Issue relating to interpretation of Basic Wages under. Section 2 (b) of the EPF Act.

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1 Issue relating to interpretation of Basic Wages under Section 2 (b) of the EPF Act. S. Ravindran, Advocate - Chennai raviadv55@gmail.com Interpretation of Section 2 (b) of the EPF Act, has gained importance as it involves huge financial implication concerning thousands of managements and lakhs of workmen who are the beneficiaries. The controversy started by EPFO the year 2004, has now reached the corridors Supreme Court of India. The background of the present scenario is dealt with here under. A RELEVANT PROVISIONS Sec.2(b) of the EPF Act defines basic wages as follows: Basic wages means all emoluments which are earned by an employee while on duty or (on) leave or on holidays with wages in either case) in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include (i) The cash value of any food concession ; (ii) Any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowance

2 payable to the employee in respect of his employment or of work done in such employment; (iii) Any presents made by the employer; Sec.5 of the Act provides for framing of a scheme called Employees Provident Fund Scheme for establishment of Provident Fund, under the Act, for employees. Sec.6 of the Act provides for contribution and matters which may be provided for in the scheme. It also states that contribution shall be paid by the employer to the fund at 10% (or 12%) of basic wages, DA and retaining allowances, (if any). Sec.9 of the Act states that for the purpose of Income Tax Act 1922, the fund shall be deemed to be recognised Provident Fund within the meaning of Chapter IXA of I.T. Act, As far as Sec.6 is concerned, the original scheme provided for contribution on basic wages alone. However by Amendment Act 46 of 1960, DA and retaining allowance were included for the purpose of Payment of Contribution. B DECISIONS OF THE SUPREME COURT ON THE ISSUE In the case of Bridge & Roof Company Limited 1962 (2) LLJ 490, the issue was whether the production incentive paid by the company to the employees which was variable depending on the production targets achieved by the workmen, would amount to bonus so

3 as to exclude for the purpose of EPF Contribution in terms of Sub Clause(ii) of Clause (b) of Sec.2 of the Act. For some reason while considering the issue whether the incentive payment is nothing but bonus which also production bonus, the Supreme Court posed the question as to why in the definition Sec.2(b) of the Act, while DA was specifically excluded, it was included in Sec.6 for the purpose of contribution. The Supreme Court stated that we must therefore try to discover some basis for the exclusion in clause (ii) as also inclusion of DA and retaining allowance (if any) in Sec.6. The Supreme Court answered it as follows: It seems therefore that the basis for the exclusion in clause (ii) of the exceptions in sec.2 (b) is that all that is not earned in all concerns or by all employees of a concern, is excluded from basic wages. To this the exclusion of DA in Clause (ii) is an exception. But that exception has been corrected by inclusion of DA under Sec.6 for the purpose of contribution. On the facts of the said case the Supreme Court held, that variable production bonus was not basic wages. The second judgement of the Supreme Court which deals with Sec.2(b) of the Act was in the case of Manipal Academy Education Institution which is reported in (2008 (5) SCC 428). In that case, the question was whether the leave encashment availed by the employees would form part of basic wages. The Supreme Court relied on Bridge & Roof and held that where the wage is universally necessarily and

4 ordinarily paid to all across the board such emoluments are basic wages. Where payment is available to be specifically paid to those who availed the opportunity is not basic wage. In that view the Supreme Court held that the leave encashment would not come within the scope of basic wages under Sec.2(b). The 3 rd decision which indirectly came up for consideration before the Supreme Court is in Kichha Sugar Company Limited (2014 (1) LLJ 257) wherein the issue was whether field development allowance, OT allowance and leave encashment would be included for the purpose of contribution. By relying upon the above 2 decisions of the Supreme Court, it was held that in our opinion those wages which are universally necessarily or ordinarily paid across the board are basic wages. When the payment made to those who availed the opportunity, the amount paid for that cannot be included in the basic wage. The Supreme Court held that the above allowances are not to be treated as Basic Wages. Therefore the above 3 decisions of the Supreme Court makes it appear that if an emolument is paid routinely to all employees in an organisation or in the entire industry that would be basic wages.

5 C THE PAST AND THE PRESENT SCENARIO In 1982 an attempt was made by the EPFO to claim contribution on special allowance. This was rejected by the Division bench of the Madras High Court, in Regional Commissioner EPF Vs. Management of Southern Alloy Foundry (1982 (1) LJ 28) by reference to the judgement of the Supreme Court in Bridge & Roof company case, by holding that needless to say that an officer like the appellant has no power to deem that something to be something else which it is not, being the prerogative only on the legislature. In that view the bench held that the special allowance would not be included for the purpose of contribution. However, in 2004, the situation dramatically changed against the employers. The Division bench of Karnataka High Court in Group 4 Securities case ( LLJ 150) considered the question whether the various allowances other than HRA are to be included for the purpose of basic wages and whether the EPFO Authority has power to hold that in his view certain allowances were in fact basic wages. The Division Bench of Karnataka High Court answered in affirmative. According to the Division Bench when there was no settlement between the employer and the union, but contract was one between the management and the individual labour, there was scope for arbitrariness in fixation of wages as the individual workman would have no capacity to bargain with the mighty employer and that therefore when various allowances were included in

6 the package of emoluments, the EPFO Authority while conducting enquiry under Sec.7A of the Act, has power to go into the question whether splitting of the pay by the employer to its employees was an act of subterfuge, intended to avoid payment of contribution to PF. This has opened the flood gates and EPFO all over India started claiming contribution by holding that (a) Except the excluded emoluments found in sub clause (ii) of clause (b) of Sec.2 of the Act, all other allowances were to be treated as basic wages. In other words according to the EPFO except HRA, overtime, bonus and commission, all other payments would be deemed to be basic wages (b) EPFO is entitled to treat various allowances which have been paid to the employees solely with a view to avoid EPF Contribution, would be treated as basic wages for the purpose of PF contribution. A Single Judge of Madras High Court in the case of Management of Reynolds {2012 (1) LLJ 381} has held in favour of EPFO and the appeal is pending before Division Bench. Some High Courts have held in favour of the EPFO and some High Courts have held in favour of the employers rejecting the stand of the EPFO. The appeals of employers as well as EPFO is pending before Supreme Court in SLP No.8781 of 212, etc which was lastly listed on and thereafter it has not been heard.

7 It is time for Supreme Court to takes up the matter early and render its decision on interpretation of section 2 (b) of the Act, so that all the stakeholders, namely the employers, the employees and EPFO can arrange their affairs in accordance with law, laid down by Supreme Court x