Introduction
The concept of “Wages” as it relates to contribution under the Employee State Insurance (ESI) scheme has been the subject matter of considerable confusion and judicial deliberation.
On November 8th, 2021, the ESI Corporation (ESIC) vide circular No. T-11/13/56/02/2020 Rev II has acknowledged to all regional and sub-regional offices the judgement of the Hon’ble Supreme Court of India that payment of conveyance allowance as per the present case does not fall under definition of term “wages”.
This circular came in pursuance of a Supreme Court Judgement in March of 2021 which upheld the decision of The High Court of Madras and the ESI Court, holding that ESI contribution was not payable on conveyance allowance.
Definition of Wages
As per Section 2(22) of the ESI Act, the term “wages” means “all remuneration paid or payable in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled and includes [any payment to an employee in respect of any period of authorised leave, lock-out, strike which is not illegal or layoff and] other additional remuneration if any, [paid at intervals not exceeding two months], but does not include:
(a) any contribution paid by the employer to any pension fund or provident fund, or under this Act ;
(b) any travelling allowance or the value of any travelling concession ;
(c) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or
(d) any gratuity payable on discharge”
Judicial Precedent
This seemingly simple definition of wage has been the subject matter of judicial interpretation over the years. In Braithwaite &. (India) Ltd vs The Employees’ State Insurance[1] on 6 October 1967, the court was tasked with dealing with the concept of “Inaam”. A scheme of “Inaam” which was in the nature of a bonus was notified to be paid to the employees subject to specific conditions. After examining the said scheme, the SC held that it was not part of the terms of employment and did not fall under the ambit of “wages” under the ESI Act owing to the following reasons:
- It was extended on a voluntary basis and the employees were not entitled to claim it as a matter of right.
- It was not part of the original terms of the contract of employment
- Payment was contingent on the achievement of the target outputs
- Payment was subject to cancellation and scheme to withdrawal even when the default was on part of the employer thus there was no question of it becoming an implied term of the contract of employment.
- It was expressly conveyed that the “inaam” was in no way connected to the wages payable.
The SC examined the said case only with reference to the first part of the definition and did not touch the second part of the definition dealing with “additional remuneration”.
Thereafter, in Employees’ State Insurance vs Andhra Pradesh Paper Mills Ltd.[2] , the Andhra Pradesh High Court relied mainly on the Braithwaite case (1967) and observed that the SC did not take into consideration the second part of the definition of wages under the ESI Act dealing with “additional remuneration”. Thus, the HC owing to the facts and surrounding circumstances in the given case held that an “incentive bonus” paid on achievement of a target was a part of “wages” falling under the category of “additional remuneration”.
Later, in 1980, the Supreme Court in Indian Drugs & Pharmaceuticals Ltd. Vs. ESIC[3], the Court held that when an employee accepts and does overtime work, it amounts to an implied contract between the employee and the employer, hence the “overtime allowance” paid would form part of his wages and a contribution under the ESI is payable on the same. It is important to note that though this allowance would be considered as wages only for the charging of the contribution and not for the purpose of the coverage of the employee under the scheme.
In Regional Director, ESIC Vs. M/s. Popular Automobiles etc. a “subsistence/suspension” allowance paid to an employee under suspension where he/she is prevented from working in the establishment was in question. The SC held that this is a remuneration payable in respect of the service regulations governing the terms of the contract of employment thus it falls under the definition of “wages” and an ESI contribution is payable on the said sum
In M/s. Harihar Polyfibers Vs. RD ESIC [4], Bangalore held that Night Shift Allowance, Heat, Gas & Dust allowance are wages under Sec.2(22) of the ESI Act.
More recently, in Deputy Director, E.S.I. Corporation vs. Traco Cable Co. Ltd.[5], a sum of money known as “production incentive” was to be paid on a monthly basis on the achievement of production targets. The HC of Kerala after examining a notice in question found that this component classified as “additional remuneration” payable within a span of the 2 months, under Section 2(22) of the ESI Act and held E.S.I contribution would be payable in respect of the same. The same has also been held of attendance bonus and other such amounts.
Conveyance Allowance
As regards conveyance allowance, the interpretation on whether this was wage or not has varied among different High Courts. The Madras High Court in Regional Director, ESI Corporation v. Sundaram Clayton Ltd.[6] and Management of Oriental Hotels Ltd., Chennai v. Employees’ State Insurance Corporation, Chennai[7] held that an amount paid for employees to commute to and from work, paid under the heads of conveyance or travel allowance, is excluded from the definition under wages.
This was affirmed by the Kerala High Court in Regional Director, ESI Corporation, Thrissur v. Royal Plastics Industries, Aluva[8].
However, the Karnataka High Court in Regional Director, Employees State Insurance Corporation v. M/s IT Solutions (India) Private Limited[9] held that the value of Conveyance Allowance cannot be excluded from the definition of ‘wages’. The reasoning of the Karnataka High Court that Conveyance Allowance cannot be excluded from the definition of ‘wages’ was because Conveyance Allowance is paid every month to every employee like House Rent Allowance, in terms of the contract of employment, so as to meet to and fro conveyance expenses, whereas travelling allowance is paid to the concerned employee when he or she is sent out of the station on duty to meet travelling expenses.
This Controversy was finally put to rest by the Supreme Court in ESI Vs. M/S. Texmo Industries[10] by affirming the Madras High Courts judgment and holding that conveyance is not a part of wages as envisioned under the Act.
Labour Codes and how they will help
The Labour Codes (The Code on Wages, 2019; The Social Security Code, 2020; The Occupational Safety, Health and Working Conditions Code, 2020 and The Industrial Relations Code, 2020) are set to bring about a single definition of wages across Twenty Eight legislations. Twelve of these had a definition of wages that differed slightly or greatly from each other. The sheer number of cases that interpreted the meaning of “wages” for the purposes of Minimum wages, Payment of Overtime, Payment of Provident Fund Contribution and ESI contribution is astronomical and a testament to the need for harmonization.
The uniform definition under the four Codes will, hopefully, put an end to the need for judicial intervention and interpretation. The definition is not without its own share of confusion but at least it is uniform and any judicial precedent will apply equally across all Codes.
The New definition of wages is as follows:
“wages” means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes,-
(a) basic pay;
(b) dearness allowance; and
(c) retaining allowance, if any,
but does not include-
(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
(b) the value of any house accommodation, or of the supply of light, water,
medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
(c) any contribution paid by the employer to any pension or provident fund,
and the interest which may have accrued thereon;
(d) any conveyance allowance or the value of any travelling concession;
(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
(f) house rent allowance;
(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
(h) any overtime allowance;
(i) any commission payable to the employee;
(j) any gratuity payable on the termination of employment;
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment, under any law for the time being in force:
Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one half or such other percent. as may be notified by the Central Government, of all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause:
Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wage.
Explanation.—Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee.
It is useful that the new definition is on the same line as that which is set out in the ESI Act. Due to this, the earlier case law will continue to hold good and the new definition will not give rise to new confusion.
[1] 1968 AIR SC 413
[2] AIR 1978 AP 18
[3] dt. 29.9.97 in Civil appeal no.3850 of 1993
[4] 1984 AIR SC 1680
[5] 2011(128) FLR 656 (Kerala HC)
[6] 2004 (II) LLJ 30
[7] 2002 (1) LLJ 14
[8] 2015 (2) KLT 64,
[9] ILR 2002 KAR 4019
[10] Special Leave Petition (C.) No.811/2021, decided on 08/03/2021