Supreme Court settles definition of wages under Employees’ State Insurance Act: ESI Corporation vs. Gnambigai Mills Ltd. (2005)

Introduction

Date of the Judgment: 19th July 2005

Citation: [Not Available in Source]

Judges: S.N. Variava and Dr. AR. Lakshmanan

In a dispute concerning contributions to the Employees’ State Insurance Corporation (ESIC), the Supreme Court of India addressed whether certain payments made to employees, initially termed as ‘ex-gratia’ in a compromise, should be considered as ‘wages’ under the Employees’ State Insurance Act, 1948. The core issue revolved around interpreting Section 2(22) of the Act, which defines wages. The bench, comprising Justices S.N. Variava and Dr. AR. Lakshmanan, delivered the judgment.

Case Background

The case originated from a wage dispute between the employees and Gnambigai Mills Ltd. The dispute was referred to a Special Tribunal in Madras for adjudication. During the pendency of the dispute, the Government of Tamil Nadu issued orders on July 15, 1985, and July 29, 1985, under Section 10-B of the Industrial Disputes Act, 1947, directing certain payments to the workmen. These orders stipulated that any money paid could be deducted from the monetary benefits the employees would receive under the Tribunal’s award.

Ultimately, the Respondent Company entered into a Memo of Compromise with the employees. The Special Tribunal approved this compromise, effectively adopting the terms of the settlement without independently determining whether the payments made under the government orders constituted wages. Clause 3(c) of this compromise stated that the payments made under the Government orders would be treated as an ex-gratia payment and not be adjusted against future benefits.

The Employees State Insurance Corporation (ESIC) then claimed contributions on the amounts paid under these government orders, leading to a dispute over whether these payments should be considered ‘wages’ for the purpose of ESIC contributions.

Timeline

Course of Proceedings

The Employees State Insurance Corporation sought to recover contributions on the amounts paid under the Government orders, leading to a Writ Petition before the High Court. A Single Judge of the High Court ruled that the amounts paid did not constitute “wages”. The Employees State Insurance Corporation then filed a LPA, which was dismissed by the impugned Judgment. The High Court judgments reasoned that while the payments would typically be considered “wages” under Section 2(22) of The Employees’ State Insurance Act, 1948, the Tribunal’s characterization of these payments as “ex-gratia payments” precluded them from being considered ‘wages’.

Legal Framework

The legal framework relevant to this case includes:

• Section 10-B of the Industrial Disputes Act, 1947: This section empowers the State Government to issue orders regarding the terms and conditions of service pending the settlement of disputes. It allows the government to direct employers to observe specific terms of employment, including the payment of money to workmen.
  
  The section states:
  
  “10-B Power to issue order regarding terms and conditions of service pending settlement of disputes. –
  (1) Where an industrial dispute has been referred by the State Government to a Labour Court or a Tribunal under sub-section (1) of Section 10 and if, in the opinion of the State Government it is necessary or expedient so to do for securing the public safety or convenience or the maintenance of public order or supplies and services essential to the life of the community or for maintaining employment or industrial peace in the establishment concerning which such reference has been made, it may, by general or special order, make provision, –
  (a) for requiring the employer or workman or both to observe such terms and conditions of employment as may be specified in the order or as may be determined in accordance with the order, including payment of money by the employer to any person who is or has been a workman;
  (b) for requiring any public utility service not to close or remain closed and to work or continue to work on such terms and conditions as may be specified in the order; and
  (c) for any incidental or supplementary matter which appears to it to be necessary or expedient for the purpose of the order;
  Provided that no order made under this sub-section shall require any employer to observe terms and conditions of employment less favourable to the workman than those which were applicable to them at any time within three months immediately preceding the date of the order.
  (3) Any money paid by an employer to any person in pursuance of an order under sub-section (1), may be deducted by that employer from out of any monetary benefit to which such person becomes entitled under the provisions of any award passed by the Labour Court or the Tribunal as the case may be.”
• Section 2(22) of The Employees’ State Insurance Act, 1948: This section defines “wages” for the purpose of determining contributions to the Employees’ State Insurance.
  
  The section states:
  
  “2(22) “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 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;”

Arguments

• Arguments on behalf of the Employees State Insurance Corporation:
  • The Employees State Insurance Corporation (ESIC) contended that the amounts paid to the employees under the Government orders dated July 15, 1985, and July 29, 1985, should be considered as ‘wages’ within the meaning of Section 2(22) of The Employees’ State Insurance Act, 1948.
  • ESIC argued that these payments were remuneration paid in cash to employees as per the terms of their employment contract, fulfilling the criteria for ‘wages’ under the Act.
  • The Corporation asserted that the High Court erred in concluding that the payments ceased to be wages merely because the Tribunal’s award termed them as ‘ex-gratia payments’ in a compromise between the parties.
• Arguments on behalf of Gnambigai Mills Ltd.:
  • Gnambigai Mills Ltd. likely argued that the payments made under the Government orders should not be considered as ‘wages’ because the Tribunal’s award, based on a compromise with the employees, explicitly termed these payments as ‘ex-gratia payments’.
  • The company probably contended that this characterization in the compromise meant that the payments were not intended to be part of the employees’ regular wages and, therefore, should not be subject to ESIC contributions.
  • The Respondent may have relied on the principle that a compromise reached between the parties and endorsed by the Tribunal should be respected and given effect, including the explicit terms regarding the nature of the payments.

Issues Framed by the Supreme Court

1. Whether the amounts paid to the employees under the Government orders dated July 15, 1985, and July 29, 1985, constitute ‘wages’ within the meaning of Section 2(22) of The Employees’ State Insurance Act, 1948.
2. Whether the High Court was correct in concluding that the payments ceased to be wages because the Tribunal’s award termed them as ‘ex-gratia payments’ in a compromise between the parties.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

• Section 10-B of the Industrial Disputes Act, 1947: Considered for the power of the State Government to issue orders regarding terms and conditions of service pending settlement of disputes.
• Section 2(22) of The Employees’ State Insurance Act, 1948: Considered for the definition of “wages”.

Judgment

How each authority was viewed by the Court?

• Section 2(22) of The Employees’ State Insurance Act, 1948: The Court relied on this section to define ‘wages’ and determine whether the payments in question fell within that definition.
• Section 10-B of the Industrial Disputes Act, 1947: The Court considered the nature of the government orders issued under this provision, which directed payments to the workmen.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the understanding that the payments made under the Government orders were, in essence, remuneration paid to the employees as part of their employment conditions. The Court emphasized that the mere labeling of these payments as ‘ex-gratia’ in a subsequent compromise could not override their fundamental nature as wages, especially since the Tribunal had not independently assessed the nature of these payments.

Logical Reasoning

Key Takeaways

• ✓ Payments made to employees as part of their employment conditions are considered wages, regardless of subsequent labeling as ‘ex-gratia’.
• ✓ Tribunals must independently assess the nature of payments rather than merely endorsing compromises.
• ✓ The definition of ‘wages’ under Section 2(22) of The Employees’ State Insurance Act, 1948, is broad and includes any remuneration paid or payable in cash to an employee if the terms of the contract of employment are fulfilled.

Development of Law

The ratio decidendi of this case is that payments made to employees as part of their employment conditions qualify as ‘wages’ under the Employees’ State Insurance Act, 1948, irrespective of being termed ‘ex-gratia’ in a later compromise, provided they meet the criteria specified in Section 2(22) of the Act. This clarifies that the substance of the payment, rather than its label, determines its categorization as wages for the purpose of ESIC contributions.

Conclusion

In conclusion, the Supreme Court allowed the appeal, setting aside the judgments of the High Court. The Court held that the amounts paid to the employees under the Government orders constituted wages, and contributions would have to be made on those amounts as per the statutory provisions.