Tuesday, December 12, 2023

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

 

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 11th June 2017. She applied for maternity leave from 1st June 2017. Since the term of employment was to come to an end on 11th 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 11th 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 1st 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

Friday, October 29, 2021

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

 

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. 

Friday, April 24, 2020

Liability of employers to pay salary during COVID 19 lockdown period


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

Tuesday, October 1, 2019

Payment of Gratuity and Gratuity Qualifying Salary


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?
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”.

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.

Tuesday, April 2, 2019

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


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

Wednesday, March 6, 2019

Provident Fund Qualifying Salary and the recent Apex Court Judgement.


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

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.

Madhu.T.K