Supreme Court settles the implementation date for Fifth Pay Commission recommendations for Maharashtra State Financial Corporation employees (02 February 2023)

Date of the Judgment: 02 February 2023
Citation: Civil Appeal No(s). 778 of 2023 (Arising out of SLP (Civil) No. 1902 of 2019)
Judges: Aniruddha Bose, J. and S. Ravindra Bhat, J.
Can a cut-off date for implementing pay revisions unfairly discriminate against employees who retired before that date? The Supreme Court of India recently addressed this question, focusing on the Maharashtra State Financial Corporation (MSFC). The court examined whether denying revised pay scales to employees who retired before a specific date, while granting it to those in service on that date, amounted to discrimination and a violation of Article 14 of the Constitution of India. The judgment was authored by S. Ravindra Bhat, J.

Case Background

The Maharashtra State Financial Corporation (MSFC) is an autonomous corporation established under the State Financial Corporation Act. The employees of MSFC were awaiting the implementation of the Fifth Pay Commission recommendations. The last pay revision for MSFC employees was effective from 01.01.1986, which expired on 31.12.1989. MSFC proposed a pay revision effective from 01.01.1990, which was submitted to the State Government for approval in 1996. Pending this approval, five revisions were due. Instead of considering these, the MSFC Board arbitrarily implemented the Pay Commission’s recommendations effective from 01.01.1996. However, the benefits of this revision were only given to the 115 employees working at the time, depriving around 900 ex-employees who had also worked during the relevant period.

The appellant association, consisting of ex-employees (those who had superannuated, opted for VRS, resigned, or legal heirs of expired employees), challenged the decision of the State of Maharashtra dated 29.03.2010. This decision denied the benefit of revised pay scales, as recommended by the Fifth Pay Commission, to MSFC employees who had retired or died between 01.01.2006 and 29.03.2010. The revision was applied only to the 115 employees working as of 29.03.2010, with effect from 01.01.2006. The association argued that this was discriminatory, as all employees were in service as of 01.01.2006, when the revision was to take effect.

The High Court accepted the MSFC and State’s argument that financial considerations were important and that the benefit was granted to those on the rolls as of 29.03.2010 to incentivize them for better performance. The High Court also noted that the MSFC had stopped disbursing loans from 2005 and was mainly focused on recovery, thus motivating existing staff was necessary.

Timeline

Course of Proceedings

The appellant association challenged the decision of the State of Maharashtra dated 29.03.2010 before the Bombay High Court (Nagpur bench) in W.P. No. 1420/2013. The High Court upheld the decision of the State Government and MSFC, stating that financial considerations justified the cut-off date of 29.03.2010. The High Court also accepted MSFC’s argument that the benefit was granted to those on the rolls as of 29.03.2010 to motivate and incentivize them for better performance. The High Court relied on decisions of the Supreme Court that stated that financial implication is the relevant criteria for fixing the cut-off date. The High Court also noted that MSFC had stopped disbursing loans from 2005 and was mainly focused on recovery, thus motivating existing staff was necessary. Aggrieved by the decision of the High Court, the appellant association approached the Supreme Court by way of a Special Leave Petition.

Legal Framework

The primary legal framework for this case is based on Article 14 of the Constitution of India, which guarantees equality before the law and equal protection of the laws. The appellants argued that the cut-off date of 29.03.2010, for granting the benefit of pay revision, was arbitrary and discriminatory, violating Article 14. The State Financial Corporations Act, 1951, particularly Section 39, was also relevant, as it outlines the relationship between the State Government and the State Financial Corporations, requiring the latter to seek guidance and directives from the State Government in policy matters.

Article 43 of the Constitution of India was also considered, which obliges the state to ensure that all workers are provided with a living wage and a decent standard of living.

Arguments

Appellants’ Arguments

• The appellants argued that the cut-off date of 29.03.2010 for granting pay revision benefits was arbitrary. They contended that employees who had retired after long years of service were being unfairly deprived of the benefit of pay revision merely because MSFC chose to implement the decision on a particular date after their retirement.

• The appellants submitted that the State and MSFC could not discriminate between persons who worked during the same period and discharged their duties, merely because some of them had retired. The crucial date for pay revision was 01.01.2006, as all appellants were in service on that date.

• The appellants highlighted that all employees, including those who were ultimately deprived of pay revision due to retirement, were granted three interim reliefs by MSFC from September 1993 onwards towards the recommendations of the Fifth Pay Commission. This indicated that the Fifth Pay Commission’s recommendations were implemented from 01.01.1996.

• The appellants argued that the total liability of MSFC was not more than ₹32 crores, including past employees. They contended that singling out existing employees from a homogenous group amounted to hostile discrimination against those left out.

• The appellants relied on Clause 5 of the VRS scheme, which stated that employees whose request for voluntary retirement is accepted would be entitled to payment of arrears on account of revision of pay scales, if made effective retrospectively. They argued that those who sought voluntary retirement could not be left out.

• The appellants relied on the decisions of the Supreme Court in Col B.J. Akkara (Retd) v. Govt of India [2006] 7 Suppl. SCR 58; (2006) 11 SCC 709 and D.S. Nakara v. Union of India [1983] 2 SCR 165; (1983) 1 SCC 305, to argue that an employer cannot discriminate and divide a homogenous class of employees by an artificial cut-off date.

Respondents’ Arguments

• The respondents argued that MSFC, being an autonomous corporation, was not bound to follow the terms and conditions applicable to Maharashtra Government employees. It had to independently generate its income and was not bound by the decisions of the State to implement the decisions of the Fourth, Fifth and Sixth Pay Commissions.

• The respondents submitted that employees of the Corporation could not claim pay revision benefits as a matter of right without MSFC’s ability to bear the burden. They highlighted that the Corporation was running in losses.

• The respondents contended that the fixation of a cut-off date was a policy matter, dependent on various considerations, including financial constraints and the number of employees involved. They argued that the paying capacity of an employer was an important factor.

• The respondents submitted that the claim of those who retired prematurely by opting for VRS was to benefit both parties. The Corporation benefited by decreasing its liability, and the employee received an ex-gratia payment. Therefore, such employees were not entitled to further benefits.

• The respondents argued that limiting pay benefits to the 115 existing employees was justified to motivate them to recover maximum amounts from Non-Performing Assets (NPA) accounts.

• The respondents relied on the decisions of the Supreme Court in A.K. Bindal & Anr. v. Union of India & Ors. [2003] 3 SCR 928; (2003) 5 SCC 563, State of Punjab & Ors. v. Amar Nath Goyal & Ors. [2005] 2 Suppl. SCR 549 ; (2005) 6 SCC 754, and State of Rajasthan & Anr. v. Amritlal Gandhi & Ors. (1997) 2 SCC 342, to argue that financial implications upon the employer are a relevant factor.

Submissions Table

Issues Framed by the Supreme Court

The core issue before the Supreme Court was whether the decision of the State of Maharashtra and MSFC to deny the benefit of pay revision to employees who had retired or died during the period of 01.01.2006 to 29.03.2010, while granting it to those in service on 29.03.2010, was discriminatory and violated Article 14 of the Constitution of India.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Col B.J. Akkara (Retd) v. Govt of India [2006] 7 Suppl. SCR 58; (2006) 11 SCC 709 – Supreme Court of India: Used to argue that an employer cannot discriminate and divide a homogenous class of employees by an artificial cut-off date.
• D.S. Nakara v. Union of India [1983] 2 SCR 165; (1983) 1 SCC 305 – Supreme Court of India: Used to argue that an employer cannot discriminate and divide a homogenous class of employees by an artificial cut-off date.
• Maharashtra Forest Guards & Foresters Union v. State of Maharashtra [2017] 14 SCR 446; (2018) 1 SCC 149 – Supreme Court of India: Cited to support the principle that creating a class within a class is impermissible.
• U.P. Raghavendra Acharya & Ors. v. State of Karnataka & Ors. [2006] 2 Suppl. SCR 582 ; (2006) 9 SCC 630 – Supreme Court of India: Cited to support the view that discrimination based on the date of retirement is invidious.
• All Manipur Pensioners Association by its Secretary v. State of Manipur & Ors. [2019] 9 SCR 905; (2020) 14 SCC 625 – Supreme Court of India: Cited to support the view that classification based on the date of retirement for pension benefits is discriminatory.
• Hindustan Lever Ltd. v. B.N. Dongre [1994] 2 Suppl. SCR 217; (1994) 6 SCC 157 – Supreme Court of India: Cited to highlight the need for providing a mechanism to neutralize price increases through dearness allowance.
• A.K. Bindal & Anr. v. Union of India & Ors. [2003] 3 SCR 928; (2003) 5 SCC 563 – Supreme Court of India: Cited to emphasize the financial implications upon the employer as a relevant factor. Also to show that VRS employees cannot claim parity.
• State of Punjab & Ors. v. Amar Nath Goyal & Ors. [2005] 2 Suppl. SCR 549 ; (2005) 6 SCC 754 – Supreme Court of India: Cited to emphasize the financial implications upon the employer as a relevant factor.
• State of Rajasthan & Anr. v. Amritlal Gandhi & Ors. (1997) 2 SCC 342 – Supreme Court of India: Cited to emphasize the financial implications upon the employer as a relevant factor.
• State of J&K v. Triloki Nath Khosa [1974] 1 SCR 771; (1974) 1 SCC 19 – Supreme Court of India: Cited for the principle that discrimination is the essence of classification and is only unconstitutional if it rests on an unreasonable basis.

Legal Provisions Considered by the Court:

• Article 14 of the Constitution of India: Guarantees equality before the law and equal protection of the laws.
• Article 43 of the Constitution of India: Obliges the state to ensure that all workers are provided with a living wage and a decent standard of living.
• Section 39 of the State Financial Corporations Act, 1951: Requires State Financial Corporations to seek guidance and directives from the State Government in policy matters.

Authority Consideration Table

Judgment

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

How each authority was viewed by the Court?

• Col B.J. Akkara (Retd) v. Govt of India [2006] 7 Suppl. SCR 58; (2006) 11 SCC 709 and D.S. Nakara v. Union of India [1983] 2 SCR 165; (1983) 1 SCC 305: The Court relied on these cases to support its finding that the cut-off date was arbitrary and discriminatory.
• Maharashtra Forest Guards & Foresters Union v. State of Maharashtra [2017] 14 SCR 446; (2018) 1 SCC 149: The Court used this case to reinforce the principle that creating a class within a class is impermissible.
• U.P. Raghavendra Acharya & Ors. v. State of Karnataka & Ors. [2006] 2 Suppl. SCR 582 ; (2006) 9 SCC 630: The Court relied on this case to support the view that discrimination based on the date of retirement is invidious.
• All Manipur Pensioners Association by its Secretary v. State of Manipur & Ors. [2019] 9 SCR 905; (2020) 14 SCC 625: The Court used this case to support the view that classification based on the date of retirement for pension benefits is discriminatory.
• Hindustan Lever Ltd. v. B.N. Dongre [1994] 2 Suppl. SCR 217; (1994) 6 SCC 157: The Court cited this case to emphasize the need for a mechanism to neutralize price increases through dearness allowance.
• A.K. Bindal & Anr. v. Union of India & Ors. [2003] 3 SCR 928; (2003) 5 SCC 563: The Court distinguished this case, holding that VRS employees cannot claim parity with those who retired upon superannuation.
• State of Punjab & Ors& Ors. v. Amar Nath Goyal & Ors. [2005] 2 Suppl. SCR 549 ; (2005) 6 SCC 754 and State of Rajasthan & Anr. v. Amritlal Gandhi & Ors. (1997) 2 SCC 342: The Court acknowledged these cases but held that the financial implications could not justify the arbitrary cut-off date in this instance.
• State of J&K v. Triloki Nath Khosa [1974] 1 SCR 771; (1974) 1 SCC 19: The Court cited this case for the principle that discrimination is the essence of classification and is only unconstitutional if it rests on an unreasonable basis, which it found to be the case here.

Ratio Decidendi

The ratio decidendi of this judgment is that a cut-off date for implementing pay revision benefits cannot be arbitrary and discriminatory, especially when it results in denying benefits to employees who worked during the relevant period. The Supreme Court emphasized that all employees who were in service as of the effective date of the pay revision (01.01.2006), form a homogenous class, and denying benefits to those who retired before an arbitrary cut-off date (29.03.2010) is a violation of Article 14 of the Constitution of India. The Court also clarified that while financial constraints can be a factor, they cannot justify arbitrary discrimination among employees of the same class.

Decision

The Supreme Court allowed the appeal and set aside the judgment of the Bombay High Court. The Court directed the respondents to extend the benefit of the Fifth Pay Commission recommendations to all employees of MSFC who were in service as of 01.01.2006 and retired or died before 29.03.2010. The Court clarified that this benefit should not be extended to those who had opted for Voluntary Retirement Scheme (VRS). The Court also directed that all arrears should be paid to the appellants within a period of six months from the date of the judgment.

Flowchart of the Case

Ratio Table

Conclusion

The Supreme Court’s judgment in this case is a significant victory for employees of the Maharashtra State Financial Corporation who were unfairly denied the benefits of the Fifth Pay Commission recommendations due to an arbitrary cut-off date. The Court’s ruling reinforces the principle that a cut-off date for implementing pay revisions must be reasonable and not discriminatory. This judgment serves as a reminder to employers, both in the public and private sectors, that they cannot arbitrarily create classifications within a homogenous group of employees and deny them benefits based on an artificial cut-off date. The Court also reiterated that while financial considerations are relevant, they cannot justify actions that violate fundamental rights, particularly the right to equality under Article 14 of the Constitution. The judgment has a wide-reaching impact on service law and reinforces the importance of fair and equitable treatment of employees, regardless of their retirement status.