The Hon’ble Supreme Court vide its judgement dated 28th February 2019, in case of The Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir & Ors. has rendered a landmark decision with reference to The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) on a common question of law as to “whether special allowance paid by an establishment to its employees would fall within the expression of ‘basic wages’ under Section 2(b)(ii) read with Section 6 of the Act for the purpose of computation of deduction towards Provident Fund (PF)”.

Background of the case:

There has always been an ambiguity surrounding the EPF Act as to what kinds of allowances have to be excluded from basic wages for the computation of PF. The Madras and Madhya Pradesh High Courts have earlier opined that since EPF Act is a social welfare legislation, it is to be construed in its correct perspective so as to fructify its legislative intent.  The High Court of Madhya Pradesh in Surya Roshni vs EPF & Anr. matter refused to interfere with the orders of the Commissioner wherein Conveyance and special allowances were included in the definition of the ‘basic wages’.  Taking a contrary view, High Court of Calcutta in RPFC vs Vivekanand Vidya Mandir and Anr; opined that the special allowance is not included in the definition of ‘basic wages’. Finally, all the above judgements along with judgements passed in U-Flex Limited v. EPF & Anr and Montage Enterprises v. EPF & Anr and others were disposed of by the Supreme Court in this case.  

Legislative provisions relevant to the decision

The relevant provisions of the EPF Act are extracted herein for ease of reference

Section 2 (b) of EPF Act;

“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 (DA) (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 payable to the employee in respect of his employment or of work done in such employment; 

(iii) Any presents made by the employer; 

Section 6 of EPF Act;

Contributions and matters which may be provided for in Schemes. – The contribution which shall be paid by the employer to the Fund shall be ten percent of the basic wages, dearness allowance and retaining allowance, if any, for the time being payable to each of the employees whether employed by him directly or by or through a contractor, and the employee’s contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten percent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:  

Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ten percent”, at both the places where they occur, the words “12 percent” shall be substituted:  

Observation and findings of Supreme Court:

Supreme Court held that:

(i) Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term ‘basic wages’ as considered in Muir Mills Co. Ltd., Kanpur  v. Its Workmen.

(ii) ‘Basic wages’ would not take within its ambit the salary breakup structure to hold it liable for PF deductions when it is paid as special incentive or production bonus given to more meritorious workmen who put in extra output which has a direct nexus and linkage with the output by the eligible workmen. When a worker produces beyond the base or standard, what he earns was not ‘basic wage’. This incentive wage will fall outside the purview of ‘basic wage’.

(iii) As considered in Bridge and Roofs Co. Ltd. v. Union of India, ‘Basic wage’ under the EPF Act, has been defined as 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 allowance 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.

(iv) As considered in Manipal Academy of Higher Education vs. Provident Fund Commissioner, where the payment is available to be specially paid to those who avail of the opportunity is not ‘basic wage’. Thus, 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 because it may not be earned by all employees of a concern, it is excluded from ‘basic wage’.

Thus, the Supreme Court contended that no material has been placed by the Establishments to prove that the allowances in question paid to the employees were either 1) variable  or linked to any incentive for production resulting in greater output by an employee, 2) the allowances were not paid across the board to all employees in a particular category or not paid in many concerns or were being paid especially to those who avail the opportunity (Mandatory Tests). 

The Supreme Court concluded that allowances in question were essentially a portion of ‘basic wages’ that were camouflaged as allowances to avoid PF deduction.