Since there has been a shift in the concept of remuneration for service from the Salary to the Cost to Company, the old theory of computing Gratuity on Basic Salary alone would require a replacement…….
Gratuity is payable to those entitled
on the basis of the last drawn salary. It is also found that in almost all
private companies only basic salary will qualify for gratuity calculation. A
very few companies, like companies which have a proper Personnel department to
take care of payroll and those who have very effective Trade Unions, may have a
component, viz, dearness allowance as part of their gratuity qualifying salary.
This is a practice followed by the companies on an impression that gratuity is
payable only on the basic pay and dearness allowances, if any.
Unfortunately, you cannot find the term
“basic wages” anywhere in the legislation governing payment of gratuity to
employees, ie, Payment of Gratuity Act, 1972.
Section 2
(s) of the Payment of Gratuity Act, 1972, defines the term “wages” as “ all emoluments
which are earned by an employee while on duty or on leave in accordance with
the terms and conditions of his employment and which are paid or are
payable to him in cash and includes dearness allowance but does not include any
bonus, commission, house rent allowance, overtime wages and any other
allowance”.
When the definition makes it very clear that wages mean the total emoluments that an employee earns why should it be calculated on basic wages alone. Certainly, if you have a dearness allowance as part of salary, that would also be included because the definition makes it clear that wages shall include dearness allowance also. But nowhere in the Payment of Gratuity Act it is said that the amount of gratuity should be calculated on Basic salary and Dearness allowance alone.
The only place where the word basic wages appears throughout the Act is in the Statement of Objects and Reasons for enactment of the Act. In the Statement of Objects and Reasons of the Payment of Gratuity Act, 1972 it shows that the term wages mean basic wages and dearness allowances only. But it cannot be accepted as part of the Act. In Gujarat University Vs. Shri Krishna, (AIR 1963 SC 703), State of West Bengal Vs. Union of India (AIR 1963 SC 1241) and S. C. Prashar, Income Tax Officer Vs. Vasantsen Dwarakadas and Others (AIR 1963 SC 1356) the Courts have observed that the Statement of Objects and Reasons accompanying a Bill, when introduced in Parliament, cannot be used to determine the true meaning and effect of the substantive provisions of the statute. They cannot be used, except for the limited purpose of understanding the background and the antecedent state of affairs leading up to the legislation....".
In the absence of a definition to basic wages/ salary under the Payment of Gratuity Act, it is good if we refer to the other enactments and judicial observations wherein the same is defined. “When an expression is not defined, one can take into account the definition given to such expression in a statute as also the dictionary meaning” is an observation by Justice C K Prasad and Justice Jugdish Singh Kheher while delivering the verdict in Kichha Sugar Company Limited through General Manager Vs. Tarai Chini Mill Majdoor Union, Uttarakhand, [(2014) 4 SCC 37].
The Industrial Disputes Act, 1947 defines the term “wages” without
any reference to “basic” as wages means all remuneration...... payable to a workman in
respect of his employment.
Section 2(b) of
the
Employees Provident Fund and Miscellaneous Provisions Act 1952, defines "basic wages" as “all
emoluments which are earned by an employee while on duty or on
leave or on holidays with wages in either case in accordance with the terms of
the contract of employment and which are paid or payable in cash to him, but
does not include (i) the cash value
of any food concession, (ii) any dearness allowance (that is to say, all cash
payments by whatever name called paid to an employee on account of a rise in
the cost of living), house-rent allowance, overtime allowance, bonus commission
or any other similar allowance payable to the employee in respect of his
employment or of work done in such employment (iii) any presents made by the
employer”. Similar definitions of wages to include all remuneration are also
available in the Payment of Wages Act 1936 and the Minimum Wages Act 1948.
In Bridges and Roofs (India) Ltd Vs Union of India (1963 (2)LLJ 490, (1963) 3 SCR 978) the Apex Court has clarified that an “allowance paid to all the employees would be part of Basic Salary and only those allowances which are paid to some employees considering the nature of their duties or purely out of management's own interests or pleasure, can be excluded from the scope of Basic Wages.”
With regard to the term “emoluments” as used in the definition of wages in section 2(s) of the Payment of Gratuity Act, we shall refer to its directory meaning and some of the interpretations of the Learned Judges. The directory meaning of the term “emolument’ is salary, fee, or profit from employment or office. The Merriam Webster Dictionary defines the term emolument as “the returns arising from office or employment usually in the form of compensation or perquisites”. It corresponds to the definition of salary as given in section 17(1)(iv) of the Income Tax Act 1961, which says that salary includes "any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages”. In Gestentner Duplicators Pvt Ltd Vs Commissioner of Income Tax (1979 (2) SCC 354, 1979 SCR (2) 788, 1979 AIR 607) it was clarified that the commission paid to the salesmen would fall under ‘salary’ as it was paid as per terms and conditions of employment. In Bennett Coleman & Co P Ltd Vs Punya Priya Das Gupta (1970 AIR 426, SCR (1) 181)it was observed that car allowance and telephone allowance were part of remuneration which would qualify for gratuity. As such, emolument is an advantage arising out of employment. Apart from salary, it shall consist of house rent allowance, medical allowance.
The Supreme Court in Straw Board Mfg. Co Ltd Vs The Workmen (1977 AIR 941, 1977 SCR (3) 91) has said that “We clarify that wages will mean and include basic wages and dearness allowance and nothing else”. This is the only available interpretation to support the act of the employers paying the gratuity on basic pay and DA. But before accepting the same in the current scenario, certain important points should also be analysed.
The Strawboard case pertains to a dispute over payment of benefits (gratuity) raised in 1958, long before the payment of Gratuity Act was passed in 1972. The case of 1958 was all about the length of service and the amount on which the gratuity was payable in the backdrop of a gratuity scheme framed by the Industrial Tribunal, Allahabad. The Company claimed it should be available to those who had worked for ten years and the amount of gratuity should be calculated on the basic salary alone. But the Tribunal framed a gratuity scheme allowing all employees who have completed five years of service and the basis of calculation at basic pay and dearness allowance. It was observed that “the determination of gratuity is not based on any definite rules and each case must depend upon the prosperity of the concern, the needs of the workmen and the prevailing economic conditions examined in the light of the auxiliary benefits which the workmen may get on determination of employment”. That means that even though the verdict from the Apex Court was delivered in 1977, that is after the enactment of the Payment of Gratuity Act 192, the decisions were based on the gratuity scheme framed by the Tribunal. The Court had even said that “we are not called upon to interpret an Act since, in this area of law, the Payment of Gratuity Act came in on a later date”. That was why in Ti Cycles Of India, Ambattur Vs M.K.Gurumani & Ors (2001(7) SCC 204) the Apex Court mentioned that “ this Court, in Straw Board Mfg. Co. Ltd. vs. Its Workmen, was concerned with the gratuity scheme formulated prior to the Act”. In Harrisons Malayalam Ltd., Vs C. Mohammed Kutty And Ors [2004 (101) FLR 115, (2004) ] the Kerala High Court has said that “the Straw Board Manufacturing Company's case (referred in T I Cycle's case by the Supreme Court), reveals that it related to the period before the enactment of the Payment of Gratuity Act,1972”. Thus, it is very clear that the Supreme Court had not considered the impact of Section 2(s) as contained in the Payment of Gratuity Act, 1972 but was analyzing whether the Gratuity Scheme of the Tribunal considered justice or not. That was why the Court had to say “determination of gratuity is not based on any definite rules” and the computation of gratuity was a matter depended on prosperity of the concern, the needs of the workmen and the prevailing economic conditions.
It is to be noted that in the Straw Board case, the Apex Court has said that “Decisions have been brought to our notice some of which refer to basic wages and others to consolidated wages as the foundation for computation of gratuity. These are matters of discretion and the “feel” of the circumstances prevalent in the industry by the Tribunal and, unless it has gone haywire in the exercise of its discretion the award should stand. We see that in the Payment of Gratuity Act also, not basic wages but gross wages inclusive of dearness allowance; have been taken so as the basis. This, incidentally, reflects the industrial sense in the country which has been crystallised into legislation.” The Apex Court has only said that decision as to whether the consolidated salary or basic salary alone should be taken for computation of gratuity is the discretion of the authority and the circumstances prevailing in the industry as they ‘feel’, and if no disorder is noticed, the decision of the authority would stand. On the other hand, if the authority has not understood the feel of the circumstances prevailing in the industry, his decision should only be regarded as a haywire decision.
When the Straw Board case was discussed, the industrial scenario was different and the concept of wages was also different. The industrial sense then was to include basic wages and dearness allowance alone as part of wages. Over the years, there has been a shift from it and now the remuneration means cost to company and the offer letters do not contain salary but only CTC, means, Cost To Company. When the employer started considering the payment of salaries, allowances and statutory contributions payable in respect of each employee who works for him as COST only, without reference to the BENEFITS or revenue that the employee adds, a new concept, viz, Cost To Company (CTC) came in to picture. This shall include all current as well as future payouts, the maximum incentives that can be earned, the performance based variables, and also the retirement benefits. There has been a misinterpretation of basic wages to mean the amount of wage that would qualify for various contributions payable by the employer. The ruling in Airfreight Ltd. Vs State Of Karnataka & Ors. AIR 1999 SC 2459, (1999) IILLJ 705 SC), the land mark judgment which observed that as long as the total remuneration paid is equal to or more than the minimum wages, there is no need to pay dearness allowance as an additional component of salary, has been misused by the employers for structuring a total remuneration in such a way that the minimum amount is put as basic wages, no amount is paid as dearness allowance and the maximum sum is put in allowances like HRA, Conveyance, Education, Medical etc. The employers also took the basic wages as the base for calculation of various contributions like PF, Bonus and Gratuity. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha has stated: “The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, which have arrived at a factual conclusion that allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the Provident Fund account of the employees.
The Supreme Court also observed that “While gratuity is usually related to the basic wage, a departure by relating it to the consolidated wage may be made if there be some strong evidence or exceptional circumstance justifying that course.” There are a lot of evidences which justify that, under the salary structure prevailing in the industry today, allowances are part of wages. These are allowances camouflaged as allowances.
4.1 House rent allowance: House
Rent Allowance (HRA) is not defined in the Payment of Gratuity
Act. HRA is a component of wage given by employers to employees
to cover costs associated with leasing a home. It is very important to note
that it is payable to those who are staying in leased residential
accommodation. HRA would be covered by the definition of “compensatory allowances”.
It is a compensation in lieu of accommodation. It is given only to those who
has not been provided with residential accommodation. The moment the
accommodation is provided or offered, the employee would lose to get it. (
Director, Central Plantation Corps research Institute, Kasaragod Vs M
Purushothaman (1994
SUPPL. (2) SCR 267)
The
House Rent Allowance excluded from the scope of Wages under The Payment of
Gratuity Act is such allowance which is paid to recompense the cost incurred by
the employee to take a house on lease. It is available only to those who are
staying in leased accommodation. If both husband and wife are working, HRA is paid to either of these two. It is
payable even if the employee is on leave. HRA is payable during the suspension
period as well. But in most of the cases in private establishments the HRA is a
component of salary which is proportionately reduced during leave days and days
during which the employee is on suspension. It is paid to both husband and wife
in the same organisation or without reference to whether the spouse is getting
it from his/ her employer. That means HRA is not a compensatory allowance for
most of the employees but part of salary camouflaged as house rent allowance.
4.2 Conveyance
allowance: It is another compensatory allowance to compensate the cost of
travel to and from the office. At the same time, if the same is paid to all
employees, and if it is paid without relevance to distance travelled, or paid
disproportionate to the actual cost, it should be part of salary only. The Hon’ble Supreme Court
of India, in case of Regional Provident Fund Commissioner (II), West
Bengal v. Vivekananda Vidyamandir & Others[(2020)17 SCC 643)] has said
that “…..transport/conveyance allowance was similar to house
rent allowance, as it was reimbursement to an employee. Such payments are
ordinarily not made universally, ordinarily and necessarily to all employees
and therefore will not fall within the definition of basic wage.” Conversely,
conveyance allowance paid universally, ordinarily and necessary to all
employees should be part of basic wages.
4.3 Education Allowance: This
is an allowance paid to take care of cost of education of the children of the
employees. Obviously, it will not be available to those who do not have
children pursuing any course of study. If it is paid to all employees, then it
would be construed as part of Basic Wages as observed in Bridges and Roofs (India) Ltd Vs Union of
India (Supra).
4.4 Special Allowance: This is
an allowance payable to those employees who use some special skill for
discharging their duties. But, in many cases, this is the residue left after
allocating different allowances under each head, and obviously, it would be a
component of salary available to all the employees. Again, if it is universally
paid, it would come under the basic salary following the Bridges and Roofs
case.
4.5 Other allowance: Some
companies use “other allowance” to put all the amounts left after putting the amounts under Basic salary, HRA,
Conveyance, Education allowance, hill allowance, city allowance etc. The use of
“other allowance” as a component of salary has a clear intension. That is,
other allowance is an allowance which can be found in the exclusion part of the
definition of wages under the Payment of Gratuity Act. Unfortunately there is
no allowance called “other allowance”. There can be allowance like house rent
allowance, conveyance allowance, special skill allowance, city (compensatory)
allowance, hill allowance, heat allowance, education allowance and many more,
but there is no allowance called “other allowance”.
The above are circumstances which would justify that these allowance are
not actually allowances but are camouflaged as
allowances with a view to avoiding statutory contributions payable by the
employer. Therefore, the Straw Board case has no relevance in the present
industrial scenario. Moreover, what the Court looked into were the computation
of gratuity and the period of service, and these “ are
matters of discretion and the “feel” of the circumstances prevalent in the
industry”, and what made the Court to say so then was that, there was no
law enforced to govern the payment of Gratuity.
Other Allowance/ Allowances as a component of
salary and exclusion part of definition of wages
Section 2(s) of the Payment of Gratuity Act defines wages as “wages mean all emoluments which are earned
by an employee while on duty or on leave in accordance with the terms and
conditions of his employment and which are paid or are payable to him in cash and
includes dearness allowance but does not include any bonus, commission, house
rent allowance, overtime wages and any other allowance”. The “other allowance”
in the exclusion part of wages means ‘any’ allowance similar to bonus,
commission, house rent allowance and overtime wages. But it is misinterpreted as
a separate item of allowance to be excluded.
It may also be noted that there is no allowance called ‘other
allowance’. An Allowance is a fixed amount given regularly by
employers to meet certain specific requirements of their employees. It is
different from perquisites. While the money received by an employee for any
objective is known as allowance, perquisites are facilities offered by
employers. The former are part of salary whereas the latter are not. There can
be allowances to compensate certain costs. It may be to compensate the
increasing cost of living, it may be to compensate the cost of residing in a
leased house for employment purpose, it may be to compensate cost of travel
involved, it may be to take care of the education of the children of the
employees, it may be to use some special skill that a particular employee shall
possess, it may be for the subsistence of an employee placed under suspension
and so on. All these ‘allowances’ are identified by means of words like,
dearness (allowance), house rent (allowance), conveyance (allowance), education
(allowance), special (allowance), subsistence (allowance)etc. But what does
‘other allowances” stand for?
The exclusion part of definition is like “.....does not include any bonus, commission,
house rent allowance, overtime wages and ‘any’ other allowance” and not like
“.....does not include any bonus, commission, house rent allowance, overtime
wages and other allowances”. There is a basic difference between the words “any
other allowance” and “ other allowances” because using “any” before ‘allowance”
should mean to understand it as allowance ‘similar to’ or ‘related to’ the one
said in the preceding text whereas ‘other allowances’ standing alone without
‘any’ prefixed to it would not mean that it should have characteristics of
words used in the preceding texts.
A careful perusal of the
characteristics of allowances excluded from the wages also reveals that these
are variable allowances and are accrued based on some conditions. Bonus is an
based on the profitability of the establishment. It is payable to those
employees whose salary is within certain limits, ie, Rs 21000 at the present
rate. It is not paid to those who have worked for less than 30 days in a year.
Commission is based on generation of certain results by the employee. House
Rent Allowance is payable when the employee resides in a rented/ leased
accommodation. It is not payable to those who stays in a house owned by him or
his spouse. HRA is payable on one condition that either husband or the wife can get it. Overtime allowance is paid when the employee
works overtime. In short, these allowances are payable depending upon the
happening of certain things, like, the establishment making profits, the
employee generating some results, the employee residing in leased accommodation
and the employee doing overtime work. Similarly, these allowances are not paid
to all the employees or are not allowances ‘universally’ paid. If there is any other allowance similar to
these allowances, then that can be excluded from the purview of salary. For
example, education allowance is an allowance payable to employees to meet
expenses relating to education of their children. Naturally, it is not paid to
those who have no child pursuing any education. Newspaper allowance is an
allowance payable to employees to purchase newspapers. Night shift allowance is
an allowance payable to employees who work in the night shift. Medical
allowance is an allowance payable to take care of medical expenses. In a month
in which the employee did not spend any amount by way of medical expenditure,
he would not be paid this allowance. Hill allowance is an allowance payable to
an employee who is posted in hill area for work. These will not qualify for
gratuity because these are allowances similar to the “other allowance’ excluded
from the scope of wages. At the same time, the ‘other allowance’ included in
the salary of many employees in the private establishments is a fixed component
and the payment of which is not dependent on any condition. It is also
interesting that the “other allowance” will always be higher than the “basic
salary”. A judicial horse sense approach would make it
very clear that the exclusion part will never be higher than the inclusion part.
The Doctrine of Ejusdem Generis
The term
‘other allowance’ in the exclusion part of the definition of wages, viz, “but
does not include any bonus, commission, house rent allowance, overtime wages
and any other allowance” should be subjected to principle of ejusdem
generis. The Doctrine of Ejusdem Generis provides
that when a list of specific words are being followed by the general
words, the general words are interpreted in a way so as to restrict them
to include the items or things which will be of same type as those of the
specific words. What is excluded from the scope of wages
under Payment of Gratuity Act is “allowance” similar to overtime wages, bonus,
house rent allowance or commission. The expression, ‘any other allowance’
clearly establishes it.
Salary for deduction for absence from work
The salary considered for deduction for absence from work should
be the salary agreed upon as per contract of employment. Under normal
circumstances, if an employee is absent without leave, his salary for the day
will be deducted, and it will be in proportion to his total emolument loss on
account of absence from work will be deducted. If allowances are separate from
salary, then why the leave day’s salary is computed on the gross salary and not
on basic salary alone? This is because the remuneration for service or labour
is the whole amount inclusive of allowances. Therefore, allowances should be
considered as part of wages/ salary.
Constant Basic salary and absence of Dearness Allowance in the salary
It is also observed that the basic salary not only kept at the minimum but kept constant. They will certainly give salary increment every year. But the same is not reflected in the basic salary and dearness allowance. Most of the companies do not have dearness allowance as a component of salary. It is true that so long as the salary paid is more than the statutory wages payable as notified by the government, there is no need to pay dearness allowance. Airfreight Ltd. Vs State Of Karnataka & Ors.(Supra) validates this stand. But the basic reason why an employee should get increase in the salary remains unanswered.
An employee is given salary increment for two reasons, one, to reward his performance and, two, to compensate increasing cost of living. The former is evidenced by an increase in the basic salary and the latter is evidenced by an increase in the dearness allowance. Most of the employers do give salary increase every year, but the increase would be reflected in “allowances” and not in Basic salary or Dearness allowance. This is intentional because they are advised that increase in the basic salary would cost them more because the contributions to PF, gratuity etc are on the basic salary only. If ‘allowances’ are not part of salary, why should they increase it every year? If allowances are supplementary to basic salary, why should no increase is given in the basic salary?
On perusal of the salary structures of supervisory and managerial personnel of various companies, what I have found is that they do not have dearness allowance as a component of salary. They defend that it is not required by law. Under which law is it said that managers should not be paid DA? If the intension was that managers should not be paid DA, why should there be a component, viz, dearness Allowance in the Minimum Wages notifications?
Conclusion
So long as the payment of Gratuity Act is silent about the term
‘basic wages’, and in the absence of any rule under the Payment of Gratuity
Rules which provide for computation of gratuity based on the basic salary
alone, the entire salary should be deemed to be the salary qualifying gratuity
calculation. Simply, the gross salary is:
·
The salary as per contract of employment
·
The salary paid to the employee on duty or on leave
·
The salary which is deducted for any leave without pay
Madhu T K
Principal Consultant
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