Monday, October 7, 2013

Negative clauses restricting employees to join competitors is not valid

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.


Tuesday, October 9, 2012

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

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. 

Friday, March 16, 2012

Employer can reduce PF contribution at a later stage also

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.


Tuesday, April 26, 2011


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.
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. At the same time, 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. 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.  
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 " 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.


Tuesday, March 15, 2011


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.


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)]


Wednesday, November 17, 2010

Contract Labour

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.


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. 

Wednesday, April 28, 2010

Labour Laws in India- updated

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.