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.
