Whether ‘SPECIAL ALLOWANCES’ are a part of Basic Wages?

…An Insight

For the better part of the last decade, the question that was there amongst both Labour Law practitioners and the Central Government Industrial Tribunals all around this Country was based on the specific question of law as to whether ‘allowances’ bearing different nomenclature, paid by any establishment to its employees would necessarily fall within the definition of ‘basic wages’ as provided u/s 2 (b) (ii) r/w sec 6 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as the EPF Act, 1952).

The Supreme Court however settled this legal position through its judgement in the Regional Provident Fund Commissioner (II) West Bengal vs Vivekananda Vidyamandir and Others. Civil Appeal No{s}. 6221 of 2011 passed by a Division Bench comprising of Justice Navin Sinha and Justice Arun Mishra.

Establishments architect the salary structure of their employees in a manner which is inclusive of components such as Variable Dearness Allowance (VDA), House Rent Allowance (HRA), Travel Allowance (TA), Conveyance Allowance, Food concession, medical allowance etc. along with the basic salary.

In the above-mentioned matter it was contended that such allowances were nothing but a camouflage to conceal the actual basic salary paid on which, contributions as per the provisions of the EPF Act, 1952 are calculated. The arguments advanced in this regard was that the Act, being a beneficial legislation in itself, should be interpreted in a manner to sub-serve the cause and best interest of the employees. The basic averment raised by the establishments was as follows: “whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under Section 6. But whatever is not payable by all concerns or may not be earned by all employees of a concern are excluded for the purposes of contribution”.

In this matter though, the Apex Court has laid down the test to ascertain whether any particular component should be included in the definition of ‘basic wages’ or not. It was held that for any incentive to go beyond the ‘basic wage’; it should not be available to all employees or it should not be available each month and should be payable over and above the salary to be paid for the scope of regular work.

The Court observed that only those emoluments earned by an employee in accordance with the terms of employment which would qualify as basic wage and discretionary allowances not earned in accordance with the terms of employment would be covered by basic wage. The Bench laid emphasis on the judgement by their brother judges in the case of Mills Co. Ltd., Kanpur vs Its Workmen, AIR 1960 SC 985 and reiterated that any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term

This decision is being seen as one which has been passed keeping the objective of the legislature in mind and the same shall definitely have far reaching impacts as far as wage structures in establishments around the Country are concerned.

In order that the amount goes beyond the basic wages,

  1. it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in; and/or
  2. it has to be variable earning which may vary from individual to individual according to their efficiency and diligence; and/or
  3. it has to be linked to any incentive for production resulting in greater output by an employee; and/or
  4. the allowances in question were not paid across the board to all employees in a particular category; and or
  5. were being paid especially to those who avail the opportunity

On the contrary, if it can be shown factually 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 accordingly to the provident fund account of the employees, the same shall be considered as part of ‘basic wages’.

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