ESI: Supreme Court’s Judgement on Conveyance Allowance – How the Labour Codes will fix the perennial problem of interpretation

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:

  1. It was extended on a voluntary basis and the employees were not entitled to claim it as a matter of right.
  2. It was not part of the original terms of the contract of employment
  3. Payment was contingent on the achievement of the target outputs
  4. 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.
  5. 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

-Aditya Kamath,
Advocate & Partner

Share This Post

Share on facebook
Share on twitter
Share on linkedin

1 thought on “ESI: Supreme Court’s Judgement on Conveyance Allowance – How the Labour Codes will fix the perennial problem of interpretation”

Leave a Comment

Your email address will not be published.

Scroll to Top

B. Chandrashekar Shetty - Advocate

Mr. Chandrashekar Shetty is a Senior Labour Law Compliance Auditor at BCP Associates and has audited multiple client companies across India. He is also a member of our senior legal advisory practice. Previously he has worked as Deputy Controller, Manager-Industrial Relations and Industrial Relations Officer in KPTCL, Bangalore for more than 30 years. Prior to this, he has dealt with Legal, Personnel and IR matters including Wage Settlements, Grievance Machinery, Manpower Study and Social Security Compliances for about 10 years. He is a Faculty member of Labour Law, HRD Centre, KPTCL Bangalore.

Mr. Shetty holds a B.Com. and L.L.B. degree, Post-Graduate Diploma in Business Administration, Diploma in Public Relations from Bangalore University and PG Diploma in Industrial Relations & Personnel Management from Bharatiya Vidya Bhawan. He is enrolled as Advocate in Karnataka Bar Council and is a Govt. Arbitrator of Chit Funds in Karnataka.

S Venugopal Rao

S Venugopal Rao is an experienced labour law and service matters expert and is a member of the senior advisory team at BCP Associates. Having joined the chambers of Mr. B C Prabhakar in 2012, he is knowledgeable and well versed in multiple employment and labour law topics.

S Venugopal Rao holds a Bachelor’s degree in Science from Karnataka University, Dharwar and Bachelor of Law from Bangalore University. He enrolled as advocate in Karantaka State Bar Council in 1976. He joined the chamber of Sri. Kolachalam Srinivasa Rao a leading civil advocate. After practicing for 6 years at Ballari, he joined Orient Paper Mills, Orissa (of G P Birla Group). He was designated as Manager (Law) under the Factories Act in 1995. In 1999, he joined Andhra Pradesh Paper Mills Rajahmundry as Manager Legal and was subsequently elevated as Dy. General Manager (Legal). As Factory Manager & Legal Head, he oversaw compliance of Factories Act and Rules there under towards safety, health and welfare, including compliance under Pollutions and Environmental laws and Explosives Act, etc. Additionally, he is well acquainted with Environment Management System ISO 14001: 2004, Occupations, Health and Safety Series 18000:1999. As Legal head in APPM he has briefed and appeared along with Senior Advocate before Appellate Authority constituted under Water (Prevention & Control of Pollution) Act. He retired from the services of Andhra Pradesh Paper Mills in 2011.

As legal head he has handled important cases both in Labour and Civil and has experience in drafting and vetting Contracts, Agreements, Lease Agreement, Conveyance Deeds, , Affidavits and scrutiny of several legal and other documents, Preparing and settling Petitions, Appeals, Plaints, Written Statements, Rejoinders, Affidavits and Written Arguments etc. for submission/pleadings for various legal proceedings.

C K Devappa Gowda - Advocate

C.K. Devappa Gowda (CKD) is an Advocate and Labour Law expert. He holds a Bachelor’s Degree in Science from the University of Mysore and a Degree in Bachelor of Law from Bengaluru respectively. He also holds a Diploma in Social Service Administration from the National Institute of Social Science, Bengaluru. After completing his studies, he had enrolled as a Advocate and initially practiced in the Civil Code attached to the office of BCP. He then worked as Personnel Officer in Chemicals and Textile Manufacturing Industries for 5 years. Thereafter took up employment in one of the largest Public Sector Bank. He has worked in different parts of the country and has extensive experience in the cross country IR domain. The significant part of his service was at corporate level overseeing and implementing HR policies and practices and management of IR. He has been a member of personnel committee of Indian Bank Association.

After retirement from service, Mr. Gowda has been working with Mr. BC Prabhakar’s firm for the last 12 years. He has expertise in all areas of people management, drafting of documents relating to service matter including the settlements under the ID Act. He has dealt with all employment laws including appearance before the Courts, Tribunal and Authorities under the different Labour Laws. Mr. Gowda is one of the senior Labour Law experts at BCP Associates.

Srijatha Ghosh - POSH Specialist & Advocate

Srijata Ghosh serves as external member on the Internal Committee of several Companies across various sectors. She handles all kinds of POSH related matters including investigations and inquiries. She provides Training on Sexual Harassment across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members on the legislation (The Sexual Harassment of Women at Workplace Prevention, Prohibition and Redressal Act, 2013). She also formulates Policies for Prevention of Sexual Harassment at Workplace (“POSH”) and advises Companies on setting up of their Internal Committees. Srijata is involved in providing Legal Advisory services on POSH and other labour law matters for various clients.

In her previous experience, she has extensively dealt with End-to-End Contract Management, Due Diligence, POSH Compliances, Legal Advisory, etc. Srijata worked with Companies like Accenture India Private Limited, Quess Corp., Capgemini Business Services (India) Limited and Pramata Knowledge Solutions Private Limited. Srijata has handled varied legal issues including drafting, vetting and negotiation of contracts, drafting policies of various organizations. She has resolved issues relating to employment laws and has worked closely with the HR teams. She has provided legal advisory services to senior management. She was also associated with Kolkata High Court in counselling clients with legal matters such as Property, Due Diligence etc. Srijata has worked in an LPO Service Firm, Manthan Legal Services Private Limited for Legal Research, depositions, medical summaries, demand drafting etc.

Srijata completed her B.A.LL.B from M. S. Ramaiah College of Law, Bangalore University in 2009. Srijata is a member of the Karnataka Bar Council since 2010. She is also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Caroline Lobo - POSH Specialist & Advocate

Caroline Lobo has been with BCP Associates for the past 2+ years. She has been handling matters and Inquiries related to the POSH Act including conducting inquiries and trainings/awareness programmes for Senior Management, employees as well as members of the Internal Committee on the POSH Legislation (The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“Act”) to address Workplace Harassment of Women. She is a member of the Internal Committee for many varied companies and organisations and has reviewed and scrutinized numerous hearings and inquiries on matters relating to sexual harassment at workplace.

She has also handled matters relating to employer-employee related Enquiries, wherein she has reviewed and conducted hearings and enquired into the matters and has guided the Internal Committee and provided guidance in providing recommendations to the management. She is also a Member of the Gender Sensitivity Sub-committee of Karnataka Employer Association (KEA).

Prior to joining BCP Associates, Caroline has has a wide range of experience in corporate, commercial and contract law, mergers and acquisition and has undertaken drafting, vetting, negotiating and finalizing legal and commercial transactions. She started her career in litigation then moved onto the Corporate sector. In the span of 13 years, she has worked at Chambers of Advocate Jayashree Murali, Krishnamurthy and Co. Legal Consultants, Colt Technology Services and Oracle India Pvt. Ltd. She always had a keen interest in Women and Child related issues. She has worked with Child Welfare Committee and NGOS’s. In addition, she has worked with Swasthi Health Resource and Centre, where she was the External member to the Internal Committee (IC). She worked closely with the committee in strategizing, planning, reviewing and implementing the assigned tasks, which included building material to raise awareness against sexual harassment at workplace. Further, she has been involved in conducting inquiries into matters related to sexual harassment at workplace.

Caroline earned her Law degree from University Law College, Bangalore, from where she graduated in the year 2005.

Manoj Kumar – Senior Associate

At BCP Associates, Manoj Kumar is involved in managing and conducting labour law compliance audits of principal employer and contractors. He is also involved in client co-ordination and conducting labour law training programs for vendors. He has conducted on-ground labour law audit for factories. Manoj also provides support in advising vendor clients on labour law queries. He completed B.A., LL.B. from BMS College of Law, Bangalore in 2016

Rashmitha Venkatachalam Das - POSH Specialist & Advocate

Rashmitha Venkatachalam Das is the External Member of the Internal Committee of several reputed Organizations across various sectors. Handling complex inquiries has been her forte and she is extremely passionate about it. She is actively involved in providing Training on Sexual Harassment (Prevention, Prohibition and Redressal) Act, 2013 across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members. Rashmitha possesses capabilities in delivering sessions in Hindi and Kannada, in addition to English. She has formulated Policies for Prevention of Sexual Harassment at Workplace (“POSH”), advised companies on setting up of their Committee. Rashmitha is involved in providing Legal Advisory services on POSH for various clients spread across diverse sectors. She has also been handling domestic enquiries for various clients. 

Rashmitha possesses experience both at Law Firms and Corporates in various capacities. She started her career at Krishnamurthy and Co, Legal Consultants and then moved on to work as an In- House Legal Counsel with Companies such as Biocon Limited, Columbia Asia Hospitals Private Limited, Adecco India Private Limited. With a long stint in the Corporate side, Rashmitha decided to pursue further education in Law with a specialization in Labour and Employment Laws. She has rich experience in drafting, vetting and negotiation of various types of contracts, providing legal opinions and has driven the team in formulating process and procedures and their implementation. She has drafted several employment related policies in Corporates. Rashmitha has been a part of various key committees in Organizations and assisted committees in scrutiny of documents pertaining to human organ transplant as well as clinical trials.

Rashmitha holds an LL.M. in Labour and Employment Laws from University Law College, Bangalore, which she completed in the year 2018 with Two Gold Medals. She is also a Rank Holder at the University. She has completed BA, LL.B. from Bangalore Institute of Legal Studies, Bangalore University in the year 2009. Rashmitha is a member of the Karnataka Bar Council since 2009 and also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Manisha Vidyadhar – Senior Associate

At BCP Associates, Manisha Vidyadhar is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. Manisha also provides support in advising vendor clients on labour law queries.  She completed B.A., LL.B. from BMS College of Law, Bangalore in 2016.

Amrutha Ananth – Senior Associate

At BCP Associates, Amrutha Ananth is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. She also provides support in advising vendor clients on labour law queries.

Amrutha is also part of the labour law advisory and HR Policy practice and is actively involved in drafting opinions on various aspects of labour laws and formulate and review employment policies and procedure.

Amrutha completed B.A., LL.B. from Christ University, Bangalore in 2015. She is also a semi-qualified Company Secretary.

Sunil Arya – Principle Associate

At BCP Associates, Sunil Arya is part of the labour and employment law advisory and HR Policy practice and is actively involved in drafting and reviewing of employment contracts, opinions, HR policies, employee handbook, show cause notice, etc. for various clients spread across diverse sectors. He conducts training on labour and employment laws. Sunil is also involved in labour law compliance audits of principal employer and contractors and has conducted on-ground labour law audit for factories. In addition, he is engaged in knowledge creation and management of the firm and keenly writes on developments in labour and employment laws.

Prior to joining BCP Associates, Sunil has 10 years of post-qualification experience in diversified portfolios of advisory, drafting, policy analysis and dispute in the domains of contracts, general civil matters, employment law, competition law and construction arbitration matters. Sunil started his career as a Law Researcher in Delhi High Court. He moved on to be part of regulatory analysis team of CIRC, a unit of CUTS International. In addition, Sunil has been part of legal team of Jindal India Thermal Power Limited. He has also taught competition law, tax law and investment law at VIPS, Delhi.

Sunil holds LL.M. from The Indian Law Institute, Delhi. He is First Rank Holder in his thesis. He completed B.A, L.L.B. (Hons.) from I.P. University, Delhi. He also holds First Rank in P.G. Diploma in Competition Policy and Laws from The National Law University, Delhi.

Chandrakala K A – Principle Associate

At BCP Associates, Chandrakala has 12+ years of experience in conducting and managing labour law compliance audits of principal employer and contractors. She is also involved in co-ordination with many clients. She has conducted on-ground labour law audit for factories. She also provides support in advising vendors on labour law queries. Chandrakala is actively involved in research and providing valuable inputs to the firm pertaining to updation in labour law audit function.

Chandrakala started her career in litigation in chamber of Sri. Ashok where she was involved in drafting, pleading and appearance before Karnataka High Courts and lower courts on the criminal side.

Chandrakala completed B.A in Arts from Kuvempu University, Shimoga in 2003 and LL.B. from Mangalore University in 2006.

X