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Supreme Court ruling - Provident Fund

01 March 2019

The Supreme Court of India on 28 February 2019 in the case of Regional Provident Fund Commissioner (II) West Bengal versus Vivekananda Vidyamandir and Others, Civil Appeal No(s). 6221 of 2011, Transfer Case No. (C) No(s). 19 0f 2019, has held that

"In order that the amount goes beyond the basic wages, 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. There is no data available on record to show what were the norms of work prescribed for those workmen during the relevant period. It is therefore not possible to ascertain whether extra amounts paid to the workmen were in fact paid for the extra work which had exceeded the normal output prescribed for the workmen. The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, who have arrived at a factual conclusion 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."

Key Highlights:

  • The division bench at Supreme Court was considering 4 appeals in which the issue was “whether 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 towards Employees' Provident Fund”.
  • The Supreme Court referring to the provisions of the Act, laid that the test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all.
  • Submissions by the Appellants: The common submission on behalf of the appellants was that basic wages defined under Section 2(b) contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment. Even with regard to the payments earned by an employee in accordance with the terms of contract of employment, the basis of inclusion in Section 6 and exclusion in Section 2(b)(ii) is that 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. Dearness allowance was payable in all concerns either as an addition to basic wage or as part of consolidated wages. Retaining allowance was payable to all permanent employees in seasonal factories and was therefore included in Section 6. But, house rent allowance is not paid in many concerns and sometimes in the same concern, it is paid to some employees but not to others, and would therefore stand excluded from basic wage. Likewise overtime allowance though in force in all concerns, is not earned by all employees and would again stand excluded from basic wage. It is 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 not be covered by basic wage. The statute itself excludes certain allowance from the term basic wages. The exclusion of dearness allowance in Section 2(b)(ii) is an exception but that exception has been corrected by including dearness allowance in Section 6 for the purpose of contribution.
  • The bench relied on various judgements and observed that –
    • Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term “basic wages” (as held in Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC 985);
    • The basic principles as laid down in Bridge Roof's case (supra) on a combined reading of Sections 2(b) and 6 are as follows:
      • Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.
      • Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.
      • Conversely, any payment by way of a special incentive or work is not basic wages.” [Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428, relying on Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3SCR 978.]

BDO Comments 

  • Creative Payroll structuring and camouflaging basic salary as a part of special allowance, will draw scrutiny;
  • Any allowance that falls within the term dearness allowance, irrespective of the nomenclature, being paid to all employees on account of rise in the cost of living, should be treated as a component on which Provident Fund contribution should be made.
  • To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output.
  • Salary structure needs to be closely looked into after this judgement.