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  • Anmol Jain

How the Supreme Court has Modified the Test of Universality for EPF Contributions without Coming Out

[Anmol Jain is a student at National Law University, Jodhpur.]


In Bridge and Roof v. Union of India (Bridge and Roof), a 6-judge bench of the Supreme Court of India (Supreme Court) laid down the test of universality for the determination of ‘basic wages’ under the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 (EPF Act), this being relevant to determine the amount of employees' provident fund contribution to be made by the employer. In this post, I argue that the universality test has undergone certain significant changes in subsequent cases and that the Supreme Court has done so without setting out the principles in clear words. In order to highlight those, I shall first discuss the ruling of the Supreme Court in Bridge and Roof and then trace the evolution of the universality test while discussing the later decisions.


The petitioner in Bridge and Roof was a production-based company that had envisaged a couple of production bonus schemes, extending a particular bonus amount to the employees when the output reached a certain quantity of production. The question under dispute was whether such production bonus can be said to be a part of basic wages. Section 2(b) of the EPF Act defines ‘basic wages’ as all emoluments which are earned by an employee in accordance with the terms of the employment contract, and, under sub-clause (ii), it excludes ‘bonus’ from its ambit.


Utilizing its clarificatory powers, the Central Government had interpreted production bonus payable as part of the employment contract in the form of an incentive wage as satisfying the definition of basic wages under Section 2(b) by falling under the phrase ‘all emoluments’. This reading was challenged by the petitioner while arguing, inter alia, that exclusion of ‘bonus’ under Section 2(b)(ii) by implication excludes all kinds of bonuses including a production bonus.


To remedy this dispute, the Supreme Court adopted the test of universality to determine whether a particular wage falls under the inclusion of basic wage. In the words of the Supreme Court:


“It seems that the basis of inclusion in Section 6 and exclusion in clause (ii) 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 exclude for the purpose of contribution.”


Applying this test and certain precedents, the Supreme Court concluded that production bonus is excluded from basic wages as it is a form of incentive wage dependent on production of output beyond a given limit, which no employee is bound to produce (read this as hinting to a sort of uncertainty and contingency). The Supreme Court had decided this case along with its decision in Jay Engineering, and therefore, it did not record any discussion on the test of universality in the latter case.


In a case appearing in the next century, Manipal Academy, the Supreme Court reiterated the principle of universality. While doing so, though the court dropped the phrase ‘in all concerns’, it necessarily endorsed the same principle:


“(a) Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. …”


Applying this principle, the Supreme Court held that leave encashments are not included under basic wages as even though such encashments are available to all the employees, it is a contingent payment payable on termination of employment.


The first change from this legal framework can be perceived in the case of Daily Partap. In this case, the Supreme Court moved from its focus from the ‘uncertainty and contingency of the wages’ to the factum of ‘particularistic extension of wages’. In this case, the Supreme Court noted that:


“in order to become a genuine production bonus scheme so as to get covered by exception (ii) to the definition of ‘basic wage’ as found under Section 2(b) of the Act, it must be shown that the Scheme in question seeks to offer production bonus to the workmen concerned who put in extra output.”


The Supreme Court further noted that in case the production bonus is available to all the employees, the same is in the nature of ‘basic extra wage’. It must be noted here that instead of perceiving the production bonus available to all as ‘incentive wage’, as was done in Bridge and Roof, the court here perceived it merely as ‘basic extra wage’. Therefore, something could be excluded from the domain of basic wages only if it is extended to employees after individual assessment, anything that the employees collectively earn with their combined efforts would not be excluded, though excludable as per the understanding in Bridge and Roof.


This change was later affirmed by the Court in Vivekananda Vidyamandir.[1] This case highlighted another change in the universality test. The court in Bridge and Roof has used the phrase ‘payable in all concerns’, arguably denoting such payments that are made to all the employees in an establishment. This requirement was narrowed in the case of Vivekananda Vidyamandir, wherein the Supreme Court replaced the said phrase with ‘all employees in a particular category’:


“… no material has been placed by the establishments to demonstrate that the … allowances in question were not paid across the board to all employees in a particular category …”


In effect, even if a particular payment is made to all employees of a particular category and not to employees across the concern, such payment shall be considered as part of basic wages.


These two changes, though the result of judicial ingenuity, are quite significant from the perspective of labour. First, changing the characterization of ‘incentive wage’ to ‘basic extra wage’ widen the domain of basic wages and consequently increasing the contributory payment on part of the employer towards employees' provident fund. Moreover, it allows the calculation of basic from a practically fair point of view. If we consider a case of production bonus itself, it is indeed true that receipt of such bonus is contingent upon the work of the employees, but if the collective efforts of the entire workforce produces extra output entitling them to extra payment, this is nothing but payment for their efforts towards production. This could be termed as the extension of the principle of differential wage payment, but on the industry level. It remains in consonance with the test of universality sans the aspects of contingency.


Second, narrowing down the area of study ‘a particular category of employee’ from ‘all concerns’ of the establishments is again a practical modification in the law as the management might come up with different policies for different categories of the employees. Therefore, the law, as it stands today, has widened the scope of basic wages on the one hand, while on the other, disallowed an employer to reduce his part of the payments towards provident fund by camouflaging basic wages as differently named allowances.


Before concluding, I wish to highlight one important point regarding judicial propriety. Bridge and Roof was delivered by six judges and Vivekananda Vidyamandir by a division bench. Therefore, given that the later judgments have substantially modified the test of universality as laid down in Bridge and Roof, they must either be subjected to judicial review by a bench of 7 judges or given statutory recognition by Parliament while coming up with the labour codes.


[1] Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir [AIR 2019 SC 1240]. The Supreme Court here noted that: “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.” The use of the expression ‘workman concerned’ shows the move of the Supreme Court towards a particularistic study of the question, a move from the ‘uncertainty and contingency’ test.

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