In EPF Laws, there are frequent changes which involve more biting than an employer can eschew. The practical difficulties of executing such amended provisions after change can only be perceived and felt at the point of implementation.
There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Author’s note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
From India, Bahadurgarh
47There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Author’s note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
From India, Bahadurgarh
Hi,
Thanks so much for the case.
One should leave little space between the paragraphs, which make the reader reads all the contents easily.
have a great weekend,
with best regards,
Umesh Chaudhary
(welcomeumesh@yahoo.com)
From India, Delhi
Thanks so much for the case.
One should leave little space between the paragraphs, which make the reader reads all the contents easily.
have a great weekend,
with best regards,
Umesh Chaudhary
(welcomeumesh@yahoo.com)
From India, Delhi
Thanks Umesh
please find the same
In EPF Laws, there are frequent changes which involve more biting than an employer can eschew. The practical difficulties of executing such amended provisions after change can only be perceived and felt at the point of implementation.
There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
Regards
Arun
From India, Bahadurgarh
please find the same
In EPF Laws, there are frequent changes which involve more biting than an employer can eschew. The practical difficulties of executing such amended provisions after change can only be perceived and felt at the point of implementation.
There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
Regards
Arun
From India, Bahadurgarh
Thanks Umesh
please find the same
In EPF Laws, there are frequent changes which involve more biting than an employer can eschew. The practical difficulties of executing such amended provisions after change can only be perceived and felt at the point of implementation.
There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
Regards
Arun
From India, Bahadurgarh
please find the same
In EPF Laws, there are frequent changes which involve more biting than an employer can eschew. The practical difficulties of executing such amended provisions after change can only be perceived and felt at the point of implementation.
There was some dispute whether the amount payable on account of encashment of leave would form part of ‘basic wages’ under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. The controversy went to the Bombay High Court and the Bombay High Court in the case of Hindustan Lever Employees Union v. RPFC & another, 1995 LLR 416 held that the amount payable on account of encashment of leave formed ‘basic wages’ and therefore it was liable for P.F. deduction.
The Karnataka High Court in the case of Manipal Academy of Higher Education v. P.F. Commissioner, 2004 (1) LLN 1103 held that encashment of earned leave would qualify as ‘basic wages’ under EPF Act. This holding of Karnataka High Court perpetuated the concept of the Bombay High Court as referred hereinabove. Both these decisions are inspired by the ratio decidendi of the Apex Court in the case of Bridge and Roof Company (India) Ltd. & Ors. v. Union of India, 1962 (2) LLJ 490. The Supreme Court in this case propounded a theory and mandated that whatever is payable in all concerns and is earned by all permanent employees is included for the propose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of a concern, is excluded for the purposes of contribution. This is the acid test that has been ruled by our Apex Court. This certainly displays a unique jurisprudential approach which even takes the functional aspect of the matter into account.
Under Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all courts within the territory of India, and similarly, it shall also be law for the land, but it may not be the position of the law declared by respective High Courts of the State.
However, on the susceptibility of the amount of leave encashment to the PF deduction, there is no direct verdict of the Apex Court and the Bombay and Karnataka High Courts have only interpreted this proposition in their own way, although they referred to the basic case law of the Supreme Court. It is doubtful whether the law declared by these two High Courts would have a universal application. Much would naturally depend on the canons of interpretation that have been made use of in these two case laws, because these holdings have certainly accorded an extended definition to ‘basic wages’ under the EPF Act in their ultra-generous approach. It is therefore alluring, daunting and at the same time, arduous to segregate the various components of this concept of basic wages. Neither a tentative and temporary view could remove the vagueness and confusion, nor a worker-oriented approach could help us pronounce an authoritative precedent. With these considerations in mind, I would now endeavor to interpret the tenability of the contentions that their Lordships of these High Courts have contended with in giving these verdicts.
It may be appropriate to observe here with respect that the earlier approach to industrial relations matter by Krishna Aiyer J and Bhagwati & Desai JJ wherein only the interest of workmen were so avowedly and self-righteously furthered with revolutionary zeal in the name of social justice, has only harmed the cause of workmen. Our Supreme Court, in the case of Allahabad Jal Sansthan v. Daya Shanker Rai & Others, 2005 (5) SCC 124, ruled that it is necessary to develop a pragmatic approach in industrial adjudication, so that a golden mean is arrived at, balancing the interest of the workmen and the employer.
So with due deference to the holdings of the Bombay and Karnataka High Court, it is submitted that strictly speaking these High Courts have not taken the basic tenet of ‘basic wages’ into account as laid down by the Supreme Court. The Supreme Court very categorically ruled that for being ‘basic wages’, they should have a characteristic of uniformity. The facility of leave encashment is not available in all concerns, irrespective of anything else and then for getting entitled to it, there are certain conditions precedent as in vogue in all the establishments. Then the quantum of leave, which is available for encashment, is different in different establishments. With these apprehensions I would now discuss the exact implications of these two verdicts.
The Karnataka High Court repelled the argument that the encashment of earned leave by the employer and the employee in terms of the contract of employment, was to be treated at par with payment of dearness allowance, or payment of overtime allowance, bonus, commission or any other similar allowance payable to the employee as referred to in clause (ii) of S. 2(b) of the Act. It further disagreed that the ‘encashment of earned leave’ could be brought within the purview of several items referred or similar matters as referred to in clause (ii) of S. 2(b) of the Act to exclude the said payment from the purview of ‘basic wages’. The Court also did not agree with the contention that if encashment of leave amount is to be reckoned for being paid PF contribution, then the employer would be required to pay contribution on 13 months’ wages. The Court felt that the scheme of S. 6 of the Act, Provident Fund Contribution by the employer to the fund, doesn’t speak about the duration for which the PF Contribution is paid.
It looks the Court has invented by intuition this concept of treating leave encashment amount as basic wages and then proved it by its logic. However, in view of the slightly different holdings of other Courts, it would be doubtful whether this peculiar exposition of law by also Karnataka High Court was all authoritative, innovative, critical or analytical and for this, I shall discuss other aspects of the proposition on the basis of the case law which has been referred to in the Karnataka case.
Consequent upon this judgement of the Karnataka High Court the Employees’ Provident Fund Organisation issued a circular letter No. Co. Ord./3(4) 2002/clarification/7731 dated 6-5-2004 to all Regional Provident Fund Commissioners and others for treating ‘leave encashment amount’ as basic wages liable for PF recovery. This circular letter inter alia referred to the verdicts of the Bombay High Court and the Supreme Court, to which I shall address a little later. Strangely enough, this circular invites if there is any contrary judgement/directions of any other High Court to the above.
Obviously, therefore, unless the matter is finally adjudicated by the Apex Court, things would not get settled and the controversy would continue haunting on and it is therefore essential that there is conceptual clarity of the concept. Till then, we have to live with it as such.
The bulk of case laws that has been referred to by the Karnataka and Bombay High Courts does not unequivocally support the proposition that ‘leave encashment amounts’ partake the nature of ‘basic wages’. Ostensibly, leave encashment is not earned wages, and therefore, deduction of Provident Fund Contribution on it could not be envisaged. It is also noteworthy that every employee would not be entitled to encashment if he has not earned the leave.
The Supreme Court’s classical holdings in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 (ii) LLJ 490 and Jay Engineering Works Ltd. v. Union of India, 1963 (ii) LLJ 72, very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution u/s.6, but whatever is not payable by all concerns or may not be earned by all employees of the concern, is excluded for the purpose of contribution, irrespective of anything. This is the acid test which has been laid down by the Apex Court, and if we were to apply it to the leave encashment payment, then some discrepancies would surface. Under the provisions of Factories Act, there are certain conditions laid down on whose fulfil-ment a workman would get entitled to earned leave. If somebody has not completed 240 days of service, he would not earn leave for encashment. Similarly in several establishments, higher cadres of workmen do not have the facility of encashment of earned leave under their respective service rules. Their earned leave after certain limits does not accumulate and just gets lapsed. It would therefore be revealed that encashment of earned leave would not have a universal application. In the circumstances, the encashment of earned leave is akin to dearness allowance, commission or bonus or similar allowance payable by the employer to its employee and no extended meaning to ‘basic wages’ contained in S. 2(b) of the Act, is envisaged.
The Karnataka High Court referred to the decision of the Supreme Court in the case of All India Reporter Karmachari Sangh v. All India Reporter, 1988 (2) LLN 540 and based its logic on the beneficent rule of interpretation. In this judgement, the Supreme Court observed that "the Act in question is a beneficial legislation which is enacted for the purpose of improving the conditions of service of the employees of the newspaper establishment and hence, if it is possible to have two opinions on the construction of the provision of the Act, the one which advances the object of the Act and is in favour of the employees for whose benefit the Act is passed, has to be accepted. However, lately our Apex Court has completely metamorphosed this yardstick of worker-oriented interpretation of industrial law in the case of State of UP v. Jai Bir Singh, 2005 (5) SCCI where it has observed that "exploitation of workers and employees has to be checked. Law and particularly industrial law needs to be so interpreted as to ensure that neither the employers nor the employees are in a position to dominate the other.
With due deference to their Lordships of the Karnataka High Court, it is now submitted that the canon of beneficent rule of construction may not be available for aid in interpreting a statute when the language of the provision is clear and unambiguous.
The relevance of this theory of beneficent rule of interpretation has also become obsolete in view of the fact that the economy of India has under-gone a sea change from an era of protectionism to liberalisation, from restricted domestic competition to international competitiveness. It is therefore desirable in the scheme of things that we strike a right balance between economic exigencies and social justice. If the industries are to live and thrive, they must cut cost of production, but such liberal interpretation of provision of a statute would only fasten an additional liability on the employers and would increase their cost of production. It is therefore suggested that purposive rule of construction should be applied in the instant case and that done, the leave encashment amount would definitely fall short of basic wages. The beneficent rule of construction is to be discarded as a broken tool in the instant case.
Now so far as the Bombay High Court case of Hindustan Lever Employees Union v. Regional Provident Fund Commissioner, 1995 (1) LLN 767 is concerned, it assumed that each and every employee of Hindustan Lever Ltd. was free and entitled to receive the amount by way of encashment of leave, and therefore, it held that the said amount was payable to each and every employee, but this may not be the position about each and every employee of other establishment, as has been explained hereinabove. As has been observed by the Apex Court, the overtime allowance though it is generally in force in all concerns but is not earned by all employees of all concerns. Substantially, similar would be the position with regard to the leave encashment payment vis-à-vis all concerns and all employees. The ratio decidendi is therefore distinguishable in certain given contingencies. Actual contours of the payments and those of the payments which are made in sole discretion and pleasure of management, etc., would enjoy immunity from being treated as basic wages. This is pure and simple and nothing is over-hyped. The payments which could be earned by all concerns without discrimination is the centric and centrality to determine provident fund liability.
The concept of basic wages under the E.P.F. & MP Act is multilayered and mystifies, unless we delineate its thin overlapping position with payments of other allowances and till we do it, there would be a rhetorical tight-rope walk and things would look a bit corny. But as soon as we apply the right test as laid down by the Apex Court that an amount which is earned by all employees of all concerns then the roadblocks in the way would disappear and the nature and extent of the contents of basic wages would become exposed. I have therefore brokered the concept by borrowing the logic as enunciated by their Lordships of the Supreme Court in the aforesaid cases. If there is no universality in leave encash-ment payment, it shall not be ‘basic wages’ under the Act. This is how things could be viewed as well.
Now the PF Organisation therefore finally issued the notification dated 16-5-2005 and directed that implementation of the proposition of PF deduction on leave encashment to be from 1-10-1994. This is now the final position so long as the verdicts stand and the deduction is to be made statutorily. In the new matrix, there won’t be letting up from the PF organisations but then we could not just be mute. Something should be evolved to get a verdict from our Supreme Court. Till such time the matter should be held in abeyance.
However, there would also be lot of difficulties in administering this deduction retrospectively from 1-10-1994, because several employees must have left services ever since. It is difficult to imagine in such cases whether only the employer would be required to pay his part of contribution because at least he is very much there. It is also not understood why these verdicts were not challenged in the Apex Court immediately after the Bombay and Karnataka verdicts. It is a case of confusion worse confounded.
Note :
As early as in the year 1995, the Bombay High Court in the case of Hindustan Leaver Employees Union v. RPFC & Another, 1995 LLR 416 and lately, the Karnataka High Court held that encashment of earned leave would qualify as ‘basic wages’ under the provisions of the EPF Act and that this amount would be liable to PF contribution. However, a final verdict of the Apex Court is still awaited, but even then the EPF organisation issued directions to all Regional Provident Fund Commissioners and others to treat leave encash-ment amounts as attracting Provident Fund Contribution.
It is strongly felt that in basic wages, there are situations overwhelmingly peopled by various allowances, commissions, etc. interwoven by inclusions and exclusions. It was therefore necessary to locate symbiotic relationship with each other and in this venture, it is discovered that universality i.e., a payment that is made by all concerns to all their employees without discrimination would be an important component of ‘basic wages’. The encashment of leave payments is not uniform in all establishments and for all employees and it is contingent. An over-expansive interpretation of ‘basic wages’ might be a deterrent
Regards
Arun
From India, Bahadurgarh
Community Support and Knowledge-base on business, career and organisational prospects and issues - Register and Log In to CiteHR and post your query, download formats and be part of a fostered community of professionals.
SALARY with out PF Deduction.xls
PF deduction on leave encashment.doc