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Updates on Indian Taxation and Coorporate Laws

- by renowned Taxmann author Mr. V. S. Datey

Definition of ‘wages’ in labour code
Nightmare for business establishments, golden opportunity for legal practitioners

V S Datey

Twenty nine labour laws have been consolidated in four labour codes (1) The Code of Wages, 2019 (2) The Industrial Relations Code, 2020 (3) The Occupational Safety, Health and Working Conditions Code, 2020 (4) The Code on Social Security, 2020.

All the four Acts have been passed by Parliament and have received assent of President. Draft rules of all four Codes have also been published. If all goes well, all the four Codes may be made effective latest by 1-4-2021, if not earlier.

Some definitions are common in all four Codes. In some of the definitions, major part is common, with some variations which are specific to that Code. This will bring uniformity in application of labour laws. This is welcome.

One such common definition is of ‘wages’. The definition is almost common in all the four Codes, with only a few minor variations. Though this will bring uniformity in application of labour laws, there are some serious lacunae in the definition, which will make the definition very litigation prone and practically impossible to comply with, at least by large organisations. Quantification of ‘wages’ is going to be a big challenge.

The definition is not conductive to ‘ease of dong business’ at all.

The issues in respect of definition of ‘wages’ are discussed in this article.

Common definition of ‘Wages’

The definition of ‘wages’ in all four Codes (with some minor variations) is contained in Section 2(y) of Code on Wages, 2019, Section 2(zq) of Industrial Relations Code, 2020, Section 2(88) of Code On Social Security, 2020 and Section 2(1)(zzj) of Occupational Safety, Health and Working Conditions Code, 2020.

The definition is as follows.

“Wages” means all remuneration, whether by way of salary, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes – (i) basic pay (ii) dearness allowance and (iii) retaining allowance, if any
but does not include
(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment
(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government
(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon
(d) any conveyance allowance or the value of any travelling concession
(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment
(f) house rent allowance
(g) remuneration payable under any award or settlement between the parties or order of a Court or Tribunal
(h) any overtime allowance
(i) any commission payable to the employee
(j) any gratuity payable on the termination of employment
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment **
Provided that, for calculating the wages under this clause, if any payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other % as may be notified by the Central Government, of all remuneration calculated under this clause, the amount which exceeds such one-half, or the % so notified, shall be deemed to be remuneration and shall be accordingly added in wages under this clause
Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wage.
Explanation.—Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed 15% of the total wages payable to him, shall be deemed to form part of the wages of such employee.

** – After ‘termination of employment’ the words  ‘under any law for the time being in force’ are there in ‘Code on Social Security, 2020’, but not in any other Code.

Some payments made to employee in exclusion clauses will be part of ‘wages’ if they exceed 50% of all remuneration

As per first proviso to definition of ‘wages’ under Labour Codes, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half (50%), or such other % as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the % so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

The intention is clear that employer should not reduce his liability of PF, ESIC, gratuity etc. by camouflaging wages as different kinds of ‘allowances’.

However, some sub-clauses under this head are highly problematic. These are discussed below.

Value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government – What this means is that if any free or subsidized accommodation has been provided to employee, its value (including light, water, medical attendance or other amenity or service) will have to be computed (probably at market rate). These calculations are required, since if total of amounts (a) to (i) exceeds 50% of wages, these will be part of ‘wages’. [If only HRA is given, that will also be part of total of (a) to (i) to calculate 50% of ceiling on wages]. Valuation should be on market value basis. Firstly, such valuation will cost money and secondly it will lead to litigation.

Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon – As is well known, an employee earns interest on his PF amount or pension account, which is added to his account. The statement is obtained by every employee much after close of financial year. If interest on accumulated balance is considered, the amount may be substantial. This figure will have to be found out for calculating ceiling of 50%. Its quantification is possible only after annual statement of employees is received from PF authorities (or private trusts which are recognised under Income Tax Act for this purpose). The interest in pension or provident fund as indicated in PF slips or statements of private trusts will be on annual basis. It will have to be converted into monthly instalments, as the ceiling of 50% is on monthly basis. It will be a herculean task.

This provision seems to be highly impractical and unrealistic indeed.

Any conveyance allowance or the value of any travelling concession – By ‘conveyance allowance’, what is meant is the monthly or periodic allowance given at flat rate on ad hoc basis. If employee’s travel expenses for official work are reimbursed on actual basis, these cannot be part of ‘conveyance allowance’. This needs urgent clarification.

Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment – This term is also prone to different interpretations. What is meant and what is intended is not very clear. Calculation of these amounts will be required to consider monthly ceiling of 50% of ‘wages’. Some of the possible points of litigation are as follows  –

(A) Will travelling, hotel and other expenses incurred for work of employer be included in this sub-clause? It seems these may be covered under this head, as the expenses are incurred by employer to defray special expenses incurred by employee for his employment. If so, in case of travelling salesmen or persons who frequently travel for business of company, the amount (including other amounts included in (a) to (i) will easily exceed 50% monthly ceiling. Calculation will be required month-wise for each employee – difficult task indeed

(B) Will this sub-clause include reimbursement of telephone expenses for business purposes?

(C) Will this sub-clause include dress allowance or washing allowance?

Tip of iceberg – The issues discussed above are only tip of iceberg. Many unexpected issues will crop up in due course of time. Calculation of ‘wages’ of each employee and worker as per new definition would be nightmare to employers and platinum opportunity (not only ‘golden’ opportunity) to legal practitioners [as is happening in GST].

Remuneration in kind upto 15% will be part of ‘wages’

As per explanation to definition of ‘wages’ under Labour Code, where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed 15% of the total wages payable to him, shall be deemed to form part of the wages of such employee.

The drafting is faulty. The words ‘does not exceed’ should bereally ‘exceeds’, as the intention seems to include the amounts if huge amounts are paid in kind and not in cash.

However, as the explanation stands today, all canteen subsidy, free or subsidized transport, supply of uniform, etc. will be part of ‘wages’. Diwali or festival gifts to employees will have to be included in ‘wages’.

Quantification of canteen subsidy, free or subsidized transport, uniforms, festival gifts etc. given to each employee will be a big challenge and will be highly litigation prone. Such remuneration in kind should not form part of ‘wages’ at all.

Ironically, if this amount exceeds 15% of ‘wages’, the excess over 15% of wages it will not form part of ‘wages’, as the definition stands today.

In any case, monthly calculations of these payments ‘in kind’ will be required per employee or worker, to determine whether the amount is less than or more than 15%.

There is no ‘ease of doing business’ at all in new definition of ‘wages’, though intentions are sound.

Some payments will be part of ‘wages’ for purpose if equal wages to all genders and for payment of wages

As per second proviso to definition of ‘wages’ under Labour Codes, for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g) and (h) shall be taken for computation of wage.

The first part of the proviso i.e. for the purpose of equal wages to all genders is fair and clear.

Meaning of ‘wages’ for purpose of payment of wages

About the second part i.e. ‘for purpose of payment of wages’, what is meant is that the provisions as contained in Chapter III of Code on Wages, 2019 [sections 15 to 25] will apply to such payments. Thus, provisions of wage period, time limit on payment of wages, deductions permissible etc. will apply for payment of following –

(1) Clause (d) – any conveyance allowance or the value of any travelling concession  

(2) Clause (f) – house rent allowance

(3) Clause (g) – remuneration payable under any award or settlement between the parties or order of a Court or Tribunal and

(4) Clause(h) – any overtime allowance.

Minimum wages are ‘wages’ and cannot be split

Definition of ‘wages’ only includes basic wage, DA and retaining allowance. Other allowances are not part of wages. Hence, where minimum wages are paid, these cannot be split into various allowances (except Dearness Allowance) to reduce liability of PF, ESIC, bonus, gratuity etc.

An employer paying minimum wages should not pay any allowance (except Dearness Allowance). Such allowance, if paid, will be treated as part of ‘wages’ for purposes of PF, Gratuity, ESI etc. but will not be treated as ‘wages’ for purpose of ‘Minimum Wages’.

As per earlier provisions under Minimum Wages Act, in APFC v. G4S Security Services 2011 LLR 316 (P&H HC), it was held that Minimum wages payable can be split in basic, house rent allowance, washing and conveyance allowance etc. In such case, Provident Fund is payable only on basic wages and not total minimum wages – view confirmed in APFC v. G4S Security Services 2011 LLR 943 (P&H HC DB). However, it was held that PF authorities should examine whether the minimum wages are split to reduce PF liability.

On the basis of above, in circular No. Coord/4(6)2003/ Clarification/Vol II/7394 dated 23-5-2011 issued by Additional Central PF Commissioner (Compliance), it was stated that basic wages are the minimum wages and these cannot be further split into various allowances. Thus, PF contribution is payable on minimum wages, which will be considered as ‘basic wages’ for purpose of PF Act.

In any case, under new definition of ‘wages’, the controversy has been set at rest.

Wages ‘camouflaged as ‘allowances’ would be part of Basic Wage

In RPFC v. Vivekananda Vidyamandir (2019) 103 taxmann.com 18 (SC), it has been held that if allowances paid by establishment to its employees were essentially part of basic wage but were camouflaged as ‘allowance’, these will be included in ‘basic wages’. In this case, so called ‘special allowance’ was linked with dearness allowance and subject to increment on time scale. However, leave encashment and overtime wages were variable and it was held that these would not fit into ‘basic wages’.

In The Daily Partap v. RPFC  1999 I LLJ 1 = 1999 LLR 1 =  AIR 1999 SC 2025 = 1999 AIR SCW 1721, though the amount paid was termed as ‘production bonus’, it had no relation to  extra production efforts. The amount paid had no direct nexus with the amount of extra output. It was held that this was ‘wages’ and not ‘production bonus’.

In RPFC v. Vivekananda Vidya Mandir 2005 LLR 399 = 2005-II LLJ 721 (Cal HC DB), employer was paying ‘special allowance’ which was revised every two years. It was held that it is part of ‘pay’ – view confirmed in RPFC v. Vivekananda Vidyamandir (2019) 103 taxmann.com 18 (SC).

Special allowance uniformly paid to all are ‘wages’ – In Gordon Woodroffe v. RC, EPF (2002) 100 FJR 657 = 2002 LLR 1167 (Mad), employees were working for five days a week. It was increased to 6 days a week and special allowance was paid for working on Saturday. The allowance was paid continuously for many years. It was held that such special allowance paid under agreement for work done on holiday has partaken the character of ‘basic wages’ for contribution to provident fund.

PF contribution is payable on conveyance allowance and special allowance given uniformly to all employees – Montage Enterprises v. EPF 2011 LLR 867 (Mad HC DB ) * Management of Reymonds Pens v. RPFC 2011 LLR 876 (Mad HC).

Leave encashment are not wages

In Manipal Academy of Higher Education vs. Provident Fund Commissioner(2008) 5 SCC 428 = AIR 2008 SC 1951 = 2008 LLR 443 (SC), it has been held that PF Contribution is not payable on Leave encashment paid. This decision will apply to gratuity also – same view in RPFC v. Vivekananda Vidyamandir (2019) 103 taxmann.com 18 (SC).

Production bonus or incentive are not ‘wages’

PF contribution is not payable on production incentive or production bonus – Bridge & Roof Co v. UOI AIR 1963 SC 1474 = 1962 II LLJ 490 = 1963(3) SCR 978 (6 member SC bench).

In Kirloskar Brothers v. Appellate Authority 2003 LLR 929 (MP HC DB), it was held that incentive bonus paid to employees is not ‘wages’ for calculation of gratuity.

In TI Cycles v. M K Gurumani 2002 LLR 57 = 2001(2) LLJ 1068 = (2001) 7 SCC 204 = AIR 2001 SC 3465 = 2001 AIR SCW 3202, it was held that there is no basic distinction between ‘basic wages’ in the PF Act and ‘wages’ in Gratuity Act. It was held that ‘incentive payment’ should not be reckoned as wages for purpose of gratuity.

Arrears of wages when pay revised with retrospective effect

When existing scales are revised with effect from back date, increase in basic wages with back date are ‘basic wages’ for purpose of PF Act and PF contribution is payable. – Prantiya Vidhyut Mandal Mazdoor Federation v. Rajasthan State Electricity Board (1992) 2 SCC 723 = 81 FJR 206 = 64 FLR 1051 = AIR 1992 SC 1737 = 1993 I LLJ 222 = 1992 LLR 401 (SC)  * Ponni Sugar v. Cauvery Sugar 2002 LLR 25 (Mad HC DB). Payment of interim advance against charter of demands as part of settlement of dispute will be increase in basic wages and will attract contributions under the Act. – Dalmia Cement v. RPFC (2002) 101 FJR 307 (Mad HC).

If arrears of wages are given in form of lumpsum payment, it is wages and provident fund contribution will be payable – Ponni Sugar v. RPFC 2001 II LLJ 1201 (Mad HC DB).

Payment made under settlement – If some ad hoc amount is paid to workmen in settlement, it is basic wages and PF contribution is payable. – Shree Changdeo Sugar Mills v. UOI 2001 AIR SCW 172 = AIR 2001 SC 557 = 2001(I) LLJ 698 = 2001 LLR 188 (SC).

Employee reinstated with back wages

If an employee is reinstated with back wages by a court order, Company has to pay its contribution to Provident Fund in respect of back wages, even if it fails to deduct employee’s share from his salary – Mrs. Savita Rani v. Oriental Insurance Co. Ltd. – (1995-2) 110 PLR 263 (P&H HC).

However, in Swastik Textile Engineers v. Virjibhai Mavjibhai Rathod 2008 LLR 472 (Guj HC), it was held that back wages are not for duty performed and hence not ‘wages’. Hence, PF contribution is not payable if back wages are awarded by Court at the time of reinstatement.

Subsistence allowance paid when employee was under suspension are not ‘wages’

Subsistence allowance paid when employee is under suspension would not amount to ‘wages’ within meaning of 2(21) of the Act, as it is not paid for work done. – Motor Industries Co  v. Popat Murlidhar 1997 I LLN 749 = 1997(2) LLJ 1206 (Bom HC) – followed in Deccan Merchant Coop Bank v. Avdhoot Marutrao Rane 2008 LLR 30 (Bom HC).. – contrary view in Project Manager, Oil and Natural Gas Commission v. Sham Kumar 1995 LLR 619 (Guj HC), where it was held that suspended employee will be entitled to bonus on suspension allowance [In Labour Codes, ‘suspension allowance’ is not part of ‘wages’ at all].

Other issues relating to ‘wages’

Other case law in respect of ‘wages’ is as follows.

Conveyance allowance are not ‘wages’ – Conveyance allowance or site allowance are not ‘wages’ for Payment of Gratuity Act – Voltas Ltd. v. Chandrakant Y Bhramhane 2008 LLR 84 (Bom HC) – relying on Straw Board Mfg Co. v. Its Workmen (1977) 2 SCC 329.

Retaining allowance to seasonal workers – Retaining allowance payable to seasonal workmen during off season establishment is ‘salary or wage’ for purpose of Bonus Act. – Managing Director v. Govt. Labour Officer – (1981) 2 SCC 147 = 1981 SCC (L&S) 290.

City Compensatory Allowance – City Compensatory Allowance paid to employees is ‘wages’ as it is attached to the post – S Krishnamurthy v. Presiding Officer 1986(I) LLJ 133 (SC) – followed in Jeeva Transport Corporation v. Presiding Officer 2004 LLR 802 (Mad HC).

Overtime wages – Overtime payment is not ‘wages’ for Bonus Act – Associated Cement Co. v. Their workmen 1959 I LLJ 644 = AIR 1959 SC 925 = 16 FJR 262 (SC) = 1959 SCR 925 * RPFC v. Vivekananda Vidyamandir (2019) 103 taxmann.com 18 (SC).

[Now the definition of ‘wages’ specifically excludes ‘overtime allowance’, but would be includible if total of all sub-clauses exceed 50% pf basic plus DA plus retention allowance.

Lay-off compensation – Lay off compensation are ‘wages’ – Mohan Kumar v. Dy LC 1991(62) FLR 903 = (1991) 1 LLN 242 = (1991) 1 CLR 418 = 1996 LLR 765 (Ker HC).

Conclusion

The definition of ‘wages’ is litigation prone. There are many issues where ambiguity and different opinions are possible. Quantification of ‘wages’ is not going to be easy at all. Computing ‘non monetary’ benefits for purpose of ‘wages’ will also be a challenge.