1. Recently Supreme Court in the case of Regional Provident Fund Commissioner vs Vivekananda Vidyamandir and Others (CIVIL APPEAL NO(s). 6221 OF 2011) had an occasion to determine whether the special allowances paid by an establishment to its employees shall fall within the expression ‘basic wages’ and hence includible in the computation of the contribution to be made towards Provident Fund (‘PF’).
2. It is a common practice across the trade & industry that employee’s receive their salary under many heads. One such head is “special allowances”. Normally it has been seen that such special allowances are not considered for the computation of the contribution to be made by the employer as well as the deduction to be made from the employee’s salary for his share of PF.
3. Sec. 6 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as the “Act”) provides that the contribution amount shall be 10% (12% for notified establishments) of the basic wages, dearness allowance and retaining allowance, if any, for the time being payable to each of the employees. Further basic wages has been defined u/s 2(b) of the Act as under:
“Section 2 (b): “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), houserent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment.
(iii) Any presents made by the employer
4. Thus the definition of basic wages (supra)clearly includes all the emoluments which are earned by an employee. However it carves certain exceptions given under clause (i), (ii) & (iii). Said emoluments shall not form part of the “basic wages”. Sec. 6 (supra) however includes dearness allowance apart from basic wages for calculation of PF. Hence apart from dearness allowance, any exceptions given under clause (i), (ii) & (iii) shall not form part of the PF computation. Moot question thus before the Supreme Court was whether the “special allowances” can be excluded under any of the exceptions ?
TEST OF UNIVERSALITY
5. Supreme Court held that the test to be applied to determine whether special allowance can be excluded from the computation of PF is the test of universality. It held as under at para 9:
“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.”
6. Relying on number of judicial precedents, the Court further elaborated on the said test of universality at para 14 as under:
“Applying the aforesaid tests to the facts of the present appeals, no material has been placed by the establishments to demonstrate that the allowances 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 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. There is no occasion for us to interfere with the concurrent conclusions of facts. The appeals by the establishments therefore merit no interference. Conversely, for the same reason the appeal preferred by the Regional Provident Fund Commissioner deserves to be allowed.”
7. The test of universality as laid down by Apex Court thus suggests that special allowance can be excluded from the computation of PF only if –
a. It is either variable or linked to any incentive for production resulting in greater output by an employee. Hence it must be shown that the employee in question was eligible for the said special allowance due to work put in by him beyond the normal work which he is required to put in and
b. The allowances in question are not paid across the board to all employees in a particular category but are paid especially to those who avail the opportunity by putting extra effort.
Employers are thus advised to relook their wage/salary structure and apply the above test of universality to the special allowances, forming part of such structure, to determine if the same can be excluded from the computation of PF.
(views are strictly personal)