Supreme Court on Allowances and PF Contributions

The Supreme Court recently decided on whether special allowance is part of basic wages for the purposes of Provident Fund (“PF”) contributions. The Supreme Court clubbed different appeals by various employers, which clubbed the common question of law on whether special allowance and various other specified allowances (“Allowances”) paid by the employers are part of basic wages for the purposes of PF contributions.

The Supreme Court relied on the decisions of Bridge & Roof Co. (India) Ltd. v. Union of India and Manipal Academy of Higher Education vs. Provident Fund Commissioner, which has held that any component of wages that is paid universally, ordinarily and necessarily across the board to all employees is basic wages and has to be included in the calculation of PF contributions. Further the decision refers to the decision of Muir Mills Co. Ltd., Kanpur v. Its Workmen, which has held that any emoluments which is variable and varied from employee to employee based on their efficiency or diligence or the nature of work or any such factor will not be included under basic wages for the purposes of PF contributions.

In light of the decisions cited above, the Supreme Court found that the appellants were not able to demonstrate that the Allowances were variable and concluded that the Allowances were paid across the board to all employees. Therefore, it held that the Allowances were part of basic wages for the purposes of PF contributions and concluded that they have been camouflaged as an allowance to avoid deduction and contribution.

In light of the above decision, employers will have to review the various components in their salary structures to determine whether they can demonstrate the variable nature of the component or if it should be included in basic wages for the purposes of PF contributions.