Definition of ‘basic wages’ for calculation of PF contribution

Oct 01 2013, 13:19 IST
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SummaryIn a recent ruling that favours employees, the Delhi High Court has expanded the scope of basic wages to be included for Provident Fund

In a recent ruling that favours employees, the Delhi High Court has expanded the scope of basic wages to be included for Provident Fund (PF) contribution. Under the PF rules, contribution towards PF is to be calculated on basic wages, dearness allowance, retaining allowance and cash value of any food concession.

Basic wages have been defined to mean all cash emoluments, except:

(a) Cash value of any food concession;

(b) Any dearness allowance;

(c) House rent allowance, overtime allowance, bonus, presents; and

(d) Commission or any other similar allowance.

The concept of ‘basic wages’ on which PF contribution is to be calculated has always been a debatable issue. The Supreme Court has laid down two tests to determine whether a component is included in the definition of ‘basic wages’ or not. These are ‘test of universality’ and ‘test of contingency’.

Applying the test of universality, if a component is paid universally, necessarily and ordinarily to all employees of a company, the same is included in the definition of basic wages. Applying the test of contingency, if a component is paid subject to uncertain events like overtime payment, the same is excluded from the definition of basic wages.

On the basis of these tests, the Delhi High Court recently held that canteen allowance paid to all permanent employees would be included in the definition of basic wages. The Delhi High Court also dismissed the argument taken by the company that canteen allowance falls under ‘any other similar allowance’, which is excluded from the definition of basic wages. This highlights another concern as to what constitutes ‘commission or any other similar allowance’, which is excluded from the definition of basic wages — whether the term ‘any other similar allowance’ has to be read along with ‘commission’ or separately.

The industry would be keen to take a view that ‘any other allowance’ is very wide in scope and, thus, various cash allowances may fall under it and get excluded from the definition of ‘basic wages’. On the other hand, the PF authorities seem to take a view that both these terms are to be read together. This would narrow the scope of ‘any other allowance’ by limiting components in the nature of ‘commission’ only to fall under it.

The Delhi High Court held that the terms ‘commission’ and ‘any other similar allowance’ have been written in the law without any break or ‘comma’. Accordingly, both the terms should be read together and

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