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 ".....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.