I am associated with a manpower service provider. Some client companies are paying statutory bonus and annual leave encashment on monthly basis so as to avoid future complications of non compliance etc.
One of the client is insisting for payment of ESI & PF contribution on these two components also. This is resulting in less take home for employee.
Please advise whether ESI & PF contributions is to be made on advance payment of statutory bonus or leave encashment.
Thank you,
S N Sitaram
From India, Hyderabad
26One of the client is insisting for payment of ESI & PF contribution on these two components also. This is resulting in less take home for employee.
Please advise whether ESI & PF contributions is to be made on advance payment of statutory bonus or leave encashment.
Thank you,
S N Sitaram
From India, Hyderabad
Both the practices are avoidable.
But companies do that many to make the pay look larger to the employee.
PF and ESIC becomes applicable on it, thought some lawyers say it is not the case.
Consider the following :
1. Any amount that is paid every month and to every worker, will mostly be considered as salary
2. The new ruling of PF says all payments other than HRA and OT is basic pay. Only allowances that are selective (not give to all) and intended to defray a cost of working will be excluded. So your payment probably comes under the definition of salary for PF
3. The bonus act intended that the bonus will be a lumps one time per year payment so it can be used for festival purposes or for special requirements. By paying the money every month, it is no longer bonus. (Some lawyers say if you specifically show it as advance against bonus in the pay slip, then its ok)
4. For leave salary paid every month, you are giving proof that you are not giving paid leave as required in the factory act. If the matter goes into dispute, you are very likely to be asked to pay again,
In any case, ESIC rules say you need to pay on everything, so there is little dispute there.
From India, Mumbai
But companies do that many to make the pay look larger to the employee.
PF and ESIC becomes applicable on it, thought some lawyers say it is not the case.
Consider the following :
1. Any amount that is paid every month and to every worker, will mostly be considered as salary
2. The new ruling of PF says all payments other than HRA and OT is basic pay. Only allowances that are selective (not give to all) and intended to defray a cost of working will be excluded. So your payment probably comes under the definition of salary for PF
3. The bonus act intended that the bonus will be a lumps one time per year payment so it can be used for festival purposes or for special requirements. By paying the money every month, it is no longer bonus. (Some lawyers say if you specifically show it as advance against bonus in the pay slip, then its ok)
4. For leave salary paid every month, you are giving proof that you are not giving paid leave as required in the factory act. If the matter goes into dispute, you are very likely to be asked to pay again,
In any case, ESIC rules say you need to pay on everything, so there is little dispute there.
From India, Mumbai
Dear Colleague,
The PF Act and ESI Act deals slightly differently the components - Bonus and Leave Encashment.
1. As far as PF Act is concerned " basic wages” is defined and means all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include—
(i) the cash value of any food concession;
(ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by the employer;
2. Earned leaves encashed are not liable for Provident Fund deductions. ... This is because earned leaves that are encashed do not constitute a part of 'basic wages' under Section 2(b) of the Employees' Provident fund and Miscellaneous Provisions Act, 1952.
3. After the latest Supreme Court Judgement on Surya Roshni case, dated 28th February 2019, the contribution shall be calculated on the basis of monthly pay containing the following components actually drawn during the whole month whether paid on a daily, weekly, fortnightly or monthly basis:
-Basic wages
-Dearness Allowances
-Retaining Allowances
-Conveyance Allowances
-Other Allowance
-Special Allowance
-Leave Travel Allowances
-Fixed cash Allowance (Management allowance, educational Allowance, Medical Allowance, Telephone, Food Allowance etc.)
-Petrol Reimbursement (without bills and without supporting documentation/data to substantiate the reimbursement is for official purposes)
-City Compensatory Allowance or any other allowance paid as fixed component, uniformly and universally having no direct nexus to the outcome of an employee’s normal work.
These components are excluded while calculating the EPF:
HRA allowance (House rent allowance)
Attendance allowance
Night shift allowance
Washing allowance
Relocation allowance
Overtime allowance
Canteen allowance
Various Incentives provided for particular employee
Bonus or Commissions payable to a particular Employee
Hence both Leave Encashment paid one time in a year based on actual balance leave and Bonus paid annually are not liable for PF deduction.
4. Employees State Insurance 1948: Section 2 (22) of ESI Act defines “ 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
The following wage components are taken into account for computation of wages for payment of
contribution.
a) Basic Pay,/Wages/Salary;
b) D.A/ HRA/ CCA/ Overtime/ officiating allowance/ Night shift allowance/ efficiency allowance/ Heat, Gas, Dust allowance/ Education allowance/ Food & Tea allowance/ Overtime wages (but not to be taken into account for determining the coverage).
c) Wages/ salary/ pay for weekly off and public holidays;
d) Commission paid to sales staff;
e) Subsistence allowance paid to an employee during the period of suspension;
f) Attendance Bonus or incentive or exgratia in lieu of Attendance Bonus or production incentive;
g) Regular Honorarium or salary or remuneration paid to a Director;
h) Collection Bhatta paid to running staff. Production incentive, Bonus other than statutory bonus,
night shift. Heat, Gas & Dust Allowance, Meal/Food Allowance.
i) Actual payments made towards leave salary, lay off compensation, or wages for strike period.
j) Any other remuneration paid or payable in cash to an employee if the terms of contract of
employment, expressed or implied were fulfilled.
The above are only indicative.
5. Any leave encashment paid is falling under ESI Deduction as it is indicated in ESI Manual of ESIC as : "Actual payments made towards leave salary". Hence my suggestion is to check with ESI Director for more clarity to be more cautious on this subject as later on it should not back fire.
6. As far as Bonus paid annually which are not connected or linked to any production/ attendance or not connected to incentive but paid as per statutory provisions of Payment of Bonus Act 1965 is usually exempted from ESI deduction. (But Attendance Bonus or incentive or exgratia in lieu of Attendance Bonus or production incentive are subject to ESI as per ESIC Manual)
Add:
As we all know, the Hon’ble Supreme Court has passed an Order recently (ESIC v/s Texmo Industries (Madras) dated 08 March 2021) stating that conveyance allowance or traveling allowance does not fall under the definition of ESI wages. This has been affirmed as a reported judgment by the Apex Court.
However Bonus paid Monthly are liable for ESI deduction. Some bonus working accumulates the production for each month and also attendance of each month, Productivity of each month and paid annually which needs to be covered for ESI Deduction.
Hence examine carefully the exact nature of such payments of your clients and then take call.
From India, Chennai
The PF Act and ESI Act deals slightly differently the components - Bonus and Leave Encashment.
1. As far as PF Act is concerned " basic wages” is defined and means all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include—
(i) the cash value of any food concession;
(ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by the employer;
2. Earned leaves encashed are not liable for Provident Fund deductions. ... This is because earned leaves that are encashed do not constitute a part of 'basic wages' under Section 2(b) of the Employees' Provident fund and Miscellaneous Provisions Act, 1952.
3. After the latest Supreme Court Judgement on Surya Roshni case, dated 28th February 2019, the contribution shall be calculated on the basis of monthly pay containing the following components actually drawn during the whole month whether paid on a daily, weekly, fortnightly or monthly basis:
-Basic wages
-Dearness Allowances
-Retaining Allowances
-Conveyance Allowances
-Other Allowance
-Special Allowance
-Leave Travel Allowances
-Fixed cash Allowance (Management allowance, educational Allowance, Medical Allowance, Telephone, Food Allowance etc.)
-Petrol Reimbursement (without bills and without supporting documentation/data to substantiate the reimbursement is for official purposes)
-City Compensatory Allowance or any other allowance paid as fixed component, uniformly and universally having no direct nexus to the outcome of an employee’s normal work.
These components are excluded while calculating the EPF:
HRA allowance (House rent allowance)
Attendance allowance
Night shift allowance
Washing allowance
Relocation allowance
Overtime allowance
Canteen allowance
Various Incentives provided for particular employee
Bonus or Commissions payable to a particular Employee
Hence both Leave Encashment paid one time in a year based on actual balance leave and Bonus paid annually are not liable for PF deduction.
4. Employees State Insurance 1948: Section 2 (22) of ESI Act defines “ 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
The following wage components are taken into account for computation of wages for payment of
contribution.
a) Basic Pay,/Wages/Salary;
b) D.A/ HRA/ CCA/ Overtime/ officiating allowance/ Night shift allowance/ efficiency allowance/ Heat, Gas, Dust allowance/ Education allowance/ Food & Tea allowance/ Overtime wages (but not to be taken into account for determining the coverage).
c) Wages/ salary/ pay for weekly off and public holidays;
d) Commission paid to sales staff;
e) Subsistence allowance paid to an employee during the period of suspension;
f) Attendance Bonus or incentive or exgratia in lieu of Attendance Bonus or production incentive;
g) Regular Honorarium or salary or remuneration paid to a Director;
h) Collection Bhatta paid to running staff. Production incentive, Bonus other than statutory bonus,
night shift. Heat, Gas & Dust Allowance, Meal/Food Allowance.
i) Actual payments made towards leave salary, lay off compensation, or wages for strike period.
j) Any other remuneration paid or payable in cash to an employee if the terms of contract of
employment, expressed or implied were fulfilled.
The above are only indicative.
5. Any leave encashment paid is falling under ESI Deduction as it is indicated in ESI Manual of ESIC as : "Actual payments made towards leave salary". Hence my suggestion is to check with ESI Director for more clarity to be more cautious on this subject as later on it should not back fire.
6. As far as Bonus paid annually which are not connected or linked to any production/ attendance or not connected to incentive but paid as per statutory provisions of Payment of Bonus Act 1965 is usually exempted from ESI deduction. (But Attendance Bonus or incentive or exgratia in lieu of Attendance Bonus or production incentive are subject to ESI as per ESIC Manual)
Add:
As we all know, the Hon’ble Supreme Court has passed an Order recently (ESIC v/s Texmo Industries (Madras) dated 08 March 2021) stating that conveyance allowance or traveling allowance does not fall under the definition of ESI wages. This has been affirmed as a reported judgment by the Apex Court.
However Bonus paid Monthly are liable for ESI deduction. Some bonus working accumulates the production for each month and also attendance of each month, Productivity of each month and paid annually which needs to be covered for ESI Deduction.
Hence examine carefully the exact nature of such payments of your clients and then take call.
From India, Chennai
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Amendment to Payment of Bonus Act 2015.jpg
Online payment of PF mandatory from 1.1.2016.pdf
PAYMENT OF WAGES ACT 2009.doc