By: Mansi Singh and Aishini Mandal
The Supreme Court of India (“Supreme Court“) recently delivered an important judgement clarifying whether the special allowances paid by an establishment to their employees would form part of ‘basic wages’ and consequently attract provident fund contributions.
The Supreme Court of India in its judgement dated February 28, 2019 in the case of The Regional Provident Fund Commissioner (II), West Bengal and Ors. v. Vivekananda Vidyamandir and Ors. (“Judgement“) re-affirmed the established position of law that all allowances that are universally, necessarily and ordinarily payable to all employees across the board in a company must be included within the definition of ‘basic wage’ for the purpose of contribution under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act“).
Five appeals arising from various High Courts and raising the common question of law, i.e., ‘whether special allowances paid by an establishment to its employees fall within the expression ‘basic wages’ for computation of deduction towards provident fund’, were jointly heard by the Supreme Court.
In the Judgment, the Supreme Court reiterated the following principles:
(a) The contribution towards provident fund by establishments covered under the EPF Act is to be determined by applying the test of universality, i.e., whatever is payable in all concerns and is earned by all permanent employees must be included within the purview of basic wages for the purpose of contribution under the EPF Act but whatever is not payable by all concerns or may not be earned by all employees of a concern must be excluded from the purview of ‘basic wages’ for the purpose of calculating the contribution under the EPF Act.
(b) Any earning that may be in force in all concerns but vary from individual to individual as per their efficiency and diligence will stand excluded from the term ‘basic wages’ as they are not earned by all employees of a concern. For example, overtime allowance and relocation allowance.
(c) To exclude an allowance from the ambit of ‘basic wages’, it must be demonstrated that the same is either variable, or linked to any incentive for production resulting in greater output by an employee, and that the allowances are not paid across the board to all employees in a particular category or are being paid especially to those who have performed work beyond the normal work that they were required to perform.
It is relevant to note that the Judgement does not distinguish between a domestic worker and an international worker and does not amend the current position of law. The Judgement has relied on the principles laid down in the landmark case of Bridge and Roof Co. (India) Ltd. v. Union of India [(1963) 3 SCR 978] (decided by a 6-judge bench of the Supreme Court in 1962) to arrive at its decision, thereby simply reiterating the existing position of law.
Impact on businesses
While the Judgment does not formulate anything new and only reaffirms the already established position, it is advisable for every employer to undertake the following exercise:
(a) Review the compensation structure presently in place for its employees and recheck the components of ‘basic wages’ in its compensation structure. Any allowances that are not in the nature of ‘bonus or incentive wage’ but are universally, necessarily and ordinarily payable to all employees must be included within the meaning of ‘basic wages’.
(b) Examine the various allowances being paid by the employer to its employees and if these allowances have been excluded for the purpose of determining ‘basic wages’.
(c) Restructure the compensation structure (if required) to comply with the Judgement for the purpose of determining its contribution under the EPF Act.