Gratuity Qualifying Salary- Some observations

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.

 Basic Salary and Emoluments

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.

 Straw Board Mfg. Co Ltd case

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

 Therefore, the gross salary should qualify for calculating the amount payable as Gratuity.

 

Madhu T K

Principal Consultant

DefusIR Solutions

Your Confidence in HR Matters

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

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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

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. 

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

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.