Supreme Court clarifies definition of ‘wages’ under Employees State Insurance Act: Employees State Insurance Corporation vs. Mangalam Publications (21 September 2017)

Introduction

Date of the Judgment: 21 September 2017

Citation: (2017) INSC 811

Judges: Arun Mishra, J., Mohan M. Shantanagoudar, J.

Is interim relief paid to employees considered “wages” under the Employees’ State Insurance Act, 1948 (ESI Act), thus requiring employers to contribute to the Employees’ State Insurance (ESI) fund? The Supreme Court of India addressed this question in a case involving Mangalam Publications, a company that had paid interim relief to its employees but had not made ESI contributions on that amount. The court had to determine whether such interim payments fell within the definition of “wages” under the ESI Act. The judgment was delivered by a two-judge bench comprising Justice Arun Mishra and Justice Mohan M. Shantanagoudar, with the opinion authored by Justice Mohan M. Shantanagoudar.

Case Background

Mangalam Publications (I) Private Limited, the respondent, is a company engaged in printing and publishing the Malayalam daily newspaper “Mangalam.” The company has over 250 employees, including working and non-working journalists. The Central Government had appointed Wage Boards, including the Bachawat Wage Board and the Manisana Wage Board, to recommend uniform wage structures for newspaper employees. Based on the Manisana Wage Board’s recommendations, the government issued a notification on 24 September 1996, fixing interim wage rates at 20% of basic wages plus an additional ₹100 per month, effective from 20 April 1996.

Mangalam Publications began paying this interim relief to its employees from 1 April 1996 to 31 March 2000. However, the company did not make the statutory ESI contributions on these interim wage payments. The Employees State Insurance Corporation (ESIC), the appellant, calculated that the ESI contribution due on these interim wages was ₹2,53,272 (later revised to ₹2,58,061.50). The ESIC issued a demand notice to Mangalam Publications on 2 November 2000, seeking this amount with interest.

The company contended that it was not required to pay ESI contributions on the interim relief, citing an office memorandum dated 19 August 1998, issued by the Ministry of Industry, which stated that interim relief was not to be considered as ‘wages’. However, this memorandum was specifically for employees of Central Public Sector Enterprises (PSES) and not for private sector companies like Mangalam Publications.

Timeline

Course of Proceedings

The Employees State Insurance Corporation (ESIC) issued a notice to Mangalam Publications, demanding ESI contributions on the interim relief paid to its employees. Mangalam Publications challenged this demand in the ESI Court, Idukki, Kerala, arguing that the interim relief was not “wages” as per the ESI Act, relying on the office memorandum of 19 August 1998. The ESI Court rejected this argument, holding that the interim relief was indeed “wages” under Section 2(22) of the ESI Act and that the office memorandum was not applicable to private companies.

Mangalam Publications then appealed to the High Court of Kerala, which overturned the ESI Court’s decision. The High Court held that the interim relief was an “ex-gratia payment” and not “wages,” thus not subject to ESI contributions. The ESIC then appealed to the Supreme Court of India against the High Court’s decision.

Legal Framework

The core legal provision at the heart of this case is Section 2(22) of the Employees’ State Insurance Act, 1948, which defines “wages.” The section states:

“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 authorized leave, lock-out, strike which is not illegal or lay-off 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.”

This definition includes all cash payments made to an employee under the terms of their employment contract, as well as additional payments made at intervals of no more than two months. However, it excludes certain payments like employer contributions to pension funds, travel allowances, special expenses, and gratuity. The ESI Act is a welfare legislation aimed at providing benefits to employees in cases of sickness, maternity, and employment injury.

Arguments

Appellant (Employees State Insurance Corporation):

• The appellant argued that the interim relief paid by Mangalam Publications to its employees falls within the definition of “wages” under Section 2(22) of the ESI Act.
• They contended that the office memorandum dated 19 August 1998, which stated that interim relief is not wages, is not applicable to private companies like Mangalam Publications, as it was specifically meant for Central Public Sector Enterprises (PSES).
• The appellant emphasized that the definition of “wages” in the ESI Act is broad and includes all remuneration paid under the contract of employment, as well as additional remuneration paid at intervals not exceeding two months.
• They argued that the interim relief was not a “gift” or “inam” but a part of the wages, as it was paid as per the notification dated 20 April 1996, issued by the Government of India, based on recommendations of the Manisana Wage Board.
• The appellant relied on the judgment of the Supreme Court in M/s Harihar Polyfibres vs. Regional Director, ESI Corporation, (1984) 4 SCC 324, to argue that the definition of “wages” is wide enough to include various allowances.
• They relied on the judgment of the Supreme Court in Employees State Insurance Corporation vs. Gnanambigai Mills Limited, (2005) 6 SCC 67, to argue that merely because the parties in their compromise chose to term the payments as “ex gratia payments” does not mean that those payments cease to be wages if they were otherwise wages.

Respondent (Mangalam Publications):

• The respondent argued that the interim relief paid to its employees should not be considered “wages” for the purpose of ESI contributions.
• They relied on the office memorandum dated 19 August 1998, which stated that interim relief is not to be considered as ‘wages’.
• The respondent contended that the interim relief was an ex-gratia payment and not part of wages.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the interim relief paid by the respondent to its employees, during the period from 01.04.1996 to 31.03.2000, is to be treated as “wages” as defined under Section 2(22) of the ESI Act, and if so, whether the respondent is liable to pay the ESI contribution?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓The Supreme Court relied on M/s Harihar Polyfibres vs. Regional Director, ESI Corporation, (1984) 4 SCC 324* to emphasize that the definition of “wages” under Section 2(22) of the ESI Act is wide enough to include various allowances.

✓The Supreme Court cited Whirlpool of India Ltd. vs Employees’ State Insurance Corporation, (2000) 3 SCC 185* to highlight that the ESI Act is a social welfare legislation and any interpretation should be beneficial to the working class.

✓The Supreme Court referred to Employees State Insurance Corporation vs. Gnanambigai Mills Limited, (2005) 6 SCC 67* to clarify that merely because parties term payments as “ex gratia” in a compromise, it does not mean that those payments cease to be wages if they were otherwise wages.

✓The Supreme Court interpreted Section 2(22) of the Employees’ State Insurance Act, 1948 to determine whether interim relief would fall within its ambit.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the broad definition of “wages” under Section 2(22) of the ESI Act and the welfare-oriented nature of the legislation. The Court emphasized that the definition of “wages” is inclusive and should be interpreted liberally to benefit employees. The Court also noted that the interim relief was not a gratuitous payment but a part of the employment contract, as it was paid based on the recommendations of the Manisana Wage Board and the notification dated 20 April 1996. The court also placed emphasis on the fact that the office memorandum dated 19 August 1998, was not applicable to private companies like Mangalam Publications.

The court’s reasoning can be summarized as follows:

The Supreme Court rejected the High Court’s view that the interim relief was an “ex-gratia payment,” stating that the payment was made as per a scheme voluntarily promulgated by the respondent, based on the notification dated 20 April 1996 and the recommendations of the Manisana Wage Board.

The court stated, “The interim relief paid by the respondent to its employees is not a “gift” or “inam”, but is a part of wages, as defined under Section 2(22) of the ESI Act.”

The court also observed, “The High Court has also failed to appreciate that the payment of interim relief/wages emanates from the provisions contained in terms of the settlement, which forms part of the contract of employment and forms the ingredients of “wages” as defined under Section 2(22) of the ESI Act.”

The court further noted, “The amount paid as interim relief by the respondent to its employees definitely falls within the definition of “wages” as per Section 2(22) of the ESI Act.”

Key Takeaways

• Interim relief paid to employees, based on wage board recommendations, is considered “wages” under Section 2(22) of the ESI Act.
• Employers are liable to pay ESI contributions on such interim payments.
• Office memorandums meant for Central Public Sector Enterprises (PSES) do not apply to private companies.
• The definition of “wages” under the ESI Act is broad and inclusive, and any interpretation should be beneficial to the working class.
• Payments made based on a settlement or scheme which forms part of the contract of employment are considered as wages.

Directions

The Supreme Court directed that the Employees State Insurance Corporation (ESIC) is entitled to recover the ESI contribution from Mangalam Publications for the period from 01.04.1996 to 31.03.2000, as per the demand notice dated 02.11.2000.

Development of Law

The ratio decidendi of this case is that interim relief paid to employees, based on wage board recommendations, is considered “wages” under Section 2(22) of the ESI Act, and employers are liable to pay ESI contributions on such payments. This decision reinforces the broad interpretation of “wages” under the ESI Act and clarifies that payments made as per a scheme or settlement, which forms part of the contract of employment, are included in the definition of wages. This case also clarifies that office memorandums meant for Central Public Sector Enterprises (PSES) do not apply to private companies. There is no change in the previous position of the law; rather it clarifies the existing position.

Conclusion

The Supreme Court’s judgment in Employees State Insurance Corporation vs. Mangalam Publications (I) Private Limited clarifies that interim relief paid to employees as part of a wage agreement constitutes “wages” under the Employees’ State Insurance Act, 1948. The court emphasized the inclusive nature of the definition of “wages” and reinforced the welfare objectives of the ESI Act, ensuring that employees receive the benefits they are entitled to. The decision also clarifies that office memorandums meant for Central Public Sector Enterprises (PSES) do not apply to private companies.