Supreme Court clarifies “salary” to include leave encashment and gratuity for aided school teachers: Jagdish Prasad Saini vs. State of Rajasthan (26 September 2022)

Introduction

Date of the Judgment: 26 September 2022

Citation: (2022) INSC 812

Judges: Uday Umesh Lalit, CJI and S. Ravindra Bhat, J.

Can employees of aided educational institutions claim leave encashment and gratuity as part of their “salary”? The Supreme Court of India recently addressed this question, clarifying the scope of “salary” under the Rajasthan Non-Government Educational Institutions Act, 1989. This judgment settles a dispute regarding the entitlements of teachers who were absorbed into government service after working in aided institutions.
The core issue revolves around whether the term “salary,” as defined in the Act, includes benefits like leave encashment and gratuity, which are typically paid upon retirement or termination. The Court examined the relevant laws and rules to determine if these benefits should be considered part of an employee’s regular salary.
The judgment was delivered by a bench comprising Chief Justice Uday Umesh Lalit and Justice S. Ravindra Bhat, with the opinion authored by Justice Bhat.

Case Background

The appellants were teachers appointed in 1993 at a senior secondary school managed by a trust, which received grant-in-aid from the State of Rajasthan. They worked continuously until the school’s management decided to stop receiving the grant-in-aid from April 1, 2008. Consequently, the State ceased providing aid from March 1, 2012.

Meanwhile, the State had introduced the Rajasthan Voluntary Rural Education Service Rules, 2010, to provide security to employees of aided institutions by absorbing them into government service. The appellants sought absorption under these rules but were initially denied. They filed writ petitions in the High Court, which were dismissed.

The appellants then appealed to the Supreme Court, which, on July 19, 2016, ordered their absorption into government service. The Court directed the State to consider their absorption from the date the 2010 Rules came into effect and to restore their salaries from March 23, 2008. The Court also ordered the school management to pay 30% of the salary liability from March 2008 until the date of absorption.

Following this order, the school management filed an application stating they owed the teachers ₹57.68 lakhs in salary and ₹36.20 lakhs in privilege leave salary. The appellants also filed contempt proceedings, which were later withdrawn, allowing them to seek enforcement of the Supreme Court’s order in the High Court.

The appellants then approached the High Court, arguing that they had not been paid their privilege leave encashment and gratuity amounts. The High Court rejected their application, stating that since salary arrears had been paid, no further action was necessary. The High Court also opined that gratuity and leave encashment were not part of “salary”.

Timeline:

Course of Proceedings

The appellants initially filed writ petitions in the High Court seeking absorption into government service under the 2010 Rules. The High Court dismissed these petitions, leading to the appellants appealing to the Supreme Court. The Supreme Court set aside the High Court’s order and directed the State to absorb the teachers.

After the Supreme Court’s order, the school management raised concerns about the financial implications, and the appellants filed contempt proceedings. The Supreme Court allowed the appellants to withdraw the contempt petitions and approach the High Court for enforcement of the order. The High Court rejected the appellants’ application, leading to the current appeal before the Supreme Court.

Legal Framework

The case is governed by the Rajasthan Non-Government Educational Institutions Act, 1989 (hereafter “Act”) and the rules framed under it.

Section 2(r) of the Act defines “salary” as:

“the aggregate of the emoluments of an employee including dearness allowance or any other allowance or relief for the time being payable to him but does not include compensatory allowance.”

Section 2(d) of the Act defines “compensatory allowance” as:

“an allowance granted to meet personal expenditure necessitated by the special circumstances in which duty is performed and shall include a travelling allowance but shall not include a sumptuary allowance nor the grant of a free passage to or from any place out side India”

Section 29 of the Act states:

“29. Pay and allowances of employees. — (1) The scales of pay and allowances except compensatory allowances with respect to all the employees of an aided institution shall not be less than those prescribed for the staff belonging to similar categories in Government institutions. (2) Notwithstanding any contract to the contrary, the salary of an employee of a recognised institution, for any period after commencement of this Act, shall be paid to him by the management before the expiry of the fifteenth day or such earlier day, as the State Government may, by general or special order appoint, of the month next following the month in respect of which or part of which it is payable: Provided that if at any time the State Government deems it fit, it may prescribe a different procedure for payment or salary and allowances. (3) The salary shall be paid without deductions of any kind except those authorised by the rules made under this Act or by any other law for time being in force.”

The Rajasthan Non-Government Educational Institutions (Recognition Grant-In-Aid and Service Conditions, Etc.) Rules, 1993 (hereafter “1993 Rules”) also apply. Rule 47 deals with privilege leave. Rule 82 of the 1993 Rules states:

“82. Gratuity and Insurance. – (1) The employees of the Aided educational institutions shall be entitled to Gratuity as admissible under Payment of Gratuity Act, 1972 as amended. from time to time. (2) The managing committee shall arrange for Group Insurance of its employees under the respective scheme of Life Insurance Corporation of India.”

The Rajasthan Voluntary Rural Education Service Rules, 2010 (hereafter “2010 Rules”) were framed under Article 309 of the Constitution. Rule 5 of the 2010 Rules outlines the terms and conditions for the appointment of employees in government service.

Arguments

The appellants argued that the term “salary” includes both gratuity and leave encashment. They pointed out that one of the original appellants was paid gratuity and leave encashment by the school management. They relied on Rule 5 of the 2010 Rules, which they argued entitles employees to these benefits from private institutions. They also relied on the school management’s application to the Supreme Court, which acknowledged its liability for these payments. The appellants also cited the Supreme Court’s judgment in State of Rajasthan and Anr. v. Senior Higher Secondary School, Lachhmangarh [2005 (10) SCC 346], which held that leave encashment is included in the definition of salary.

The State argued that under Rule 5(xi) of the 2010 Rules, the employees had accepted all the terms and conditions of service and that Rule 5(viii) denied carry forward of privilege leave and required employees to seek leave encashment from their previous employers. The State also argued that under Rule 82 of the 1993 Rules, employees were entitled to gratuity under the Payment of Gratuity Act, 1972, but under Rule 14 of the 1993 Rules, gratuity was not an approved expenditure for the State, relying on Rajasthan Welfare Society v. State of Rajasthan [2005 (5) SCC 275].

The school management contended that the Supreme Court’s order was explicit and did not include leave encashment and gratuity within the term “salary”. They argued that the payment of gratuity to one employee was a solitary instance and did not create a general liability. They also argued that the term “salary” under the Rajasthan Non-Governmental Educational Institutions Act, 1989, means “aggregate of the emoluments of an employee” and does not include privilege leave. They relied on Senior Higher Secondary School Lachhmangarh (supra), arguing that the State should disburse the corresponding aid to enable payment of privileged leave. The school management also relied on the Chhattisgarh High Court decision in Ambika Mission Boys Model School v. State of Chhattisgarh [(2020) 2 CLR 177], which held that the State was primarily liable to disburse gratuity. They also cited Regional Provident Fund Commissioner v. Sanatan Dharam Girls Secondary School & Ors [2007 (1) SCC 268] to argue that aided institutions are under the control of the State.

Issues Framed by the Supreme Court

• Whether the term “salary” includes leave encashment and gratuity for employees of aided educational institutions in Rajasthan?
• What is the liability of the State and the aided institution for payment of leave encashment and gratuity to employees who have been absorbed into government service?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 2(r) of the Rajasthan Non-Government Educational Institutions Act, 1989: Definition of “salary.”
• Section 2(d) of the Rajasthan Non-Government Educational Institutions Act, 1989: Definition of “compensatory allowance.”
• Section 29 of the Rajasthan Non-Government Educational Institutions Act, 1989: Pay and allowances of employees.
• Rule 47 of the Rajasthan Non-Government Educational Institutions (Recognition Grant-In-Aid and Service Conditions, Etc.) Rules, 1993: Privilege leave.
• Rule 82 of the Rajasthan Non-Government Educational Institutions (Recognition Grant-In-Aid and Service Conditions, Etc.) Rules, 1993: Gratuity and insurance.
• Rule 5 of the Rajasthan Voluntary Rural Education Service Rules, 2010: Terms and conditions for appointment of employees in government service.

Judgment

The Supreme Court held that the term “salary” includes leave encashment, but not gratuity. The Court relied on its previous decision in Senior Higher Secondary School Lachhmangarh (supra), which held that leave encashment is part of salary under the Act. The Court also held that the State and the aided institution are liable to pay leave encashment in the ratio of 70:30, respectively. The Court held that the aided institution is solely liable for the payment of gratuity, relying on Rajasthan Welfare Society (supra).

The following table shows how each submission made by the parties was treated by the Court:

The following table shows how each authority was viewed by the Court:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure fair treatment of employees of aided educational institutions. The Court emphasized that the term “salary” should be interpreted broadly to include benefits like leave encashment, which are essentially deferred payments for services rendered. The Court also highlighted that the State cannot impose arbitrary and unconscionable conditions on employees who are being absorbed into government service. The Court considered the previous judgment in Senior Higher Secondary School Lachhmangarh (supra), which had already established that leave encashment is part of salary. The Court also took into account the fact that the aided institutions were receiving grants from the State, and therefore, the State had a responsibility to ensure that the employees received their due benefits.

The Court was also influenced by the fact that the appellants had to fight for their entitlements, and the State had initially denied them the benefit of regularization. The Court noted that the appellants had been paid their salaries and arrears according to the recommendations of the Pay Commission, but their claim for leave encashment and gratuity had not been addressed. The Court also considered the fact that the school management had admitted to its liability for these payments in its application to the Supreme Court.

The Court’s reasoning was also based on the principle that welfare legislation should be interpreted to promote education and improve the service conditions of teachers. The Court noted that teachers of aided private schools deserve to be treated at par with teachers of government institutions to the extent possible.

The ratio of fact to law demonstrates that the court relied more on legal principles and precedents to arrive at its decision, while also considering the factual aspects of the case.

Logical Reasoning

The following flowchart illustrates the court’s logical reasoning for the issue of whether “salary” includes leave encashment:

The following flowchart illustrates the court’s logical reasoning for the issue of whether “salary” includes gratuity:

The following flowchart illustrates the court’s logical reasoning for the issue of liability for leave encashment:

The following flowchart illustrates the court’s logical reasoning for the issue of liability for gratuity: