SC rules that leave encashment should not be included in wages for PF calculation

Credits to Mr. CS Ravichandran of AIG.

In a significant ruling reducing the deductions on the salary sheet , the Supreme Court has held that the money got by an employee from encashing earned leave could not be taken as wages for calculation of provident fund (PF) contributions. Deciding a bunch of petitions in favour of the employees, a bench comprising Justices Arijit Pasayat and P Sathasivam rejected the stand of regional PF commissioner that the amount received on encashment of earned leave had to be taken into account for the purpose of calculating PF contributions.
The bench allowed the appeals -- the lead case being the one filed by Manipal Academy of Higher Education -- saying "the inevitable conclusion is that basic wage was never intended to include amounts received for leave encashment". It took note of a Mumbai case where an employer was including the amount of leave encashment as emoluments for the purpose of calculating PF dues from the employer as well as employees' contribution. When the Employees' Union took up the issue with the commissioner, it was informed that the provision did not provide for deduction of PF on leave encashment.
"Where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages. Conversely, any payment by way of a special incentive or work, is not basic wages," the court said.

Civil Appeal No. 1832 of 2004 With Civil Appeal Nos. 2535, 2536, 2539, 2540 and 2541 of 2004
MANIPAL ACADEMY OF HIGHER EDUCATION
Vs
PROVIDENT FUND COMMISSIONER
Arijit Pasayat and P Sathasivam, JJ.
Dated : March 12, 2008
PF Contribution: Basic wages:
(a) Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.
(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.
(c) Conversely, any payment by way of a special incentive or work is not basic wages.

"The inevitable conclusion is that basic wage was never intended to include amounts received for leave encashment."

For detailed judgment, click http://thisisvj.googlepages.com/basicwagewasneverintendedtoincludeam.doc