Basic salary for PF include allowances camouflaged to avoid deduction unless employee earned it- SC

Basic salary for PF deduction include allowances unless it is shown that employee had earned the extra amount beyond normal work which was otherwise required of them- SC

ABCAUS Case Law Citation:
ABCAUS 2807 (2019) (02) SC

Important Case Laws Cited/relied upon by the parties
Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR   978,
Kichha Sugar Company Limited through General Manager vs. Tarai Chini  Mill Majdoor Union,  Uttarakhand, (2014) 4 SCC 37

The appellants were establishments covered under the Employees’ Provident Fund and  Miscellaneous Provisions Act, 1952 (the Act). The appeals raised a common question of law, i.e., if the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction  of the Provident Fund.

One of the establishment was an unaided school giving special  allowance by way of incentive to teaching and non ­teaching staff pursuant to an agreement between the staff and the management. The said incentive was reviewed from time to time upon enhancement of the tuition fees of the students. The PF authority held that the special allowance was to be included  in  basic  wage  for deduction of provident fund. The Single Judge of the High Court set aside the order. The Division Bench initially after examining the salary structure allowed the appeal holding that the special allowance was  a  part  of dearness allowance liable to deduction. However, the order was recalled at the behest of the respondent as none had appeared on its behalf. The subsequent Division Bench dismissed the appeal holding that the special allowance was not linked to the consumer price index, and therefore did not fall within the definition of basic wage, thus not liable to deduction.

In another case,  the establishment was paying basic wage + variable  dearness allowance (VDA)  + house rent allowance (HRA) + travel allowance + canteen allowance + lunch incentive. The special allowances  not having been included in basic wage, deduction for provident fund  was  not made from the same. The PF authority held that only washing allowance was to be  excluded  from basic wage. The High Court partially allowed the writ petition by excluding lunch incentive from basic wage. A review petition against the same by the establishment was dismissed.

One of the appellant establishment was not deducting Provident Fund contribution on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from basic wage. The PF authority held that the allowances had to be taken into account as basic wage for deduction. The High Court dismissed the writ petition.

Another appellant was a company who was not deducting PF contribution on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from basic wage. The PF Authority held that the special allowances formed part of basic wage and was  liable to deduction. The writ petition and review petition filed by the appellant were dismissed by the High Court.

Another Petitioner filed a Writ Petition against the show cause notice (SCN) issued by the PF authority calling for records to determine if conveyance allowance, education allowance, food concession, medical allowance, special holidays, night shift incentives and city compensatory allowance constituted part of basic wage. The writ petition was dismissed by the High Court being against a SCN and the statutory remedy was available under the Act. 

The common submission on behalf of the appellants was that basic wages defined under Section 2(b) of the Act contains exceptions and will not include what would ordinarily not be earned in  accordance  with the terms of the contract of employment. 

The Hon’ble Supreme Court observed that the term basic wage has not been defined under the Act. It was noted that adverting to the dictionary meaning of the same, the Court had held that 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. 

Their Lordships had held that those wages which are universally, necessarily and ordinarily paid to all the employees across the board are basic wage. Where the payment is available to those who avail the opportunity more than others, the amount paid for that cannot be included in the basic wage. As for example, the overtime allowance, though it is generally enforced across the board but not earned by all employees equally. Overtime wages, leave encashment, extra bonus dependent upon the extra hour of work done.

In the instant case, the Hon’ble Supreme Court observed that applying the aforesaid test to the facts no material was placed by the establishments to demonstrate that the  allowances  in  question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity.   

The Hon’ble Supreme Court opined that In order to claim that the amount is beyond the basic wages, it has to be shown that the workman concerned had become eligible to get the extra amount beyond the normal work which he/she was otherwise required to put in.  

The Hon’ble Supreme Court held that analysis of the wage structure and the components of salary showed that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

The Hon’ble Supreme Court opined that there was no occasion for the Court to  interfere with  the concurrent conclusions of facts.

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