Supreme Court clarifies definition of basic wages

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The Supreme Court, in a recent judgment, clarified whether allowances paid to employees would fall within the definition of basic wages in the context of calculating contributions to employee’s provident funds (PF).

The case, in the Regional provident fund commissioner (ii) West Bengal v Vivekananda Vidyamandir and ors, comprised five different appeals or transferred cases where employers and regional provident fund commissioners were seeking clarification whether certain allowances were to be excluded from the aggregate amount on which PF contribution under section 6 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, (EPF act) is calculated.

While passing the judgment, the Supreme Court referred to the definition of basic wages under section 2 (b)(ii) read with section 6 of the EPF act, and re-reaffirmed certain aspects laid down by the Supreme Court in the judgment of Bridge and Roof Co (India) Ltd v Union of India (1963) passed by the constitutional bench of the Supreme Court. In the Bridge and Roof case, it was held that only allowances that are not payable by all concerns, or may not be earned by all employees of the concerns, would be excluded from deductions.

Applying the test laid in Bridge and Roof judgment, the Supreme Court observed, “the test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have direct access and linkage to the payment of such special allowance as not being common to all.”

While summarizing the law, the Supreme Court held that the crucial test is one of universality, and wages that are universally, necessarily and ordinarily paid to all employees are basic wages. It further said that when a worker produces beyond the base or standard, what he earns is not a basic wage. This incentive wage will fall outside the purview of basic wages.

Applying the above tests, the Supreme Court arrived at the conclusion that no material had been adduced by the establishments in the appeals to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for greater output by an employee, or 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 availed themselves of the opportunity. The Supreme Court proceeded to dismiss the appeals filed by the employers and allowed the appeal preferred by the regional provident commissioner.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.