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The Regional Provident Fund Commissioner (II) West Bengal vs Vivekananda Vidyamandir


All the appeals raise a common question of law, if the special allowances paid by an establishment to its employees would it fall within the expression Basic Wages under Section 2(b)(ii) read with Section 6 of Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (the EPF Act).

Appellants Respondents
The Regional Provident Fund Commissioner Vivekananda Vidyamandir & Ors
Surya Roshini Ltd EPF & Ors
U-Flex Ltd EPF & Ors
Montage Enterprises Pvt. Ltd EPF & Another
The Management of Saint-Gobin Glass India Ltd Regional Provident Fund Commissioner, EFP Organisation


All the appeals raise a common question of law, if the special allowances paid by an establishment to its employees would it fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (the EPF Act).

SC Judgement:

The SC analysed the definition of “basic wage” under the Act and held that basic wage includes all emoluments paid in cash to an employee in accordance with the terms of his contract of employment. But it carves out certain exceptions which would not fall within the definition of basic wage and which includes dearness allowance apart from other allowances mentioned therein. But this exclusion of dearness allowances finds inclusion in Section 6. 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. The crucial test is one of universality.

In our opinion, those wages which are universally, necessarily and ordinarily paid to all the employees across the board are basic wage. Where the payment is available to those who avail the opportunity more than others, the amount paid for that cannot be included in the basic wage. As for example, the overtime allowance, though it is generally enforced across the board but not earned by all employees equally. Overtime wages or for that matter, leave encasement may be available to each workman but it may vary from one workman to other. The extra bonus depends upon the extra hour of work done by the workman whereas leave encashment shall depend upon the number of days of leave available to workman. Both are variable. In view of the above, the SC was of the opinion that the amount received as leave encashment and overtime wages is not fit to be included for calculating 15% of the Hill Development Allowance.

Applying the aforesaid tests to the facts of the present appeals, the SC held that no material has been placed by the establishments to demonstrate that the allowance in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and 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 avail the opportunity. In order that the amount goes beyond the basic, 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. It was found that there was no need to interfere with the concurrent conclusions of facts.

1. On what basis is the Provident Fund calculated?

As per Section 6 of the Act, provident fund is calculated at 10% of the basic wage, dearness allowance and retaining allowance.
Section 2(b)(ii) defines dearness allowance as all cash payment by whatever name called paid to an employee on account of a rise in the cost of living. Section 6 further explains that a dearness allowance also includes Cash value of any food concession allowed to the employee. retaining allowance means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services.

Based on the SC judgment, to determine if any payment was to be excluded from basic wage, one must apply the test of “universality” i.e., whether the payment under the scheme has a direct access and linkage to the payment of such special allowance as not being common to all.

2. Does the situation differ between blue collar workers and white collar?

The SC has not directly analysed this aspect in the judgment. However, it has referred to Bridge and Roof Co. (India) Ltd vs. Union of India (1963) 3 SCR 978, where it was held that the basis of inclusion of dearness allowance in Section 6 of the Act and exclusion in clause 2(b)(ii) of the Act 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 is excluded for the purpose of contribution.” It was held that dearness allowance is payable to all concerns either as an addition to basic wages or as a part of consolidated wages where a concern does not have separate dearness allowance and basic wages. Similarly, retaining allowance is payable to all permanent employees in all seasonal factories like sugar factories and is therefore 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, for the theory is that house-rent is included in the payment of basic wages plus dearness allowance or consolidated wages. Therefore, house-rent allowance which may not be payable to all employees of a concern and which is certainly not paid by all concern is taken out of the definition of “basic wages”, even though the basis of payment of house-rent allowance where it is paid is the contract of employment. Similarly, 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 it may not be earned by all employees of a concern it is excluded from basic wages.

Therefore, for calculating the Provident Fund, there is no distinction made between the nature of employees (white/blue collar employees). It depends upon the type of payments that are made to permanent employees uniformly in all concerns.

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