IN THE HIGH COURT OF KERALA AT ERNAKULAM
Ins.APP.No. 5 of 2008()
1. THE DEPUTY DIRECTOR,
... Petitioner
Vs
1. TRACO CABLE COMPANY LIMITED
... Respondent
For Petitioner :SRI.T.V.AJAYAKUMAR
For Respondent :SRI.E.K.NANDAKUMAR
The Hon'ble MR. Justice K.M.JOSEPH
The Hon'ble MRS. Justice M.C.HARI RANI
Dated :27/09/2010
O R D E R
K.M. JOSEPH &
M. C. HARI RANI, JJ.
-----------------------------------------
INS.APPEAL NO.5 OF 2008 A
------------------------------------------
Dated this the 27th September, 2010.
JUDGMENT
K.M. Joseph, J.
This is an Appeal filed under Section 82(2) of the Employees’
State Insurance Act, 1948 (hereinafter referred to as the Act). The
appellant challenges the order passed by the Insurance Court in
I.C.No.111 of 2003 which is an Application filed by the
respondent herein challenging the proceedings under Section 45A
of the Act. The proceedings under Section 45A arose from a
demand made for additional contribution from the respondent for
having paid certain sums to its employees by way of production
incentive for the period September, 1999 to March, 2000. The
respondent is a Public Sector Unit of the Government of Kerala.
The substantial questions of law framed are as follows:
INAP.5 OF 2008 2
“(i) Whether the declaration made by the
learned EI Court that the production incentive paid by
the applicant is not wages and hence no ESI
contribution is payable in this regard and all the
findings made in its support are not erroneous,
perverse and against the definition of wages under
Section 2(22) of the ESI Act ?
(ii) Whether the production incentive compelled
to be paid by the applicant to the employees on the
basis of an agreement arrived at between the
Management and Union is not a contract of
employment express or implied and would it not come
within the definition of wages under Section 2(22) of
the ESI Act ?”
2. It is the case of the respondent that the amounts paid by
way of production incentive to its employees was a voluntary
payment under a voluntary scheme unilaterally initiated by it. It
bagged an order from the BSNL. The contract with BSNL
provided that if the respondent did not honour its commitment
under the contract within the time limit, it will have to pay
INAP.5 OF 2008 3
liquidated damages. According to the respondent, it approached its
employees and laid the facts before them. They were not
agreeable, going by the averments. We will extract the case set up
by the respondent before the Court in regard to the matter as
follows:
“5. It is submitted that during the year 1999, there
was more orders from BSNL which were to be
delivered within the specified time failing which
company has to pay liquidated damages. In spite of
the repeated requests by the applicant, the workers
were reluctant to give more production as according
to them, the norm fixed only need be given. The
applicant took up the issue with the unions and the
unions insisted that more production can be given
only on payment of incentive. The management was
constrained to pay incentive based on the production
given by the workers. The payment of incentive was
only for a particular period and on attaining the
target, the payment of incentive was stopped. The
stoppage of incentive also was accepted by the unions
as well as by the workers. This itself shows that it was
INAP.5 OF 2008 4
never a service condition and the decision to pay
incentive was only to encourage the workers to give
more production.”
Consequent upon the same, it is not in dispute that the respondent
proceeded to issue a Notice. The terms of the said Notice are as
under:
“TRACO CABLE COMPANY LTD.
Panampally Nagar, Kochi
No.15/P&A/2926 7th
October, 1999
NOTICE
The Management is pleased to introduce an
Adhoc Incentive Scheme for the JFDC unit, Thiruvalla
with a view to enhance production and execute the
order received from the Department of
Telecommunications in time. Timely delivery will
ensure proper share of orders from DOT in the
coming year which is very important for the growth of
our company. As per the scheme, incentive will be
paid on monthly basis for a minimum production of 1
LCKM of cables. Incentive rates for attaining various
INAP.5 OF 2008 5
production ranges are as shown below:
Monthly production Incentive in
in LCKM Rs./p.m. Remarks
Per employee
_________________ ______________ _______________
1.00 to 1.04 250 In the case of
the
1.05 to 1.09 350 difference
between the
slabs, the
1.10 to 1.14 500 incentive
corresponding
1.15 to 1.19 650 to the lower slab
will be applicable
1.20 to 1.24 1,000
1.25 to 1.29 1,300
1.30 & above 1,500"
Eligibility for Incentive:
1. The incentive will be given in full to all
employees working in the factory side except those
belonging to the ministerial category.
2. Employees belonging to the ministerial category
as well as other employees attached to the
administrative office will be given 75% of t4he above
incentive.
INAP.5 OF 2008 6
3. A minimum of 22 days attendance (including
eligible leave) is required for getting the above
incentive.
4. For those employees having attendance above 15
days and below 22 days (including eligible leave) will
be getting only 50% of the above incentive.
5. Those employees having attendance below 15
days (inclusive of eligible leave) will not be eligible
for any incentive for that particular month.
The above adhoc incentive scheme will be in
force from September, 99 to March, 2000.
Sd/=
For Traco Cables
Company Limited”
It is on the said basis that the respondent contended that the
payments which were made would not qualify to be comprehended
with the scope of Section 2(22) of the Act by which the word
“wages” is defined. We extract the provision as hereunder:
“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
INAP.5 OF 2008 7
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;
) 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”.
3. The Court proceeded to accept the contention of the
respondent that it is not wages. In doing so, the Court has
proceeded on the basis that there is no basis for the case of the
respondent that the amount was paid on the basis of an agreement
between the respondent and the workers’ union, as there was no
evidence for the same. It is found that the Scheme was introduced
unilaterally and voluntarily by the respondent, and that the
INAP.5 OF 2008 8
production incentive was withdrawn in 2000 itself. It is found that
the production incentive was introduced and implemented not on
the basis of any contract of employment expressed or implied, but
by a voluntary act. Reference is made thereafter to the Judgment
of a Division Bench in Carborundum Universal v. ESI Corporation
(1976 (1) LLJ 17). Thereafter, it is stated that the employees are
not entitled to claim incentive as a matter of right, apparently for
the reason that it was by a voluntary act which was introduced and
the same was withdrawn subsequently and for this reason, it is
stated that it is not remuneration either as contemplated in the First
part or in the Second Part or additional remuneration in the Third
Part. The Court also drew support from the Judgment in S.T.
Reddiar & Sons v. Regional Director (1989 (1) LLJ 285) and
Management of Kuttukkaran Engine Rebuilders v. Employees’
State Insurance Corporation (1999 (3) LLJ (Suppl.) 31).
4. We heard Shri T. V. Ajayakumar, learmed counsel for the
appellant and Shri Benny P. Thomas, learned counsel appearing on
INAP.5 OF 2008 9
behalf of the respondent.
5. Learned counsel for the appellant would first submit that
the nature of the payment made by the respondent to its employees
must be appreciated in the context of undisputed facts. As already
noted, the respondent bagged an order which involved increased
production. Increased production was impossible with the level of
work that was being turned out by its employees. Respondent had
to approach its employees. They were not agreeable to increase
production apparently on the basis of the payments which were
made. Respondent, thereupon, agreed to increase the payment and
this decision was notified to the workers. He lays stress on the
word “constrained” in the Application. Therefore, he would
contend that the payment would fall within the four corners of First
Part of the definition of the word “wages”, namely it was a
contractual payment. He would further submit that, at any rate, the
Court has acted illegally in not holding that the incentive would
fall within the Third Part, namely, he would contend that it was
INAP.5 OF 2008 10
additional remuneration.
6. He would contend that the matter is no longer res integra,
as it is concluded by the Apex Court in the decision in M/s.
Harihar Polyfibres v. The Regional Director, ESI Corporation (AIR
1984 SC 1680). He would further bring to our attention the
decision in Handloom House, Ernakulam v. Regional Director, ESI
(AIR 1999 SC 1697). He also referred to the decisions of this
Court in United Brewaries Ltd. v. ESI Corporation (2003 (1) KLT
158) and The Regional Director of ESI Corporation v. Hotel
Alukkas (2008 (1) KLJ 296).
7. Per contra, learned counsel for the respondent would
submit that the payment was a voluntary payment made in the
circumstances which we have already adverted to. There was no
settlement within the meaning of Section 12 or Section 18 of the
Industrial Disputes Act and without there being an agreement as
settlement under Section 12 or Section 18, he would submit that it
is inconceivable as to how it could be contended that the
INAP.5 OF 2008 11
production incentive paid in this case could be said to be paid on
the basis of the terms of the contract of employment. He would
submit that the payment lasted only for a short period of time and it
was unilaterlly withdrawn after the said period of time. He also
drew our attention to the decision of the Apex Court in Whirlpool
of India Ltd. v. E.S.I.C. ((2000) 1 LLJ 1101). He also relied on
the decision of the Apex Court in Regional Director, Employees’
State Insurance Corporation and Another v. Bata Shoe Co. (P) Ltd.
(AIR 1986 SC 237).
8. After having heard the learned counsel appearing for the
parties, we are of the view that this case can be disposed of with a
reference to the Third Part of Section 2(22) of the Act defining the
word “wages”, that is to say, we do not deem it necessary to go
into the question as to whether the payment can be said to have
been made under a contract of employment express or implied, as
we would think that the appellant is justified in contending that the
incentive bonus paid by the respondent Company to its employees
INAP.5 OF 2008 12
would fall in the Third Part, namely it would constitute additional
remuneration paid for the following reasons:
The definition of the word “wages” has been subjected to
interpretation at the hand of the Apex Court on a number of
occasions. As far as the First Part is concerned, the payment must
necessarily be in terms of a contract of employment, be it express
or implied. The Second Part of the definition of the word “wages”
need not detain us in the facts of this case. The Third Part of the
definition of the word “wages” provides for including any
additional remuneration, if it is paid at intervals not exceeding two
months. However, it does not include any contribution paid by the
employer to any pension fund or provident fund under the Act, any
travelling allowance or value of travelling concession and any sum
paid to a person employed, to defray special expenses entailed of
him by the nature of his appointment and any gratuity payable on
discharge. This is the statutory scheme of the definition “wages”.
In M/s. Harihar Polyfibres v. The Regional Director, ESI
INAP.5 OF 2008 13
Corporation (AIR 1984 SC 1680), the Apex Court considered the
question as to whether among other things “incentive wages” could
be treated as part of wages, as defined in the Act. The Court, inter
alia, held as follows:
“The interposition of the clause `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 between the first clause, `all remuneration paid
or payable in cash to an employee, if the terms of the
contract of employment, express or implied, was
fulfilled’ and the third clause, `other additional
remuneration, if any, paid at intervals not exceeding
two months’, makes it abundantly clear that while
`remuneration’ under the first clause has to be under a
contract of employment, express or implied,
‘remuneration’ under the third clause need not be
under the contract of employment but may be any
`additional remuneration’ outside the contract of
employment.”
Thereafter, the Apex Court has further held as follows:
“3. In Employees’ State Insurance Corporation,
INAP.5 OF 2008 14
Hyderabad v. Andhra Pradesh Paper Mills Ltd.,
Rajahmundry, 1978 Lab IC 19: (AIR 1978 Andh.
Pra.18), a Full Bench (Divan, C.J., Raghuvir and
Gangadhara Rao, JJ.) of the Andhra Pradesh High
Court held that incentive bonus paid to an employee
(which the Court, on the facts of the case, found was
not remuneration in terms of the contract of
employment, express or implied) fell within the third
part of the definition of `wages’ that is `additional
remuneration if any, paid at intervals not exceeding
two months’. The Full Bench said (para 19):-
“The word `other’ appearing at the
commencement of the third part of the definition of
wages under Section 2(22) indicates that it must be
remuneration or additional remuneration other than
the remuneration which is referred to in the earlier
part of the definition vis., all remuneration paid or
payable, in cash to an employee, if the terms of the
contract of employment, express or implied, were
fulfilled and incentive bonus in the present scheme is
certainly additional remuneration. It must be
emphasized at this stage that under the third part of
the definition of `wages’ it is actual factum of payment
INAP.5 OF 2008 15
which counts because the word used is `paid’ as
distinguished from `paid’ or `payable’. The moment
you get any additional remuneration other than the
remuneration payable under the contract of
employment and if this additional remuneration is
paid at intervals not exceeding two months, it becomes
wages by virtue of the third part of the definition of
`wages'”.
In The Regional Director, Employees State Insurance Corporation
and Another v. Bata Shoe Company (Pvt.) Ltd. 1986 LLJ 138), we
notice that a Bench of two Judges of the Apex Court has proceeded
to consider whether attendance bonus paid pursuant to a settlement
between the workmen and management could be regarded as
remuneration paid or payable. The Court proceeded to hold as
follows:
“The attendance bonus paid to the employees is
an exgratia payment and is paid as a gesture of
goodwill. It is neither production bonus nor any
customary bonus nor any statutory bonus. It cannot be
regarded as part of the contract of employment. The
INAP.5 OF 2008 16
standing orders which originally dealt with attendance
bonus was subsequently amended, excluding
attendance bonus from its purview. In our opinion,
bonus paid under successive settlements and
agreements cannot be regarded as a remuneration
paid or payable to the employees in fulfilment of the
terms of contract of employment…………The concept of
bonus is that it is a cash incentive paid in addition to
wages and given conditionally on certain standards of
attendance and efficiency being attained. When wages
fall short of living wages and when the Industry makes
huge profits part of which are due to the contribution
which the workmen make in increasing production, the
demand for bonus becomes an Industrial claim.
Payments made by employer as an expression of
goodwill towards its employees does not fall within the
concept of bonus. Hence attendance bonus will not
fall in the first category of remuneration enumerated in
the definition of wages under Employees State
Insurance Act.”
But, more importantly, in regard to the contention based on the
attendance bonus being wages, as it was additional remuneration,
INAP.5 OF 2008 17
the Court held as follows:
“9. The second category of remuneration defined
within the expression “wages” by sub-s.(22) of S.2 of
the Act speaks of other additional remuneration paid at
intervals not exceeding two months. It cannot be
disputed that the bonus under consideration here is not
paid at intervals not exceeding two months. It is
payable “one month after the end of each quarter.”
10. We have carefully perused the terms of the
definition of “wages” set forth in sub-s.(22) of S.2 of
the Employees’ State Insurance Act, 1948, and we are
satisfied that the bonus in question in these appeals
does not fall under any category or class mentioned in
the definition.”
That was a case where the payment did not fall under the third part
of the word “wages” having regard to the fact that the amount was
payable only one month after the end of each quarter. Having
regard to the embargo in the third part against reckoning any
payment made when the payment is made at the interval exceeding
two months, clearly the payment would not qualify as additional
INAP.5 OF 2008 18
remuneration. We further notice that this is a Judgment which was
rendered by the Apex Court without referring to the earlier
Judgment of a two Judge Bench in M/s. Harihar Polyfibres v. The
Regional Director, ESI Corporation (AIR 1984 SC 1680). In
Handloom House, Ernakulam v. Regional Director, ESI (AIR 1999
SC 1697), the Apex Court considered the question whether
incentive bonus and sales commission were part of “wages” under
Section 2(22) of the Act. The Court referred to the decision in
M/s. Harihar Polyfibres’ case supra and also the decision in
Modella Woollens Ltd. v. E.S.I.C. (1994 Suppl. (3) SCC 580).
The Court approved of the decision of the Apex Court in Harihar
Polyfibres’ case. In Whirlpool of India Ltd. v. E.S.I.C. (2000(1)
LLJ 1101), the Court was considering the question as to whether
production incentive paid under a production incentive scheme was
to be included in the “wages” for determining the contribution
payable under the Act. Therein, the Court, inter alia, held as
follows:
INAP.5 OF 2008 19
“13. Learned counsel for the respondent made a
feeble attempt to contend that the payment in the
present case would fall within the first part of
definition of “wages” as there is an implied contract
for payment of the said amount. As already noticed,
none of the Courts has held that the amount in question
was paid or was payable on fulfillment of terms of
contract of employment. Further, learned counsel
fairly conceded that the payment under the scheme
cannot be termed as payment under settlement as
contemplated by Section 2(p) of the Industrial Disputes
Act. It also cannot be held that the payment in
question under the scheme would amount to a
condition of service requiring compliance of Section 9-
A of the Industrial Disputes Act, for effecting any
change in the conditions of service. The payment thus
does not fall within the first part of definition of
`wages’.”
However, it is more important to notice that in paragraph 14, the
Court also held as follows:
“14. It is evident that the additional
remuneration to become wages has to be “paid” at
INAP.5 OF 2008 20
intervals not exceeding two months as distinguished
from `being payable’. Thus, under the last part there
has to be actual payment. The High Court has found
that the payment was made quarterly. It is not for us to
rewrite the definition of wages even if we assume that
there is a possibility of misuse by employers by making
the payment at a period exceeding two months and thus
circumventing the provisions of the Act. When in the
last part of Section 2(22), the word used is `paid’, we
cannot add the word `payable’ or other similar
expression thereto.”
Therefore, this is also a case where apparently matters turned on
the fact that the payment was being made quarterly and we are of
the view that this decision will not advance the case of the
respondent.
9. In The Regional Director of ESI Corporation v. Hotel
Alukkas (2008 (1) KLJ 296), a fairly large sum of money, namely
Rs.4,24,940/= was paid by the employer to the employees. The
employer contended that it was a gift. The Court rejected its
contention and proceeded to, inter alia, hold as follows:
INAP.5 OF 2008 21
“The definition clause would clearly indicate that
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. Expression “additional remuneration” has to be
noted. Additional remuneration in the nature of
incentive is paid to the employees for the service
rendered by them. It cannot be said that those
payments have got the character of gift. First of all,
there is nothing to show that it partakes the character
of a gift and that the employer can always recover it
from the employees. AW-1 deposed before the court
that at any moment the employer could withdraw the
said amount and that it would not be a remuneration
under any settlement or part of service conditions. We
find it difficult to accept that contention. It is difficult
to believe that an amount of nearly Rs.4 Lakhs paid to
the employees by way of gift. On the other hand, it is
the specific stand of the Corporation that incentive was
paid to the employees in all the months at fixed rates.”
INAP.5 OF 2008 22
In Braithwaite & Co. (India) Ltd. v. Employees’ State Insurance
Corporation (1968 (1) LLJ 18), the Court was dealing with the
question as to whether inam paid or to be paid under Inam Scheme
initiated was “wages” under the Act. The Court held as follows:
“The features of the scheme which indicate that
the payment of the inam did not become a term of the
contract of employment are the following:
(1) the payment of inam was not among the
original terms of contract of employment.
(2) The only offer under the scheme was to make
an incentive payment, if certain specified conditions
were fulfilled by the employees.
(3) Payment of inam was dependent upon the
employee exceeding the target of output appropriately
applicable to him.
(4) If the targets are not achieved due to lack of
orders, lack of materials, break-down of machinery,
lack of labour, strikes, lockouts, go-slow or any other
reason whatsoever, no inam was to be awarded. This
is inconsistent with the payment of inam having
INAP.5 OF 2008 23
become an implied term of the contract of employment.
(5) It is also made clear in the scheme that the
payment of inam was in no way connected with
wages.”
We must notice that the Court did not consider Section 2(22).
Thirdly, namely, the Court did not consider whether it is additional
remuneration. At any rate, we must not overlook the fact that the
Apex Court has in subsequent rulings, namely, M/s. Harihar
polyfibres v. The Regional Director, ESI Corporation (AIR 1984
SC 1680), Handloom House, Ernakulam v. Regional Director, ESI
(AIR 1999 SC 1697), and a Bench of this Court in The Regional
Director of ESI Corporation v. Hotel Alukkas (2008 (1) KLJ 296)
approved of the view taken in M/s. Harihar polyfibres v. The
Regional Director, ESI Corporation (AIR 1984 SC 1680), namely
that any amount which is paid without the support of an agreement
as understood in the first part of Section 2(22) will still be
additional remuneration, subject to it not falling in any excepted
INAP.5 OF 2008 24
categories and it not being paid at intervals exceeding two months.
10. We would not think that the Court was justified in
relying on the decision in S.T. Reddiar & Sons v. Regional
Director (1989 (II) LLJ 285) and Management of kuttukkaran
Engine Rebuilders v. Employees’ State Insurance Corporation
(1999 (III) LLJ (Supp) 31), having regard to the law laid down by
the Apex Court in M/s. Harihar Polyfibres v. The Regional
Director, ESI Corporation (AIR 1984 SC 1680) which we have
adverted to. Similarly, we are not impressed by the reliance placed
by the Court on the decision of a Bench of this Court in
Carborundum Universal v. ESI Corporation (1976 (1) LLJ 17).
We notice that it related essentially to payments made under a
contract. We must also notice that this is a case where the pleading
in the application of the respondent which we have adverted to
itself would show that the respondent was faced with the prospect
of being saddled with liability to pay liquidated damages, if it did
not honour its commitment under the contract with BSNL whose
INAP.5 OF 2008 25
orders it had bagged. The workers were reluctant to give more
production, as according to them, they were obliged only to
perform in accordance with the norm which was fixed. That itself
means that they had agreed for a particular norm which transforms
into a particular production figure or in substance the work was to
be pegged at a particular level. The performance of the obligations
of the respondent under its contract with BSNL within the time
provided for in the contract, necessarily involved the workers
giving more out turn. That is to say, they were called upon to work
more. They were not agreeable to work without being paid more,
apparently. It was at that stage and being constrained to do so, as
the application eloquently shows on its own wording the
management introduced the incentive based on production. Of
course, learned counsel for the respondent would point out that it
could not be said to be a contract for the reason that faced with the
attitude of the workers, the management only unilaterally and
voluntarily introduced a production based incentive scheme. The
INAP.5 OF 2008 26
actual rates at which the amounts were to be paid based on the
increase in production attained, etc. were never actually agreed
upon, it is contended. These arguments really need not detain us,
for, the fact of the matter is, as held by the Apex Court, to invoke
the Third Part of Section 2(22), additional remuneration paid,
what is relevant is whether it is paid. It is not necessary to dwell
further into the question as to whether the payment became
obligatory on the basis of a contract, express or implied, which is a
question which would be germane, only in an enquiry whether it
was wages under the first part of Section 2(22). The word
“remuneration” signifies essentially payment for work done. The
respondent in this case wanted the workers to churn out an
increased out-turn having regard to the constraints, namely to the
unenviable position, it would have been placed in, namely its
obligation to pay liquidated damage to BSNL for supplies made
beyond the time limit. We have already referred to the notice. The
notice provides for the amounts to be paid on attainment of various
INAP.5 OF 2008 27
levels of production. It is not in dispute that these amounts were
paid every month along with wages. Therefore, the payments in
question also satisfied the further requirement that it is not paid in
intervals of excess of two months. The respondent does not have a
case that it falls within any of the categories, namely Clauses (a) to
(d) of Section 2(22). We must also refer to another contention
raised by the learned counsel for the respondent. He would
contend that accepting the reasoning of the appellant would result
in great prejudice. There is a ceiling limit which, at the relevant
time, was Rs.6,500/= and if the incentive payments were to be
added to the wages, many of the employees concerned would be
out of the ceiling limit and the resultant position would that they
would go out of the ambit of the word “employee” and no
contribution would be payable under the Act and the amount
already paid may have to be refunded. Learned counsel for the
appellant, on the other hand, would point out the proviso in the
definition of the word “employee” and contended that this
INAP.5 OF 2008 28
eventuality may not occur. For answering the questions of law
which have been framed in this case, we do not think it necessary
to go into the said question and we leave it open. Accordingly, we
answer the substantial question of law raised by the appellant in
favour of the appellant and hold that the production incentive paid
by the respondent/applicant is wages being additional
remuneration and hence ESI compensation is payable in regard to
the same.
The Appeal is allowed as above.
Sd/=
K.M. JOSEPH,
JUDGE
Sd/=
M.C. HARI RANI,
JUDGE
kbk.
//True copy//
PS to Judge
INAP.5 OF 2008 29