00.056-07:00

There have been differences of opinion about the applicability of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 to such operations or civil constructions carried out within a factory premises which is part of the factory covered under Factories Act. This is mainly due to the lack of clarity in the definition of construction work as given in section 2(d) of the BOCW Act which excludes building and construction work to which the provisions of the Factories Act and Mines Act will apply. Obviously, when a construction work is carried out within the factory premises, it is natural that the employer will take it for granted and say that they are under the coverage of Factories and therefore, no cess is payable as per the BOCW Act. However, it should be understood that Factory licence is given to work connected with manufacturing activities and for a factory which is meant for manufacture of, say, cement, it is for the manufacturing of cement that the licence is issued. Similarly, the Factories Act provides for health, welfare and safety of workers employed in the factory and these workers are the workers employed for manufacturing and not those who are employed for construction of building. Therefore, such construction activities will come under the purview of BOCW Act and cess as per Welfare Fund Act should be paid. [Lanco Anpara Power Ltd vs State Of Uttar Pradesh And Ors ((2016)10 SCC 329))]

However, in Larsen and Toubro Limited vs State of Chhattisgarh and others, the HC distinguishes the building and construction activities in a proposed factory premises and the one in a factory premises which has already started manufacturing activity.

Now my interpretation is still spinning around the exclusion part of the definition of building and other construction work as per section 2(1)(d) of BOCW Act which says that construction activities TO WHICH the provisions of Factories Act will apply. A factory is registered to manufacture a given product. The operations may include the allied activities like storage of materials, warehousing etc but in no case it can include construction of building. As such a building construction is not an operation covered by Factories Act.

The definition of worker under Factories Act covers only workers who are employed for manufacturing and allied activities. When the Factories Act is mandated for ensuring the health, safety and welfare of the workers in the Factory, will the occupier take care of the health, welfare and safety of the workers engaged in construction? I don't think anybody will extend it to them. If the arrangement is like, the occupier purchases the require materials, engages workers and gets the building constructed, then there will be direct employee employer relationship between the workers and the occupier and certainly, it will be the occupier who would ensure health, safety and welfare of these workers. In such a situation the provisions of BOCW Act will not apply. However, in reality, the arrangement is that there will be a builder who will undertake to construct a building as per the specifications of the occupier and that builder will bring in materials, manpower, machines etc. Here the occupier does not know who all are engaged in the work, how many are engaged in the work. In this arrangement the construction workers are workers of the builders and as such their health, safety and welfare matters will be taken care of by the builders. Accordingly the builders being the employer of the construction workers should pay cess to the Board constituted for the welfare of the construction workers. If the contractor of the builder fails to pay it, obviously, the occupier shall pay a certain amount, say, one percent of the cost of construction, towards cess.

Therefore, what is important is whether the builders have ensured health, safety and welfare of their workers by paying them minimum wages, providing them medical aid, and other facilities which are required as per law. This would also include Provident Fund, Insurance, Bonus etc. It is to compensate the social welfare contributions payable by the employer that the Act has mandated payment of cess. The builder being the employer in respect of the construction workers, is primarily responsible to pay the cess. Since the activity of construction of building is carried out for the occupier, and in the absence of records to show that the construction workers were given all welfare schemes etc, by the builder, the occupier shall also bear the amount.

Liability of employers to pay salary during COVID 19 lockdown period

2020-04-24T01:04:00.000-07:00

We are going through an unexpected period, a period mandated by government not to function our establishments and remain at homes, but still take care of the welfare of the persons employed, by paying their salaries and other benefits.

It requires no explanation as to why should we have a lockdown. Obviously, it aims at breaking the chain, by staying away from each other, avoiding crowding, which probably, is not possible when we function our establishments, even if we take all measures to mitigate spreading of epidemics like, temperature checking, washing hands and face frequently and so.

As part of nation’s efforts to mitigate spreading of virus, we are also forced to stay at homes, and probably without any revenue to come, but with burden of paying salaries to all, not only to those who are regularly employed on our rolls but to the casual workers whose contract commences in the morning when he starts working and ends in the evening when he completes 8 or 9 hours of working.

Today, this is a topic which is being discussed in large by HR groups, why should the employer pay for the days not worked?

Accordingly a few cases have also been filed in the Supreme Court challenging the government order requiring the employers to pay wages in full.

The purpose of lockdown, as we know, is social distancing so that spreading of virus to a certain extent can be mitigated. This is possible if people stay at homes. In order to make people stay at homes, directions have been issued following the provisions of Epidemics Diseases Act, 1897 and Disaster Management Act, 2005.

The Epidemics Act, provides for issuing any direction so that the disease is not spread.

The Government of Kerala has promulgated an Ordinance, Kerala Epidemic Diseases Ordinance, 2020, which replaces the very old Acts like, Cochin Epidemic Diseases Act, Travancore Epidemic Diseases Act and the Epidemic Diseases Act. The ordinance also provides for issuing any instructions which are necessary for mitigating and avoiding spreading of a disease. It also provides for prohibiting the functioning of shops and commercial establishments, factories, mines etc.

Similarly section 10 of the Disaster Management Act provides for issuing such directions which are necessary to mitigate the disaster.

Under both these Acts provisions for penalizing those who violate the directions are available. Section 51(b) of the Disaster Management Act, 2005 provides for one year imprisonment with or without fine. In case such violation of directions given by the authorities under the Act to prevent a disaster results in loss of lives, then the imprisonment shall extend to two years. The Kerala Ordinance also provides for two years imprisonment with or without fine of Rupees Ten Thousand or both.

Why should Employer pay Full Salary during lockdown period?

It is true that nowhere it is mentioned in any of these Acts that employer should pay full wages to workers during a lockdown period like this.

When we invoke the lay off provisions of Industrial Disputes Act, 1947, obviously, we can manage with 50 % salary as lay off compensation. But the directions issued following section 10 of the Disaster Management Act is very clear that we should not declare lay off. The ID Act also provides for payment of lay off compensation to workers on roll (other than badly workers) and those who have completed one year of service. But the instructions from the Disaster Management Committees call for payment of full wages to all employees including contract workers and casual workers.

In this circumstance, we may go back to the objectives of lockdown, ie, making people stay at homes. It is implied that they should not come out of homes in search of job, even though the establishment where they use to go for work is closed, let it be some other work, say, domestic work, at least, and if they come out of their homes the very purpose of lockdown would be defeated. Therefore, the only possible way to make the people stay at homes is compensating the loss of work by offering salary.

In this context I would also like to say that a similar was the objective to amend section 135 of the Peoples Representation Act in 1996. The previous section called for ‘giving opportunity to employees to cast their votes’, but when it was understood that people are not using it properly and would like to go for work and earn that day’s wages rather than going to polling station and queue up to cast vote, it was decided to make it a holiday with wages. When they were assured of their wages, people would go for casting their votes. Now section 135B provides for declaring holiday with wages to all employees including casual workers. In the similar way, I would say that the lockdown period is paid holidays so that people would stay at homes, failing which they would get out of their homes in search of earnings. True, there may not be establishments opened to offer employment, but they would find any suitable engagement and for that they will move around. This cannot be allowed and this is the logic why the government has issued a direction to pay wages in full.

Can’t we invoke provisions of Industrial Disputes Act?

Section 25 C and 25 M say about lay off and compensation payable to workers laid off. Section 25C applies to establishments wherein less than 100 workers are employed whereas section 25M (under Chapter VB) applies only to establishments wherein more than 100 workers are employed. Obviously, small establishments wherein less than 50 workers are normally employed cannot lay off workers. If they lay off the workers shall be paid full wages. (Ref. Workmen Vs Firestone Tyre & Rubber Co [1976(1)LLJ493 SC]

The Act permits payment of 50% of wages to workers who are laid off and the maximum period of lay off shall be 45 days. Only employees who have completed one year of service shall be eligible for lay off wages.

In respect of establishments employing 100 or more workers, the layoff requires permission from the government (though lay off due to natural calamities does not require prior approval)

Again, nothing in any labour law will protect supervisory and managerial persons and as such lay off is not applicable to them.

Since the directions issued by the authorities under the Disaster Management Act following the clauses of section 10 of the Act do not permit the employers to declare lay off, declaring lay of will become violation of the directions punishable under section 51(b) of the Act.

Now can the employees invoke ID Act or provisions of Payment of Wages Act, if salary is not paid?

Certainly yes, because the lockdown days are to be treated as holidays with pay and if not paid, they can invoke section 15 of Payment of Wages Act or 32C(2) of ID Act.

What is the status of casual workers?

Legally they are workers with whom we do not have any formal agreement or contract of employment. They are not even recruited by your HR Managers nor do they undergo the formal induction program. The Standing Orders of the company may not be applicable to them. Their agreement with the establishment commences in the morning when they are hired at the factory gate and will extend till evening when they complete that day’s work. They will be hired only when we need additional manpower to handle excess production and similar scenario. They are not hired on holidays and paid for that holiday. They do not get regularized in service also. In their case, the direction to pay wages is not convincing, because in respect of them there does not exist any formal legal relationship.

What is the status of contract workers?

The contract workers are employees engaged through a contractor. The contract workers are paid through the contractor and the total pay they receive would normally include the wages for the days on which the establishment did not function due to holidays. Though there exists no legal relationship with individual workers of the contractor, the Principal Employer should have a contract with the contractor. If it is not sham or camouflage, the Principal Employer is expected to reimburse the costs incurred by the Contractor in paying the wages of the workers during lockdown period.

What happens if full salary is not paid?

Obviously, section 51(b) of the Disaster Management Act provides for penal provision for noncompliance of directions given by the appropriate authority.

It is true that these Acts or Ordinance do not empower the government to require the employers to pay salaries for the days the workers did not work. At the same time, if the objective of the direction is to make the people stay at homes against a compensation in the form of full salary, the employers are ought to comply with it.

It is a fact that while issuing such a direction, the government has not considered the hardships which the employers will face or are facing due to economic slowdown which they are facing even before COVID 19 issues. In this scenario asking to pay full salary even to casual workers is unethical. In the case of workers on the rolls and those engaged through contractors under a specific service contracts it is okay but in respect of workers with whom we do not have any formal contract of employment, it cannot be justified. I do not say that the casual workers should be kept away from this direction but there should be a logical thinking about this class of employees.

It will be okay if the employers are asked to pay an amount required for the subsistence of the casual workers which may come around 50% of the normal wages, roughly.

The theory that the cost of losing lives is more than what we cost to pay for the workers should be remembered and as a moral responsibility, payment of a remuneration equal to their subsistence shall be ensured by us.

Initiatives of Employees Provident Fund Organisation, ESI Corporation etc

The EPF Organisation, ESI Corporation and various Labour Welfare Fund Boards have come up with various schemes to help the workers who have lost wages due to lockdown. The EPFO has decided to bear the contributions payable by the employees as well as employers subject to certain conditions. ESIC has a proposal to extend its unemployment allowance to the workers who do not get wages due to lockdown also. Various Welfare Funds have started paying a fixed amounts considering the loss of job and subsequent loss of revenue to the workers.

The Government has directed the employers to pay full salaries to all employees during lockdown period. That means the employees will get their remuneration in the same rate as they were getting prior to lockdown period. Then why should the EPF Organisation bear the ‘employees’ share’ of provident fund contribution?

I am okay with EPFO bearing the ‘employers’ share’ which is an additional burden to the employers who pay salary when they do not have any revenue to come, but why should they bear employees’ share which they contribute from their salary received in full without working?

If the workers are to be paid full salary, why should the ESIC pay unemployment benefits?

This is contradictory, one side the government directing the employers to pay salary in full and the other side, government agencies themselves assuming that the employees would lose their wages, and on the basis of that, announcing measures to compensate it.

Madhu T K

24-04-2020

Payment of Gratuity and Gratuity Qualifying Salary

2019-10-01T02:39:00.004-07:00

Having clarified by the Apex Court of India that PF qualifying salary is the amount of salary that the employer has agreed to give to the employee in return for the labour the latter gives, the next question that arises into the minds of all employees is that what will be the salary for the purpose of calculating Gratuity?

The above definition of wages is almost similar to the one given for wages under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, which provides under section 2 (b) as follows:

Basic wages means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

(i) The cash value of any food concession;

(ii) Any dearness allowance (that is to say, all cash payments by whatever name called paid to an employees on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer.

Under both these Acts the meaning of basic Salary is same, ie, the total or gross emolument payable as per terms and conditions of employment or, simply, the contract of employment. It is true that an employee joins an organisation after accepting the terms and conditions of employment which will include a salary structure with a basic pay and other components. It is also common now a days to show how much will be the contribution by the employer towards Provident Fund and even the gratuity payable at the time of exit of the employee. For an employee, whatever is offered as salary is the salary on which he has agreed to work with the employer, and he is not concerned with the heads under which he is paid the same. As such, even if the agreement contains a break up of salary, the total should be regarded as the remuneration for his labour.

In the case of most of the private companies who treat Provident Fund and other social security schemes as a mandatory requirements or obligation rather than employee welfare schemes, it is obvious that they would keep the salary on which these contributions are to be made at a very low level. The history which induced the Supreme Court of India to clarify the meaning of Basic Wages to include all allowances is known to all. It is nothing but a dispute raised by the Employees Provident Fund Organisation against those employers who bifurcated the salary payable into small compartments with distinguishing headings leaving only a small fraction as under “Basic Salary” to attract Provident Fund deduction. This was done by following section 6 of the EPF and MP Act, which says that contribution is payable on Basic Wages and Dearness Allowances only. (in the case where there is no work and the employees are retained and as such instead of salary, if an allowance is paid to retain them, viz, retaining allowance, the same will also attract PF contribution) But the employers did not go to the scope of the meaning of Basic Wages as total wages but took it as the basic wages that they fix. Now having clarified that Basic Wages means the total salary payable as per agreement with an exception of house rent allowance (HRA) many have also restructured the salary with huge amounts shown as HRA.

What is House Rent Allowance?

This is an allowance paid or payable to an employee who stays in and around the place of office/ factory as mandated by the employer for the purpose of his occupation. It is not payable to all employees uniformly but is payable only to those who stay in leased houses. The basic feature of this allowance like any other allowance which are exempted from the scope of Basic Wages is that it will be payable even if the employee is on leave without pay. For example, the salary agreed is Rs 30000 per month. But the employee is given an additional amount of Rs 5000 as house rent allowance so that he can take a house on lease near the establishment and stay there. If the employee takes three days’ leave when is short of any paid leave, his salary will be subjected to deduction of three days’ salary at the rate of Rs 1000 per day on a calculation that monthly wages divided by 30 would be the average daily wage. But he will be paid HRA of Rs 5000 in full. HRA will not be subjected to proportionate deduction. If he is given telephone allowance of Rs 300, the same will be paid in full and no deduction proportionate to the days that he remained on leave will be made.

HRA is part of Salary

Let us take the same example with a difference that HRA is part of salary. The salary will be Rs 35000 and of this HRA as a component will be Rs 5000. In this case, if the employee takes three days’ leave without pay, it will be Rs 1166 per day which will be deducted from the salary. In this case HRA becomes part of Salary and in the former case, of course, it is a perquisite not falling under the scope of Salary. The same test applies to other allowances also. Most of the private establishments follow this pattern of salary structure. They would even consider the employers’ contributions towards PF, ESI, Gratuity etc as part of personnel cost and add it to the salary (commonly referred to as Cost to Company or CTC) so that the total amount would lure the job seeker.

Special Allowances

The issue of treatment of Special Allowance is no exemption. It is to be noted that Special Allowance is something that is paid only to a particular employee or particular category of employees in return for a special skill that they contribute to perform their task. Special Allowance in such cases can be excluded from the scope of definition of wages. But if special allowance is paid to all the employees, it will be considered as an allowance universally applicable to all the employees and in such cases, it will become part of Wages/ Salary for any purpose.

In the current system or custom of pay fixation, whatever left after allocating to segments like Basic Pay, HRA, Conveyance allowance etc is taken as Special Allowance. Obviously, it will have nothing to do with special skill nor is given only to a few employees who require special skill to do the work. Right from the decision of the Supreme Court in Bridges and Roofs (India) Ltd Vs Union of India (1963 (2)LLJ 490) there have been directions from the appropriate authorities that (Special) Allowance paid to all the employees would be part of Basic Salary and only those allowances which are paid to some employees considering the nature of their duties or purely out of management's own interests or pleasure, can be excluded from the scope of Basic Wages.

A variant of Special Allowance is “other allowance”. Obviously, this is another head which will also form part of Wages or Salary or all purposes including payment of EPF, Bonus and Gratuity.

Meaning of Gross Wages/ Salary

Gross wage is the total wage paid or payable as per contract of employment. It is the amount of wage that one gets if he works on a day or takes an authorised leave. On the other hand, it is from the same gross wage that one’s salary for the day on which he remained leave without pay is deducted. For example, let us say that the gross salary of an employee is Rs 30000 per month. The salary is bifurcated as follows:

Basic Salary : 7000

HRA : 5000

Conveyance : 3000

Special Allowance : 15000

Total : 30000

Let us assume that the above employee has taken one day leave without pay. For the purpose of deduction, it is 30000 taken as base and it will account for Rs 1000 for a day, assuming that there are 30 days in the month. Accordingly, he will get Rs 29000 as salary for that month.

Why deduction is made from the base of 30000? It is because the salary as per contract of employment is Rs 30000 and the average salary per day is Rs 1000 and if you do not work on a day, you will lose Rs 1000 for that day.

In order to treat House Rent Allowance, Conveyances Allowances, Special Allowance, Telephone allowance etc as allowances not forming part of salary or basic salary, we should deduct the day’s salary in respect of the leave taken on without pay basis from the Basic Pay alone, and give the other allowances in full without subjecting them for deduction. But what is the practice? We deduct it from the total.

Gratuity qualifying Salary

Now coming to the calculation of Gratuity we have to take average salary. What the Act says? The Payment of Gratuity Act, 1972, by its section 4(2) says that “……..the employer shall pay gratuity to an employee at the rate of fifteen days wages based on the rate of wages last drawn by the employee….”

We have seen the definition of wages under section 2(s) of the Act as total emoluments which are earned by the employee. As such it is the gross salary that should be taken as the base for the calculation of gratuity. But the practice is to take the Basic Pay alone. In companies that pay dearness allowance, naturally, they consider DA also as part of Gratuity Qualifying salary. This is also a custom followed at par with the treatment of Wages for Provident Fund contribution.

The payment of Gratuity Act has further said how to arrive at the average rate of wages. The average rate of wages is the monthly wages divided by 26 and not 30.

In respect of piece rated workers, it is the average of the total wages received by him for a period of

three months immediately preceding the termination of his employment. In respect of an employee who has been disabled but has been reemployed on reduced wages is to be calculated prorate for the period preceding his disablement and for the period subsequent to his disablement on average wages of the respective periods.

In the above cases, including wages of seasonal employees and daily rated workers, you cannot bifurcate the piece rated wages into basic, HRA, Special Allowance etc but whatever is paid is the wages. Only those amounts which can be excluded from it are any overtime wages, commission or incentive though it is also paid along with the wages. It is only in respect of employees who receive monthly salary, the bifurcation of gross salary normally happens. As such when two employees with the same length of service leave the establishment, one with a higher salary but on monthly basis may get lesser gratuity when compared to another employee with daily rated salary. Since the Provident Fund is also contributed on the daily wages without any bifurcation as to HRA, Conveyance allowance etc, the latter may get more PF and may also be eligible to more Pension!

The issue of Basic Wages regarding Provident Fund has been clarified by the Apex Court. Now everybody is looking to find a solution for payment of Gratuity, and he base for calculating amount of Gratuity. As the definition of wages given under both the Acts are the same, I am of the impression that Gratuity is to be calculated on the gross salary and not alone on Basic salary and Dearness Allowance. Simply, gross salary is:

· The salary as per contract of employment

· The salary paid to the employee on duty or on (authorised) leave

· The salary which is deducted for any leave without pay

Therefore, the gross salary should qualify for calculating the amount payable as Gratuity.

Pension Based on Actual PF Contributing Salary- Who will get the benefit of higher pension as per Supreme Court Verdict?

2019-04-02T01:29:00.001-07:00

Yesterday, ie, on 1st April, 2019, the Supreme Court of India has pronounced a landmark judgement on Provident Fund Pension by holding the decision by the Hon. High Court of Kerala of October 2018 and rejecting the appeal by the Employees Provident Fund Organisation (EPFO). The verdict directs the EPFO to pay pension based on the actual salary of the member. There are a few points which require attention.

Background

1. The Employees’ Pension Scheme 1995 provided for payment of 8.33% of the PF qualifying wages to the Pension Fund. The basic scheme also provided that if the PF qualifying salary of any employee exceeds Rs 6500 the contribution payable to the Pension Fund could be restricted to Rs 6500. However, the Scheme was amended in 1996 which provided that if both the employee and the employer jointly agree, a higher amount equal to the amount contributed to Provident Fund could be contributed and, in such cases, that higher amount would qualify for pension calculation. Following this, many organisation (who later became parties to the case against the EPFO before the Kerala High Court) contributed to Pension Fund on higher salary. But the EPFO, with an administrative order, stopped this option with effect from 1st December 2004.

2. In September 2014 when the PF threshold limit of wages was revised from Rs 6500 to Rs 15000, the contribution limit prescribed in the principal Scheme of Pension Fund was also revised from Rs 6500 to Rs 15000. Since a dispute was already in force about the higher contribution to pension fund and higher pension treating that as the pensionable salary, the EPFO restricted the Pension qualifying salary to Rs 15000 without any scope for the employer to pay contribution to pension fund on salary higher than Rs 15000. Moreover, the amended Scheme provided that the Pensionable Salary would be average of the 60 months’ salary. Owing to this many persons who retired in 2014 received Pension based on a maximum salary of Rs 6500 only.

3. This was also challenged in the court. The Kerala High Court in October 2018 found that the order of the EPFO putting a cutoff date (1st December 2004) for giving option as unconstitutional. The court also scrapped the provision in the Act which limited the Pension Fund qualifying salary to Rs 15000. The High Court of Kerala viewed that when an employee is contributing to the Provident Fund on a salary higher than Rs 15000, he should be paid pension considering the same salary as the Pensionable Salary.

4. The above order was challenged by the Employees Provident Fund Organisation before the Supreme Court of India. The Apex Court also found that a member of the EPF must be paid pension based on his actual contribution to the Provident Fund. The Court also directed that the pensionable salary should be the average of the salary for the preceding 12 months as against 60 months. The Court also upheld the decision of the Kerala High Court scrapping the provision in the Scheme which capped the pension fund qualifying salary to Rs 15000 and said that “the employees, who have been making contributions on the basis of their actual salaries after submitting a joint option with their employers as required by the Pension Scheme, are denied the benefits of their contributions by the said amendments without any justification. Apart from the above, to cap the salary at Rs. 15,000/- for quantifying pension is absolutely unrealistic. A monthly salary of Rs.15,000/- works out only to about Rs.500/- per day. It is common knowledge that, even a manual labourer is paid more than the said amounts as daily wages. Therefore, to limit the maximum salary at Rs.15,000/- for pension would deprive most of the employees of a decent pension in their old age. Since the pension scheme is intended to provide succour to the retired employees, the said object would be defeated by capping the salary."

Who will get the benefit?

Really, the employees who are members of the Pension Fund Scheme of the Employees Provident Fund Organisation are overwhelmed by the verdict from the Supreme Court which upheld the decision of the Kerala High. It gives them a relief that they are on the right track with regard to savings, investment and retirement planning. All the apprehensions spinned around the value of a 1000 rupees pension per month in 2030 or 2040 have gone. If this is the way in which pension will be calculated, then no one would think of investing in any other form of retirement plan. But things would not be so simple as many thinks. This is because many organisations take EPF as a STATUTORY BURDEN rather than a welfare scheme to their own employees. It is true that for employees of an employer who contributes his share of contribution without capping it at Rs 15000, but for an employee whose PF qualifying salary is limited to the mandatory amount of 12% of Rs 15000, there is nothing to cheer up.

Those who contribute to PF on a salary higher than Rs 15000, say, Rs 50,000, that higher amount, ie, Rs 50000, will be the Pensionable Salary. Since the average pensionable salary for the 12 months preceding the date of retirement is the base salary for calculation of pension, he will get pension based on Rs 50000. At the same time, if his PF is capped to Rs 15000, only Rs 15000 will be taken as base for Pension calculation. In order to get higher pension, he should have contributed to PF on higher salary. Since the Pensionable salary is the average of 12 months’ pay preceding the date of retirement, any increase in PF contributing salary during this period would also benefit the employee.

Is it possible to increase the PF contributing Salary?

If the employer agrees that the contribution can be made on the actual salary, then there is nothing wrong in increasing the PF contributing salary. At the same time, neither the employee nor the EPFO can direct the employer to increase the PF contributing salary beyond Rs 15000.

Will the verdict of Supreme Court on PF contribution on allowances help the employees to increase their PF and Pension qualifying salary?

It is true that PF is payable on allowances as well. The recent Supreme Court Verdict on contribution on allowances also substantiate that allowances other than HRA will attract PF and as such your actual pay should be the base for PF contribution. But this does not apply in the case of salary above Rs 15000. The decision of Marathwada Gramin Bank Karmachari Sanghatana Vs Management of Marathwada Gramin Bank by the Supreme Court also says that EPFO cannot demand a contribution on a salary above Rs 15000. As such, it is entirely left to the employer whether to increase the PF contributing salary above Rs 15000 or not.

It costs nothing to an employer if he decides to remove the capping of Rs 15000 from his payroll because whatever he contributes is accounted as part of remuneration in the present style of salary structure, viz, Cost To Company or CTC. Therefore, if he contributes more to PF it will be reflected in the CTC. At the same time the employees get the benefit of higher pension when they retire. As rightly observed by Justice Surendra Mohan and Justice AM Babu, you cannot get a labourer for Rs 500 per day then what is Rs 15000 all about?

Madhu T K

Provident Fund Qualifying Salary and the recent Apex Court Judgement.

2019-03-06T03:17:00.002-08:00

Section 2(b) of the Provident Fund and Miscellaneous Provisions Act, 1952, defines basic wages as all emoluments which are earned by an employee while on duty or on leave as per contract of employment. It also provides that cash value of any food concession, any dearness allowance which is paid to compensate a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment shall not form part of Basic Wages.

Section 6 of the Act instructs that every employer should pay contributions towards Provident Fund at the prescribed rates calculated on the Basic Wages, dearness allowances and retaining allowances, if any. Retaining allowance is the amount paid to employees of such organisation which are not presently running and is paid to retain the manpower and make them available when the establishment resumes its work. The definition of basic wages given in section 2(b) clearly says that wages is nothing but the amount earned by an employee while on duty or on leave. As such retaining allowance will not form part of wages per say.

What constitutes PF qualifying salary, therefore, is very clear and is nothing but basic wages and dearness allowance in the case of employees receiving salaries and retaining allowance in the case of employees retained by temporarily closed establishments. But various employers misinterpreted the term basic wages as that basic wages that they fix in their organisation and started deducting or paying the contribution on that basic wages alone which is only a component of the total remuneration agreed to be paid to their employees. It is also pertinent to note that many have kept the basic salary at a very low level so that their contribution towards provident fund could be reduced. But the Act had envisaged the meaning of Salary or Wages in its authentic meaning to mean and include the amount required for an employee to apportion to food, shelter and clothing which in normal months would be 80%, 15% and 5% respectively. Of these, you cannot have a compromise on 80% which is the amount required for the basic things, ie, all the direct costs of your family budgets, probably, cost of food items, cooking gas, electricity, water, education, medicine and like things. This is the way in which basic wages is designed in government departments, public sector undertakings and other organized sectors. It is to be welcomed that about 90% of the establishments which have collective bargaining practices and trade unions follow the pattern of Basic wages, dearness Allowances and other allowances. It is also pathetic in new generation companies who are not heard of what dearness allowance is and how the same is fixed according to changes in the cost of living index!

On account of misinterpretation or even by unscrupulous interpretation of law by the employers the basic wages were taken as the base for deciding the contribution towards PF. This was challenged by the Employees Provident Fund Organisation initially by means of administrative instructions requiring the employers to pay PF at least on the wages as per the notified statutory minimum wages. They even inspected the companies and directed the employers to comply with the Minimum Wages Act. This resulted in a back fire since the Employees Provident Fund Organisation had nothing to do with enforcement of minimum wages which is to be done by the State Labour Department. When their efforts in that direction failed, they filed cases against the employers. Various High Courts have ruled the issue in different manner and finally the issue came for the consideration of the Supreme Court. There were four appeal cases and one transfer case on the same subject before the Apex Court. The landmark judgement (it is a landmark judgement because there has been a law made by practice and once it is pointed out as wrong practice then it will be become a sensation) directs that PF should be paid on all the emoluments that an employee gets, and it should not be restricted only to basic wages fixed as a component of wages of your company. It provides that only HRA is an exempted allowance and all other allowances will form part of basic wages.

The Practice of Compensation Fixation

As against fixing the basic wages and building up the salary by adding Dearness Allowance based on CPI, HRA as a percentage of the basic wages and city of residence, conveyance allowance according to the grades or city of residence and other allowances as per eligibility of the respective employees, in private sector concerns we have a system of first deciding what is the Personnel Cost to the Company and then cutting the same into small compartments and giving some title to each component. There will not be any grade wise pay structure, but the remuneration is fixed by the concerned officer giving weightage to the candidate’s present salary, experience etc and in this pursuit, occasionally, the bargaining power of the candidate and the bias of the HR Manager will be decisive factors. Everything is discussed on the CTC and once it is decided the same is put in an excel template which will give you a break up like Basic pay, HRA, Conveyance, performance pay, medical allowance and finally Special Allowance. This special allowance is the amount left after putting the percentages are put on each cell representing the amount demanded by the employee and the amount payable by the Personnel policy of the organisation. Eventually, this component will be common for all employees and whenever salary hikes are declared, often this is the component of salary to which the increase in the salary will be absorbed. This is because any addition to basic pay will increase the burden of the employer towards PF, Bonus, Gratuity, leave encahment etc!

It is to be noted that, whatever is paid to all the employees commonly should form part of basic wages. At the same time, if any particular employee or a class of employees having special skills or requiring special skills to do a particular work is paid any additional amount, that can only be excluded from basic wages as special allowance. This was decided very long before in Bridges and Roofs India Ltd Vs Union of India (1963(2)LLJ 490) and a few other cases like R Ramanathan Chettiar Jewelers,Madurai Vs Regional PF Commissioner, Madurai, (1988(ii)LLJ 045) and Associated Cement Company Ltd, and Ors Vs RM Gandhi, Regional PF Commissioner, Gujarat (1995-III-LLJ(suppl.) 368)

The system of pay fixation based on Cost to Company and making it more and more employer friendly only has put them under trouble. With the new decision the employers are now thinking of increasing of share of CTC to HRA because HRA is in the exclusion part of the definition of basic wages and as such no contribution is payable on HRA. But the EPF Organisation is ready with a calculation of HRA in tune with the Income Tax Act preventing the employers to pay more for the shelter rather than for their basic requirements.

Take Home Salary

Though the Supreme Court has ruled that provident fund should be contributed on your Gross Fixed Salary (less HRA), the amount of contribution of those whose basic salary was more than Rs 15000 will not change. This is because the EPFO cannot demand a contribution on a salary above Rs 15000. In Maratwada Gramin Bank Karmachari Sanghatana and Another Vs Management of Maratwada Gramin Bank and others (SC 2011 LLR 1130) it was held that the EPFO has no right to demand a contribution on a salary above Rs 6500. (Please note that the mandatory salary was Rs 6500 when this verdict came and now it has become Rs 15000). Therefore, the employer’s liability to pay PF shall be restricted to 12% of Rs 15000. As such those whose salary are subjected to PF deduction at this figure will continue to get the same take home salary.

For those whose contributions were worked out on amounts less than Rs 15000, the take home salary would certainly come down. But the reduction of take home pay should not be taken as a negatively because of various reasons. First, whatever you contribute will be a saving. Second, the same amount is put by the employer also. This will increase your take home at the time of your retirement. Since 8.33% of the PF qualifying salary is posted in Pension Fund, your pension qualifying salary will also be high and this will, obviously, result in higher pension through out the rest of your life. If you wish to take a loan, say for construction of a residence, the amount available to you will be 36 times of your PF qualifying salary. An increased PF qualifying salary will result in increased amount available as loan from PF.

Provident Fund is an investment and is considered to be the best available retirement benefit available in India. Besides its beauty of income tax savings, insurance under the Employees Deposit Linked Insurance and easiness of getting advances for construction or purchase of residential plots, education of children, marriage etc, it is the only form of investment which gives the nominee of the deceased member monthly pension without reference to the service. Therefore, I would recommend that the ruling of the Supreme Court should be welcomed.

Apprehensions

The ruling only gives a direction that basic wages means total salary and you should include special allowances, conveyance allowance and other allowances to wages which qualifies to PF contribution. However, the EPFO can demand the arrears of contribution by sending notices to all the establishments who have not complied with the statutory requirements. Therefore, from now onwards it will be a period of enquiries under section 7A of the EPF & MP Act. If so, from which dates the employers will have to pay the contributions? Is it from the date on which the Employees provident Fund and Misc. Provisions Act was enacted or the date on which the Act was made applicable to the establishment whichever is later or whether the EPFO will give a cut of date for this? If they take the former, the employers will have to provide for a huge amount in their next year budget and this will include the employees’ share because they cannot recover a single paisa from the employee in respect of their old dues. For the EPFO, it is benefited because there are huge amounts which are remaining unclaimed by members who have either not bothered to get it or died without claiming the amounts. Under the Payment of Gratuity Act there is a provision that it is the responsibility of the employer to pay the gratuity to an eligible employee within 30 days of his leaving service even if he has not claimed it. Similarly, the EPFO should be mandated that it is their responsibility to pay the PF amounts and pension as soon as an employee leaves or communication of his exit is given to them by the employer.

Madhu T K

Negative clauses restricting employees to join competitors is not valid

2013-10-07T04:31:00.003-07:00

Now-a-days, it is becoming a popular practice by established companies to insert a negative covenant clause in their service agreement. Such clauses generally mean to restrain the outgoing employees of a company for a certain period from joining other company or practice similar trade themselves or jointly with others.

The Indian law does not recognize such restrictive agreements. As per Section 27 of the Indian Contract Act, 1872, such contracts to that extent are void and against public policy. No employee can be prevented from pursuing similar work if he/she quits the present one, merely on the pretext that it will be detrimental to the previous employer.

Gujarat High Court in this context, in the case of Sandhya Organic Chemicals v. United Phosphorous held that, an employee cannot be prevented from utilizing the knowledge and experience that he has gained while being in employment. In Ambiance Indai pvt Ltd vs Naveen Jain, an agreement between the parties prohibiting an employee for two years from taking employment with present, past or prospective customer of plaintiff was held to be void and contrary to section 27 of the Indian Contract Act. It was held that such a stipulation would prima facie be against public policy of India and arm-twisting tactic adopted by employer against young man looking for a job.

The Supreme Court in Superintendence Co. of India v. KrishunMurgai. AIR 1980 SC 1717 has ruled that under Section 27 of the Contract Act. a service covenant extended beyond the termination of the service is void.

Though such post termination restraint agreements are void, confidentiality and non-disclosure agreements are valid and effective when it is exercised during the time when the employee is in service.

Madhu.T.K

Gratuity cannot be forfeited for an act involving moral turpitude which is not in the course of employment

2012-10-09T06:50:00.001-07:00

In Vithal Rangnath Darekar Vs New India Insurance Company Ltd [2012 LLR 1027], the Bombay High Court has ruled that the right to receive gratuity is a statutory right and the gratuity cannot be forfeited due to conviction by criminal court for an offence (ie, kidnapping a girl) since such act does not come under purview of section 4(6)(b) of the Payment of Gratuity Act, 1972.

Section 4(6)(b) deals with forfeiture of gratuity and it reads as follows:

“The gratuity payable to an employee may be wholly or partially forfeited -

(i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or

(ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.”

In the instant case, the petitioner was a sub staff of the respondent company and he was convicted for an offense of kidnapping a girl under section 363 and 344 of Indian Penal Code, directing to undergo rigorous imprisonment for four years together with fine. On the ground of his conviction by criminal court his services were terminated by the employer. He had rendered a service of 19 years and 2 months. He moved an application for gratuity before the Controlling Authority which, in turn, was rejected on the ground that the applicant has been convicted for an offence involving moral turpitude. He then challenged the decision before the High Court.

The High Court observed that the act of kidnapping a girl has nothing to do with the act of employment. The expression in section 4(6)(b)(ii) clearly suggests that such act involving moral turpitude must be caused in the ‘course of employment’. An employee is acting in the course of employment only when he is doing something in discharge of a duty imposed upon him by his contract of service.

Employer can reduce PF contribution at a later stage also

2012-03-16T04:41:00.000-07:00

When an employer is deducting and depositing EPF upon more than Rs 6500, he can reduce it to Rs 6500 later on and in that event section 12 of the EPF Act providing bar on reducing wages will not attract as was decided in MARATHWADA GRAMIN BANK KARAMCHARI SANGHATANA AND ANOTHER Vs MANAGEMENT OF MARATHWADA GRAMIN BANK AND OTHERS (SC 2011 LLR 1130)

For more details please follow the link.

http://www.mediafire.com/?v8ad6q02pwa8ja9

Madhu.T.K

STATUTORY MINIMUM WAGES AND EMPLOYERS’ LIABILITY IN RESPECT OF PF, BONUS AND GRATUITY

2011-04-26T06:42:00.000-07:00

In a recent judgment in Globe Detective Agency (P) Ltd vs. Presiding Officer, Industrial Tribunal No. III and Another (2011- LLR 236) the Delhi High Court has ruled that Bonus should be paid to eligible workers at least on the statutory minimum wages applicable.

It has been a practice of establishments to split up the total salary into components like Basic, House Rent Allowance, Conveyance Allowance, Washing Allowance etc. There is nothing wrong in doing so with respect to employees drawing higher salaries whose salary incomes are subject to income tax deduction, but not in respect of low paid or those who are paid statutory minimum rates of wages.

If any establishment has been paying wages to employees after splitting the gross salary in to basic + HRA+ Conveyance+ etc …., and whereas the sum of these heads make equal to or more than minimum wage fixed by the government, the employer is said to comply with the requirements under the Minimum Wages Act as was penned inter alia in the judgment in Airfrieght Ltd Vs State of Karnataka (AIR 1999 SC 2459). This ruling has been interpreted as a licence to split the total salary into components like HRA, Conveyance etc which do not form part of statutory salary.

What is statutory wage/ salary?

Statutory wage means wage as defined under various labour enactments. Different Acts have defined wages/salary differently. But almost all Acts have included the Basic Wage and Dearness allowance as part of wages/ salary. For instance, section 2(h) of the Minimum Wages Act, 1948, wages means an all inclusive remuneration payable to a worker as per the terms of contract of employment and includes house rent allowance. However, wage as per the said Act does not include any other facilities or amenity like rental value of house accommodation given to the employee, electricity or water bills paid in respect of them or medical attention given to them, special allowance paid to defray special expenses entailed on an employee or a class of employees by the nature of his or their nature of employment or any travel allowance or concession paid. Certainly, any contribution payable by the employer towards Provident or Pension Fund, Employees State Insurance, amount payable as bonus or amount payable as gratuity at the time of discharge of the employees is also not part of wages/ salary. The latter part is common under all legislations whereas under the CTC concept of salary fixation all contributions payable by the employer in respect of an employee is included in the salary or the so called Cost To Company.

Section 2(iv) of the Payment of Wages Act, 1936, also defines the wages in the similar manner by including all amounts payable as per contract of employment. Section 2(rr) of the Industrial Disputes Act, however, includes in wages the value of house accommodation, supply of water and electricity, medical attendance or other amenity like value of concessional supply of food grains, travelling concession and any commission payable on the promotion of business.

Section 2 (s) of the Payment of Gratuity Act, 1972, excludes all allowances like HRA, travelling allowance etc from wages. Section 3(n) of the Maternity Benefit Act, 1961, includes HRA and value of food grains in wages. However, section 2(21) of the Payment of Bonus Act, 1965, excludes all allowances other than dearness allowance from wages.

Section 2(b) of the Employees provident Fund and Misc. Provisions Act defines basic wage as the whole emolument that an employee gets while on duty or on leave but excludes House Rent Allowance. The scheme 29(3) of the Employees Provident Funds Schemes, 1952, requires that provident fund contributions shall be on basic wages, dearness allowances, retaining allowance and value of food concessions payable to the employees. This has been wrongly interpreted by employers that PF is payable only on basic wages and DA that they fix. However, the objective of section 2(b) was to include all allowances other than HRA to be part of basic wages.
Section 2(22) of the Employees State Insurance Act, 1948, includes in wages all allowances which are paid in intervals of not exceeding two months. There are two components exluded from the wages and these are travelling expenses and washing allowance. Though the treatment of travelling allowance has been a subject of dispute, its inclusion for coverage and contribution are being regulated by court ruling and separate notifications. However, the frequency of its payment and the nature of its payment as to whether as part of contract of employment or as reimbursement are also determining factors. A general understanding is that travelling expenses reimbursed and that paid for meeting the expenses of employees to reach the place of work and back home can be considered as excluded. In Management of Oriental Hotels Vs ESI Corporation [(2002-I-LLJ-14(Mad-DB)] and ESI Coporation Vs Sundaram Clayton Ltd and Others (2004(IILLJ30 Mad) it was held that travelling allowance falls under the exclusion clause provided under the definition.

In short the two basic components of salary which should be treated as salary for the purpose any Act concerned are the Basic wage and the Dearness Allowance. It is accordingly that the appropriate authorities under the Minimum Wages Act fix the minimum rates of wages. As such there is expected to have a basic rate of wage and a dearness allowance variable according to changes in the consumer price index. However, in many establishments the practice of paying variable dearness allowance (VDA) is not present. They pay under different heads like, Basic, HRA, Conveyance etc. Under such pay scales, the only component which qualifies all the tests of a statutory salary would be basic salary. This is often done with a view to reducing the employer’s burden of payment of bonus, gratuity, provident fund contribution etc.

A wrong Practice

The minimum wage as per the Minimum Wages Act is expected to include a basic rate and a dearness allowance which is adjustable according to the changes in cost of living indices. However, the employer is said to comply with the Act even if he is not paying DA under a separate head but the total pay is an all inclusive amount at par with or higher than the basic and DA as per the Minimum Wages Act. This was supported in the ruling by the Apex Court in Airfreight Ltd Vs. State of Karnataka. Therefore, an employer can split the total salary into basic salary, HRA, Conveyance, washing allowances etc and thereby can reduce his burden of payment of contribution to EPF, Bonus and Gratuity. In many instances the basic salary is kept at a very lower level and the major portion of salary would be in the form of HRA, conveyance allowance and even washing allowances!

Observations by Provident Fund Authorities

On finding that the Basic wage has been fixed at a lower level deliberately to deflate employer’s contribution towards Provident Fund, the PF Authorities have come up with a decision of requiring the employers to pay PF contributions at least on the minimum wages fixed by the government. This decision of the EPF Organisation has been challenged in various courts saying that it is the basic wage which will qualify for PF contributions or HRA, Conveyance and Washing Allowances do not form part of PF qualifying salary and even the EPFO has no authority to enforce minimum wages. The EPFO, on the other hand, uphold that the schemes under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, are social security schemes meant for the benefit of employees and the very purpose of the schemes would be defeated if the employers are allowed to split the salary into different components. Certainly, very recently the view expressed by the EPFO has been dismissed by the High Court of Punjab and Haryana in Asst. provident Fund Commissioner, Gurgaon Vs G4S Security Services (India) Ltd and another. The court relied on the definition of PF qualifying wages as per the Schemes which excludes HRA or other allowances.

However, the Employees Provident fund Organisation has issued a circular (No.: Coord/4(6)2003/Clarification/Vol-II/ Dated: 23-05-2011) calling on all employers that minimum wages should not be bifurcated for the purpose of payment of PF contribution. The circular says that ".....it is abundantly clear that basic wage in no case can be lesser than the minimum wage as the same is not only contrary to law of land but is also beyond logic and rationale that an establishment which can not pay even minimum wages to its employees, would be willing to pay allowances to them and if such instances exist, there is certainly a malafide motive which may be considered as knowingly making or causing to make false statement/representation punishable u/s 14(1) of EPF & MP Act, 1952. It may also attract the provision of section 418 of IPC. It adds that " any agreement which negates any law of land is ab-initio-void and would have effect of non-existence. Therefore, any such terms of agreement for employment where minimum wages is splitted to reduce the liability under EPF & MP Act, 1952 would be governed by the same logic as it is against the provisions of Minimum Wages Act and hence illegal".

Observations of Court in payment of Bonus

In Globe Detective Agency (P) Ltd vs. Presiding Officer, Industrial Tribunal No. III and Another (2011- LLR 236), the Delhi High Court has taken a different view about treatment of ‘other allowances’ in calculation of bonus. Though section 2(21) of the Payment of Bonus Act excludes all allowances other than dearness allowance from wages, the verdict allows the contention of the respondents that allowances and amounts payable which are otherwise included as part of permanent wages cannot be removed for the purpose of calculation of bonus as was earlier held in S. Krishnamurthy Vs. Presiding Officer, Central Govt. Labour Court [1985-LLJ-133(SC)]

There are similar views about retrenchment compensation also. There is no doubt that no establishment has any right to exist unless it pays at least the bare minimum rates of wages fixed by the government [Crown Aluminum Works Vs. Workmen (1958 AIR 30)] Subsequent ruling on minimum wages also show that retrenchment compensation shall invariably be calculated on minimum wages since there is no question of defence if the aggrieved employee is paid lower than the minimum wages as nonpayment of minimum wages itself is a matter of industrial dispute. In the similar way payment of gratuity is also regulated in the first instance by taking in to consideration the basic wage which should not be less than the statutory minimum wages applicable.

Therefore, any attempt by an employer to split the statutory minimum wages shall only be viewed as a calculated act of reducing his burden of payment of his contribution towards Employees Provident Fund in the first instance and thereby gaining by way of reduced bonus payment and gratuity liability. It is worth understanding the quantum of outflow of funds had he worked out the PF contribution, Bonus and Gratuity payments in real terms and it would never be a burden since the amount of minimum wages by itself is a small amount. It is worth settling in the wordings of the Apex Court in Crown Aluminum Works case that no establishment has right to exist unless it pays at least the minimum wages. It is not confined only to the sum of amount paid but the variables like bonus, gratuity and other social security payments which depend on it as well. It is okay in the case of those whose drawings exceed minimum wages but is not acceptable in the case of low paid workers. The verdict of Delhi High Court in Globe Detective Agency’s case is a right step but not final. There are more decisions to come in line with the present verdict which will entail minimum wage earners to get the exact benefit as envisaged by our Welfare State.

MADHU.T.K

PROTECTED WORKMEN

2011-03-15T08:51:00.000-07:00

Who is a protected workman?

A protected workman in relation to an establishment means a workman who, being an office bearer or member of the executive committee of a registered trade union connected with the establishment, is recognised as such in accordance with rules made in this behalf.

Rule 61(1) of Industrial Disputes (Central) Rules, 1957, provides that every registered trade union connected with an industrial establishment shall communicate to the employer before the 30th April every year, the names and addresses of the officers of the union who are employed in that establishment who should be recognised as protected workmen. Rule 61(2) makes it obligatory on the part of employer to recognise such number of workers as provided u/s 33 (4) of the Industrial Disputes Act, 1947, as ‘protected’ for a period of 12 months, within fifteen days of receipt of the proposal from the union.

However, management is entitled to decline recognition as protected workman to a person nominated by the union, if any disciplinary proceeding is pending against such workman. Union certainly cannot exercise their power under Rule 61(1) to give immunity to an employee against whom disciplinary proceedings initiated by the management are pending, by nominating his name for recognition as protected workman [HLL Lifecare Ltd Vs. Hindustan latex Labour Union (AITUC)]

How many protected workmen?

As per Section 33 (4) of the Industrial Disputes Act, 1947, the number of workmen to be recognised as protected workmen shall be one per cent of the total number of workmen employed therein subject to a minimum number of five protected workmen and a maximum number of one hundred protected workmen.

Where the total number of names received by the employer exceeds the maximum number of protected workmen, admissible for the establishment, u/s 33(4) of the Act, the employer shall recognise only such maximum number of workmen as “protected”.

Where there are more than one registered trade unions in the establishment, the maximum number of protected workmen shall be distributed among the unions in such a way that each union shall have representation as protected workmen in proportion to the membership of the unions. If the number of protected workmen allotted to a union is less than that proposed by the union, the union will have to select from the proposed list the names of such persons who should be recognised as protected workmen and intimate the names to the employer within five days.

Rights of Protected Workmen

Section 33 (3) of Industrial Disputes Act, 1947, provides that during the pendency of any conciliation procedure before a conciliation officer or a Board or of any proceeding before an arbitrator or a Labour Court or Tribunal or National Tribunal in respect of an industrial dispute, the employer should not initiate any action against any protected workman concerned in such dispute-

(a) by altering, to the prejudice of such protected workman, the conditions of service applicable to him immediately before the commencement of such proceedings; or

(b) by discharging or punishing, whether by dismissal or otherwise, such protected workman, save with the express permission in writing of the authority before which the proceeding is pending.

Remedy for employer

If an employer wants to take action against a protected workman during the pendency of a conciliation proceeding, before the Conciliation Officer, Board, Arbitrators, Labour Court, Tribunal or National Tribunal, he should get express permission from the conciliation Officer, Labour Court or Tribunal, as the case may be, by applying in form J. It may be remembered that application for approval should be made before the action for change in service conditions or discharge or dismissal, as the case may be, becomes effective [McKenzie & Co Vs Workmen(AIR 1959 SC 389)] At the same time, during the pendency of application for dismissal of a worker u/s 33, the employer can place him under suspension.

Conclusion

Right to get service conditions to be unchanged during pendency of dispute is available not only to protected workmen but to every workman on whose behalf the dispute has been raised and includes those who would be benefited by the award [New India Motors Vs. Morris (AIR 1960 SC 875)]. Therefore, the matter in respect of which the change in service conditions took place should have been connected with the dispute and that the workman affected by such change in service condition should have been concerned with the dispute pending [Premier Tyres Ltd Vs Bhaskaran Nair (1979 Lab.I.C.549.Ker)] Section 33 gives a workman in pending dispute a protection against victimization. As observed in Sharma Vs SBI (AIR 1968 SC 985), it ensures a fair and satisfactory enquiry of an industrial dispute undisturbed by any action on the part of the employer which could create fresh cause for disharmony between him and his employees.

The termination of employment of a probationer at the end of the period of probation will not constitute any change in service conditions of employment and is not within the purview of section 33 [Stanley Mendez Vs Geovanol Binny Ltd (1968 KLT 623)]

MADHU.T.K

Contract Labour

2010-11-17T04:12:00.001-08:00

Engaging workmen through a Contractor or outsourcing of job is a common practice now- a- days. Though both the terms appear to signify the same meaning and result the former is used when the employee engagement is taken place within the boundaries of the establishment under the control of the principal employer whereas the later is taken place outside the premises of the establishment. As such when a job is outsourced and is undertaken outside the premise which is not under the control and management of the Principal Employer the Contract Labour (Regulation and Abolition) Act, 1970, will not apply. In all other kinds of engagements and outsourcing the provisions of Contract Labour (Regulation and Abolition) Act, 1970 will apply. Let us see what the Act says:

n Contract Labour (Regulation and Abolition )Act, 1970 is an Act to regulate employment of contract labour, prevent exploitation of contract labour and for abolition of contract labour in certain areas.

n The Contract Labour (Regulation and Abolition ) Act, 1970 applies to establishment employing 20 or more contract labour and Contractors employing 20 or more employees

n The Act requires that every establishment which employs 20 or more contract labour shall obtain Registration from the Appropriate Authority. Similarly, a Contractor who engages 20 or more workers shall have to obtain licence.

n The Act makes it obligatory on the part of Principal Employer to ensure that the contractor pays wages in respect of his employees in time as prescribed under the Payment of Wages Act, 1936. Similarly, it is the responsibility of the Principal Employer to ensure that the contract workers are paid at least the Minimum Rates of wages as prescribed for the Industry. Above all, the Principal Employer has to make sure that remittances in respect of contract workers towards Employees State Insurance, Employees Provident Fund, Welfare Fund and other statutory contributions are made by the Contractor in time. If the contractor fails to comply with the above statutory provisions the Principal Employer will be responsible. In respect of contract workers not covered by ESI, it is the duty of the Principal Employer to bear any compensation which may become due under the Workmen’s Compensation Act. However, any amount paid by the Principal employer shall be recovered from the Contractor as deduction from the amount payable to the contractor as a debt due from him.

n Section 10(1) of the CLRA Act empowers the Appropriate Authority to prohibit engagement of contract labour in certain kinds of jobs or process of operation. Contract Labour in a particular operation or job is abolished mainly on the following grounds.

1. When the process in which contract labour is engaged is identical to the the core area of operation

2. When the work in which contract labour is engaged is perennial in nature.

3. When the work in which contract labour is engaged is carried out by regular workmen in similar establishments in the same industry

4. When the work in which contract workers are engaged is of such duration that regular workers can be employed

Therefore, an establishment should not engage contract workers in core areas of its operation which are regular in nature and for which regular and full time employees could be engaged. Once a particular work or operation is declared prohibited the Principal Employer should not engage contract labour in that work or operation. Not complying with notification prohibiting contract labour will make the Principal employer liable to absorb the workmen so engaged, subject to other conditions pertaining to legitimacy of the contract.

Consequences of Sham Contract

In a discussion about contract labour it is very important to study the legality or authenticity of contract. If the contract between the Principal Employer and the Contractor is ruse or camouflage, it will be treated as a sham contract. In the following instances a contract shall become sham contract.

Ø When Principal employer signs as party to a wage settlement between the Contractor and his workmen

Ø When the Principal Employer has absolute control and supervision over of the work of contract workers

Ø When the Principal Employer fixes the service conditions of contract workers and initiates disciplinary action against them as and when required.

Ø When the Principal Employer ordinarily pays of salaries and allowances to contract workers otherwise than when the contractor fails to pay it time.

Ø When the Principal Employer himself becomes the authority for granting leave to contract workers

If the contract is sham the Principal employer is liable to absorb the workers as permanent or regular workers. In Hussain Bhai Vs Alath Factory Thozhilali Union(1978 SC AIR 1410) it was held that only “outworker”is excluded from the definition of workmen and hence if nature of employment and control of principal employer over contract workers is established in favour of workmen, they can claim regularisation. However, merely because the workers are under the supervision and control of the Principal Employer does not make the contract sham as some kind of supervision and control is inevitable in any kind of relationship as was observed in International Airport Authority of India Vs International Air Cargo Workers’ Union (2009-IV-LLJ-31-SC). In Gujarat State Electricity Board Vs Hind Mazdoor Sabha (1995 SC –II-LLJ 790) it was held that claim for regularization is maintainable if raised on the ground that the contract was sham and camouflage. The same view was expressed in Municipal Corp. of Greater Mumbai Vs K V Shramik Sangh (2002-II-LLJ 544)

Abolition of Contract labour and absorption

If contract labour is prohibited by notification finding that the operation in which the labour is engaged is perennial in nature or the work is of such duration that regular workmen shall be engaged, the Principal Employer is expected to terminate the contract. The question of whether the contract workers engaged in an operation which is later on declared as prohibited should be absorbed as regular workmen by the Principal Employer has been discussed in various cases. In Steel Authority of India Ltd Vs. National Union Waterfront Workers’ (2001 (II) LLJ 1087) it was held that mere abolition of contract labour following section 10(1) of the CLRA Act would not entitle the workmen for automatic absorption. If any job is found to be perennial in nature and following the finding the Appropriate Authority has prohibited engagement of contract labour in that job or operation, the principal employer can employ regular workmen. In the process he shall give preference to the former contract workmen, if otherwise found suitable. A direction of this kind has been given by the Jharkhand High Court in a recent judgment in Bharat Coking Coal Ltd Vs. Workmen, Bharat Coking Coal Ltd(2010-II-LLJ 131). Therefore, there is no compulsion on the part of Principal employer to employ the erstwhile contract labour.

Conclusion

Whenever workers are engaged through a contractor make sure that the operation in which the said workers are engaged is not directly related to the core function of the establishment. In other words, do not engage contract workers in operations of perennial nature. Similarly, the purpose of contract should be genuine. It should not be fake or a screen to deter rights conferred by Labour Laws to workers.

Labour Laws in India- updated

2010-04-28T08:28:00.000-07:00

Dear HR Executives,

An understanding of various labour enactments that are applicable to your establishment is very important for your success in your career. Please find some brief notes on various Labour Legislations in the form of Ppt by following the link below.

http://www.mediafire.com/file/cx7hstsp6hcsr6q/Labour_Law-_PPT.pdf

Regards,

Madhu.T.K

MCQs on Labour Laws

2010-03-07T05:57:00.000-08:00

Please find some multiple choice questions on Labour Laws. It may be useful for those who prepare for interviews for the posts of Personnel/ Industrial Relations/ Managers.

http://www.mediafire.com/file/ootgyyy0zza/HR Interview Questions.doc

Regards,

Madhu.T.K

CTC Vs BTC

2010-02-22T01:06:00.000-08:00

The concept of showing the Salary of an employee in the form of CTC (Cost To Company) is a gimmick developed by (new generation) companies to attract employees. The CTC will include all costs – fixed and variable, historic and future or actual and anticipated- which are to be incurred due to employment of a person. Under the CTC concept even the expenses which are to be met after 5 years of employment are not spared but the projected sum is distributed evenly through out right from the month one of service!

An offer letter issued to an employee by a Multi National Company is given below.

FIXED SALARY

Basic Salary
House Rent Allowance
City Compensatory Allowance
Special Allowance
Conveyance Allowance

REIMBURSEMENTS

Meals coupon
Books/Periodicals
Education
House Maintenance Allowance
Uniform Allowance

BENEFITS/ PERKS

Leave Travel Allowance
Telephone Expenses
Mobile Phone reimbursement
Electricity/Gas
Servant/Gardener
Credit Cards
Furnishings/Durables
Holiday Facilities
Medical Reimbursements
Medical Insurance

RETIRALS

Provident Fund
Gratuity

BONUS

Fixed Bonus
Productivity Linked Variable Bonus

The total amount mounts up very huge and one looking at is impressed by the OFFER given by the company. This is just to lure employees. With the exception of Fixed Salary, all other payments are reimbursements of actual amount spent. Most of them are payable yearly and leave travel concession is generally paid once in two years. Provision of subsidised food (see Meals coupon) may be a requirement of the company entailed after any enactment like the Factories Act, 1948. In some cases bonus will never accrue although amount will be projected well at the time of preparation of offer letter. Later on the employee will be denied of the bonus quoting salary ceiling provisions in the Payment of Bonus Act. I have come across to find an employee whose expectation was that he would get the stated sum every month but was deprived of of many reimbursements for want of adequate proof of having spent the amount claimed. Surprisingly, these companies do not pay any Dearness Allowance which will compensate the cost of living in real terms to a great extent. This is because the company can not graph the cost of living on which the DA is structured.

Similar are the cases of Employees Provident Fund contribution and the Gratuity. These are statutory obligations of the employer. Though EPF contribution takes place every month the gratuity payment takes place only once and that also after five years of service. When no one is certain that he will be in continuous service for five years with an employer the practice of showing gratuity in the salary cannot be encouraged. More over, gratuity is not payable to any employee during his service but it is payable only when he leaves due to any reason including death.

The practice of including employer’s contribution to EPF as part salary and then making a deduction of the amount from the salary shall be interpreted as recovering employer’s contribution from the employee and can be challenged as ‘ an employer shall not deduct his own share of contribution from the salary of the employee’. Similarly an employer cannot realize any amount from the employee for payment of gratuity in future.

In the conventional style of salary fixation, the Basic Salary is fixed and allowances like Dearness allowance, House rent Allowance etc are declared as percentages of the fixed basic. The other benefits will be offered as ‘stated in the standing orders of the organisation’. Normally an organisation will have certified standing orders of its own which define the relationship between an employer and employee. The standing orders will speak about different benefits available to different categories of employees.

When the employers think of cost to company, why doesn’t there be a much fruitful Benefit To Company concept? The benefit that the company gets out of employment of each and every employee shall be worked out applying any theory like that used to measure the marginal productivity of labour. Since transition of Personnel Management concepts to Human Resource Management, labour has been recognised as a capital gifted with rich resource. In this context it is not worth to relate the service of human capital to Cost to Company alone, rather the services rendered shall be measured in tune with Benefit To Company (BTC). This is relevant in fixing remuneration in functional areas like Marketing wherein the marginal revenue, the benefit to the company by employing the marginal labour, determines the salary. The psychology of mass retrenchment in a reputed MNC which lead 500 skills unemployed tells us that those with negative or diminishing BTC have no room in an organisation. When performance is the yardstick for deciding whether or not one employee shall be shown the way out, the same shall also be the index for retention of employee. A good performer brings in many benefits which a bad performer doesn’t. Imagine that the supply of labour is inelastic and there exits alternative employment. In such situation it will be the labour who fixes the benefits that the company gets by employing him!

Retrenchment of employees for poor performance shall be justified provided all efforts using the highly sophisticated tools of the (modern) HR to rearrange and reallocate work have been bushed. But, ironically, many are routed out of the organisation without redistribution of functional areas just finding them unbeneficial to their respective job. Here benefits play the lead role rather than the cost, the very end of which is in the hands of the employer with plenty of ‘variables’ hidden in the pay scale. Above all, the question commonly asked in a job interview that ‘why should we appoint you?’ has an implicit meaning ‘what benefit the company gets out of employing the candidate’.

Madhu.T.K

The Marketing Executive

2010-02-21T08:32:00.000-08:00

I was listening to Yesudas singing to the tunes of M S Baburaj when he knocked the door. I lowered the volume irritated and bend out to open the door. It was a smart looking young man who introduced himself as Marketing Executive of a multi national company.

“Yes, how can I be of any help?” I asked.

Moving forward and unshouldering a bulky bag he longed a packet to me and said. “Well sir, this is our new product which can be used even by a child of less than 5”.

He unwrapped the product and started highlighting its features like, time saving, power saving and so on. I found some thing missing in his words but I did not ask any thing. He continued his narration and after five long minutes he took a pause and looked at me to take out his invoice book.

I asked “shall I know what for your this piece is used?”

He took a back a little and regaining his existence said “ sorry sir, I forgot to tell you, Well sir, this is used for toasting bread and as you know we all are having the habit of taking bread every morning and evening, this product suites your requirement. If you go for your conventional cooking, you will have to devote your entire time on it and at the same time, if you try our product, you will definitely feel that your morning is very fresh because there is no need to cook in quantities but in micro number as required”.

He said it could be better to make food instantly according to the need of each person otherwise the cool atmosphere inside the room would make the food flabbier.

I tried to hide clouds of rashness and said “see, I am not interested, please, I don’t want”

He caught at his neck to make his tie a little bit slack and threw an innocent appeal to me and after a suspension started explaining the offers that the ‘company’ gives to those ‘ first 10 persons’ who buys it, rather ‘gets’ it, as he said. He said depending upon the usage by the wannabe the company would give back the money paid!

“Why it is so?” I asserted with curiosity “if I pay for this item and I continuously use it, I shall win bonus every year by way of return of capital?”

“Yes sir, the scheme is aimed at promoting new food habits”.

“You mean, we should take bread toast every morning and evening?”

“That’s obvious! We expect that in the years to come there is enormous scope for bread” and he narrated the changing nature of employment and human schedules. He said “our company does not want such busy persons suffer. We have a long run perception that we serve the most remote areas of the world”.

“Then what are your main criteria for return of capital?” I asked.
He said the number of breads toasted would be recorded in the memory unit of the toaster and the same would be decisive factor for capital return. For a few seconds I went back to my childhood and recollected the sweet memory of my winning of an ink bottle without a lid from a thambola at a temple fest. While recovering from the yesteryears I heard “….kanmashiyum kunkumavum karivalayum vangiduvan………” and fastening a smile on my lips I said “ I don’t think that this would be of any help to me, after all, I live here jointly with my aged parents who seldom like to have bread through out the day. I do agree that your product has some power saving device built in, but our food habits can not be compromised to the economies offered by your company. As you see, this is not an air conditioned house”.

Taking a deep breath he defended “I agree sir, but tomorrow…. it is going to be new generation day where you will find it very difficult to adjust your schedules with that of your children and even your grand parents will be forced to follow it”.

I have already found my parents surpassing any young one by substituting television plays to Ramayana during karkkidakam. I have already started buying imported mangoes for them. I have noticed the elegancy of woman while pushing the trolley of Big Bazars and retails giants and the punch they have while entering ATM counters. I have noticed the upsetting change that my former servant maid had when she was promoted as ‘home nurse’ by one of the ‘service providers’. During my recent visit to Guruvayoor temple, I have noticed old women dressed in salwars in the shrine as if they were waiting for the decision of the government to enter the temple for the first time!! I recollected how many Bank executives would have approached me offering car loans after seeing my 1987 model motor car!

“Yes, time has changed” I muttered.

“Sir..?” he asked “did you say anything sir?”

“Nothing, but….. let me buy one piece” I replied.

Now I have become the part of new generation!!!! I have changed my food habits- from now onwards we will have bread toasted in the highly sophisticated toaster manufactured and marketed by multi national companies who have taken a vow to make the entire land free from conventional food habits, thanks to globalization. Now I take very fresh food independently and have it while engaged in other work confining myself to the air conditioned room specially modified according to the company (MNC) norms. But what happened to my cassettes?

“aadiyil vachanamundayi, aa vachanam roopamaayi…..” Yes it is there!

MADHU.T.K

KNOW YOUR PF PENSION

2010-02-21T08:29:00.000-08:00

If you are a member of Employees Provident Fund and wish to know what would be the pension you would receive when you retire please go through a presentation in the following URL

http://www.mediafire.com/file/dyymmwzmoti/Employees' Pension Scheme 1995.pdf

Regards,

Madhu.T.K

Disciplinary Action

2010-02-21T08:23:00.000-08:00

Here is a presentation about how to conduct a domestic enquiry in your organisation. The presentation is expected to give you a brief idea about an enquiry. Please follow the link.

http://www.mediafire.com/file/z23otzyd00o/DISCIPLINARY ACTION.pdf

Regards,

Madhu.T.K

Standing Orders

2010-01-24T06:21:00.000-08:00

It is mandatory that an establishment employing at least 100 employees (subject to State Amendments) should have Standing Orders of its own. Standing Orders is a set of rules which defines the relationship between the employer and the employees. Since the Standing Order is drafted in consultation with the employees and is certified by the Labour Authorities of the government these rules are binding on both the parties. A draft of Standing Orders is available in the following URL which can be downloaded and modified according to your requirements.

http://www.mediafire.com/file/kjjwhmm2ooz/STANDING ORDERS.doc

Regards

Madhu.T.K

Sexual Harassment at Workplace

2010-01-24T06:18:00.000-08:00

Here is a draft of Policy against sexual harassment at workplace.

Please use the URL

http://www.mediafire.com/file/zmmmm1m422z/Policy against Sexual Harassment.doc

Regards,

Madhu.T.K