'Wages', and the Definitions That Decide Every Calculation

Some words this chapter uses

Remuneration is everything payable for the employment, whatever it is called.

Basic pay is the core wage before allowances.

Dearness allowance is the allowance paid to offset the cost of living, ordinarily linked to a price index.

Retaining allowance is paid to keep an employee available during a period when the establishment is not working, typically in a seasonal industry.

Ex gratia means paid as a favour rather than as of right.

Remuneration in kind is payment in goods or services rather than money, dealt with in the Explanation.

Section 2(y): the definition

The opening words are wide: all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed, which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment.

Three features of that opening. It covers salaries, allowances or otherwise, so nothing escapes by being called something else. It covers what is capable of being expressed in money, so a benefit in kind is in principle within it. And it is what would be payable if the terms were fulfilled, so it is the contractual entitlement rather than what happened to be paid.

What it includes

• (i) basic pay;
• (ii) dearness allowance; and
• (iii) retaining allowance, if any.

Those three are the core, and a student should be able to name them without hesitation.

What it excludes

The definition does not include:

• (a) any bonus payable under any law in force which does not form part of the remuneration payable under the terms of employment;
• (b) the value of house accommodation, or of the supply of light, water, medical attendance or other amenity, or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
• (c) any contribution paid by the employer to any pension or provident fund, and the interest accrued on it;
• (d) any conveyance allowance or the value of any travelling concession;
• (e) any sum paid to defray special expenses entailed by the nature of the employment;
• (f) house rent allowance;
• (g) remuneration payable under any award or settlement between the parties, or order of a court or Tribunal;
• (h) any overtime allowance;
• (i) any commission payable to the employee;
• (j) any gratuity payable on the termination of employment;
• (k) any retrenchment compensation or other retirement benefit, or any ex gratia payment made on the termination of employment.

Group them and they become learnable. Clauses (a) to (c) are things paid under other statutes or into funds. Clauses (d) to (f) are allowances for expenses or accommodation. Clause (g) is money ordered by a forum rather than agreed. Clauses (h) and (i) are variable earnings, overtime and commission. Clauses (j) and (k) are terminal payments.

The first proviso: the fifty per cent. rule

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

Take it slowly, because the arithmetic is exactly what MU will ask.

Step one: add up all remuneration.

Step two: add up the payments falling under clauses (a) to (i). Note that the proviso stops at (i): the terminal payments in (j) and (k) are not counted for this purpose, which makes sense because they are not part of a monthly pay packet.

Step three: compare that total with one-half of all remuneration.

Step four: if the excluded payments exceed one-half, the excess is deemed remuneration and added into wages.

Work an example. Suppose the monthly package is:

Excluded under (a) to (i): 7,000 plus 3,000, that is 10,000.

One-half of all remuneration: 10,000.

Does the excluded total exceed one-half? No, it equals it. So nothing is added back, and wages are 8,000 plus 2,000, that is 10,000.

Now change the package: basic 5,000, dearness allowance 2,000, house rent allowance 8,000, conveyance 5,000. All remuneration is still 20,000. Excluded under (a) to (i) is 13,000, which exceeds one-half, that is 10,000, by 3,000. That 3,000 is deemed remuneration and added into wages, so wages are 5,000 plus 2,000 plus 3,000, that is 10,000.

Notice what the two examples show, and it is the point of the provision. However the employer arranges the package, wages can never be less than half of all remuneration. The proviso puts a floor under the calculation base that no pay structure can get below.

And the figure is movable: "or such other per cent. as may be notified by the Central Government".

The second proviso: four clauses come back for two purposes

Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g) and (h) shall be taken for computation of wage.

This is a separate rule and it is frequently missed. For two purposes only, four of the excluded clauses are put back into the computation:

• (d) conveyance allowance or travelling concession;
• (f) house rent allowance;
• (g) remuneration under an award, settlement or order;
• (h) overtime allowance.

The two purposes are: equal wages to all genders, that is section 3; and payment of wages, that is Chapter III.

The logic of each is worth stating. For equal pay, excluding allowances would let an employer pay men and women the same basic wage and differentiate through house rent and conveyance allowances, defeating section 3 entirely. For payment of wages, the Chapter is about paying the employee what he is owed on time and in full; it would be absurd for the overtime allowance he has earned to fall outside "wages" for the purpose of the obligation to pay wages.

So the same word carries a slightly wider meaning in Chapter III and section 3 than it does in Chapters II and IV. That is unusual drafting, and a student who notices it will handle a problem question much better than one who does not.

The Explanation: payment in kind

Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee.

Two limits. The remuneration in kind counts only up to fifteen per cent. of total wages payable; and it counts only where given in lieu of the whole or part of the wages.

Read it with section 15, which requires wages to be paid in current coin or currency notes, by cheque, by bank credit or electronically. The Explanation is the narrow exception: a limited amount of payment in kind is recognised, and the rest of the wage must be money.

Section 3: no discrimination on the ground of gender

3(1): there shall be no discrimination in an establishment or any unit thereof among employees on the ground of gender in matters relating to wages by the same employer, in respect of the same work or work of a similar nature done by any employee.

3(2): no employer shall:

• (i) for the purposes of complying with sub-section (1), reduce the rate of wages of any employee; and
• (ii) make any discrimination on the ground of sex while recruiting any employee for the same work or work of a similar nature, and in the conditions of employment, except where the employment of women in such work is prohibited or restricted by or under any law in force.

Four points, and the first is the headline.

The word is "gender", not "sex". The Equal Remuneration Act 1976 prohibited discrimination on the ground of sex. Section 3(1) uses gender, which is wider, and covers employees who are neither men nor women. Note, however, that section 3(2)(ii), dealing with recruitment, still uses sex, so the Code is not consistent between the two sub-sections. A careful answer says so.

Levelling down is forbidden. Section 3(2)(i) stops an employer from complying by reducing anybody's wages. Without it, an employer paying men more than women could "equalise" by cutting the men's pay, which would satisfy the letter of sub-section (1) and help nobody.

It reaches recruitment and conditions of employment, not only pay. Sub-section (1) is about wages; sub-section (2)(ii) extends to recruitment and to the conditions of employment.

And there is one exception, in sub-section (2)(ii): where the employment of women in such work is prohibited or restricted by or under any law in force.

Section 3 must be read with the second proviso to section 2(y), worked above: for the purpose of equal wages to all genders, conveyance allowance, house rent allowance, remuneration under an award or settlement, and overtime allowance are taken into the computation. Without that, equal pay could be defeated by paying the difference as an allowance.

Section 4: who decides whether the work is the same

Where there is any dispute as to whether a work is of the same or a similar nature for the purposes of section 3, the dispute shall be decided by such authority as may be notified by the appropriate Government.

The question section 4 answers is the one every equal-pay case turns on. An employer's answer to a claim under section 3 is almost always that the work is not the same: different duties, different responsibility, different skill. Somebody must decide that, and section 4 gives it to an authority notified by the appropriate Government rather than to a court.

A worked example

The facts. A packaging establishment in Wada. Meera and Rakesh do the same packing work. Their monthly packages are:

Is there discrimination under section 3? The basic pay and dearness allowance are identical, and the employer says he complies. He does not. By the second proviso to section 2(y), for the purpose of equal wages to all genders the emoluments in clauses (d) and (f), conveyance allowance and house rent allowance, shall be taken for computation of wage. On that footing Meera's wage is 14,000 and Rakesh's is 17,000 for the same work, and section 3(1) is contravened.

The employer proposes to equalise by cutting Rakesh's house rent allowance to 4,000. Section 3(2)(i) forbids it: no employer shall, for the purposes of complying with sub-section (1), reduce the rate of wages of any employee.

He then says the two jobs are not really the same. That is a dispute as to whether the work is of the same or a similar nature, and by section 4 it is decided by the authority notified by the appropriate Government.

Now the fifty per cent. rule, on Meera's package. All remuneration is 14,000. Payments under clauses (a) to (i) are the house rent allowance of 4,000 plus the conveyance allowance of 2,000, that is 6,000. One-half of all remuneration is 7,000. The excluded total does not exceed one-half, so nothing is added back and her wages for the purposes of Chapters II and IV are 6,000 plus 2,000, that is 8,000.

Change her package: basic 3,000, dearness allowance 1,000, house rent allowance 6,000, conveyance 4,000, total still 14,000. Excluded under (a) to (i) is 10,000, which exceeds one-half, that is 7,000, by 3,000. The first proviso deems that 3,000 to be remuneration and adds it into wages, so wages are 3,000 plus 1,000 plus 3,000, that is 7,000, exactly half of all remuneration. The employer cannot get the base below half however he arranges the packet.

Finally, payment in kind. The employer proposes to pay Meera 3,000 of her wage as groceries from the company store. Her total wages payable are 8,000, and fifteen per cent. of that is 1,200. By the Explanation, only the value of remuneration in kind not exceeding fifteen per cent. of total wages is deemed to form part of her wages. And section 15 requires wages to be paid in current coin or currency notes, by cheque, by credit to a bank account or by electronic mode.

What this does NOT mean

It does not mean allowances are always outside wages. Clauses (d), (f), (g) and (h) are brought back in by the second proviso for equal pay and for payment of wages.

It does not mean the fifty per cent. rule counts every exclusion. The first proviso operates on clauses (a) to (i) only; the terminal payments in (j) and (k) are not counted.

It does not mean the excess replaces wages. It is added to them.

It does not mean an employer may comply with section 3 by cutting pay. Section 3(2)(i) forbids reducing the rate of wages of any employee for that purpose.

It does not mean section 3 is confined to pay. Sub-section (2)(ii) reaches recruitment and the conditions of employment.

It does not mean the Code says "sex" throughout. Section 3(1) says gender; section 3(2)(ii) says sex.

It does not mean payment in kind is unlimited. The Explanation caps its recognition at fifteen per cent. of total wages payable.

Limits, criticism and amendments

The fifty per cent. rule is widely regarded as the most important thing in the Code and it has two criticisms. Employers say it forces a restructuring of pay packets across the economy and raises provident fund and gratuity costs, because those are computed on wages. Workers' representatives answer that this is precisely the point: the costs were being avoided by a device, and the rule restores the base the statutes always assumed.

The figure is set by proviso and movable by notification, so the protection can be altered without amending the Code.

The inconsistency between "gender" in section 3(1) and "sex" in section 3(2)(ii) is a drafting defect, and it matters: the wider word governs pay and the narrower one governs recruitment.

And section 4's allocation of the same-work question to a notified authority rather than to a court or Tribunal is criticised as leaving the crux of every equal-pay claim to an administrative decision-maker whose identity and procedure are left to notification.

Against that, having a single definition of wages for minimum wages, payment of wages, bonus and equal pay is a real simplification, and it removes a body of litigation about which of four Acts' definitions applied to a given calculation.

Quick revision

• Section 2(y): all remuneration, by salaries, allowances or otherwise, in money or capable of being so expressed, payable if the terms of employment were fulfilled. Includes basic pay, dearness allowance, retaining allowance.
• Excludes, clauses (a) to (k): statutory bonus not part of the terms; house accommodation, light, water, medical attendance or amenity excluded by order; employer's pension or provident fund contribution and interest; conveyance allowance or travelling concession; sums to defray special expenses; house rent allowance; remuneration under an award, settlement or court order; overtime allowance; commission; gratuity; retrenchment compensation, retirement benefit or ex gratia on termination.
• First proviso, the fifty per cent. rule: if payments under clauses (a) to (i) exceed one-half of all remuneration, or the notified per cent., the excess is deemed remuneration and added into wages. Clauses (j) and (k) are not counted.
• Second proviso: for equal wages to all genders and for payment of wages, clauses (d), (f), (g) and (h) shall be taken for computation.
• Explanation: remuneration in kind in lieu of wages counts as wages up to fifteen per cent. of total wages payable.
• Section 3(1): no discrimination among employees on the ground of gender in matters relating to wages, by the same employer, for the same work or work of a similar nature. 3(2)(i): no reduction of any employee's wages to comply. 3(2)(ii): no discrimination on the ground of sex in recruitment and in the conditions of employment, except where the employment of women is prohibited or restricted by law.
• Section 4: a dispute whether work is of the same or similar nature is decided by the authority notified by the appropriate Government.

Test yourself

1. Define wages under the Code, stating what is included and excluded. Section 2(y) defines wages as all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed, which would, if the terms of employment express or implied were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment. It includes basic pay, dearness allowance and retaining allowance. It excludes any statutory bonus not forming part of the remuneration under the terms of employment; the value of house accommodation or of the supply of light, water, medical attendance or other amenity or of any service excluded by order; the employer's contribution to any pension or provident fund and interest on it; any conveyance allowance or travelling concession; sums paid to defray special expenses entailed by the nature of the employment; house rent allowance; remuneration under an award or settlement or order of a court or Tribunal; overtime allowance; commission; gratuity; and retrenchment compensation, other retirement benefit or ex gratia payment on termination.

2. Explain the fifty per cent. rule with an illustration. The first proviso to section 2(y) provides that if payments made under clauses (a) to (i) exceed one-half, or such other per cent. as the Central Government notifies, of all remuneration calculated under the clause, the amount exceeding that one-half shall be deemed remuneration and added into wages. Take a package of 20,000: basic 5,000, dearness allowance 2,000, house rent allowance 8,000, conveyance allowance 5,000. The excluded payments under (a) to (i) total 13,000; one-half of all remuneration is 10,000; the excess is 3,000, which is deemed remuneration and added, so wages are 5,000 plus 2,000 plus 3,000, that is 10,000. The effect is that wages can never be less than half of all remuneration, however the employer structures the packet. Note that clauses (j) and (k), the terminal payments, are not counted for this purpose.

3. What does the second proviso to section 2(y) do, and why? It provides that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g) and (h), that is conveyance allowance or travelling concession, house rent allowance, remuneration under an award or settlement or court order, and overtime allowance, shall be taken for computation of wage. The reason for the first purpose is that excluding allowances would let an employer pay men and women the same basic wage and differentiate through allowances, defeating section 3; the reason for the second is that Chapter III is about paying an employee what he is owed, and it would be absurd for earned overtime to fall outside "wages" for the purpose of the obligation to pay wages.

4. State the prohibition in section 3. Section 3(1) provides that there shall be no discrimination in an establishment or any unit of it among employees on the ground of gender in matters relating to wages by the same employer, in respect of the same work or work of a similar nature done by any employee. Section 3(2) provides that no employer shall, for the purposes of complying with sub-section (1), reduce the rate of wages of any employee, and shall not make any discrimination on the ground of sex while recruiting any employee for the same work or work of a similar nature and in the conditions of employment, except where the employment of women in such work is prohibited or restricted by or under any law for the time being in force.

5. An employer pays men and women the same basic wage but a higher house rent allowance to men. Is that lawful? No. Although house rent allowance is excluded from wages by clause (f) of section 2(y), the second proviso to that clause provides that for the purpose of equal wages to all genders the emoluments in clauses (d), (f), (g) and (h) shall be taken for computation of wage. On that footing the women are being paid less than the men for the same work or work of a similar nature by the same employer, contrary to section 3(1). The employer may not cure it by reducing the men's allowance, because section 3(2)(i) forbids reducing the rate of wages of any employee for the purpose of complying. If he disputes that the work is the same or similar, section 4 sends that question to the authority notified by the appropriate Government.

6. To what extent may wages be paid in kind? By the Explanation to section 2(y), where an employee is given, in lieu of the whole or part of the wages payable to him, any remuneration in kind, the value of that remuneration which does not exceed fifteen per cent. of the total wages payable to him shall be deemed to form part of his wages. Anything beyond that is not recognised as wages. The Explanation must be read with section 15, which requires all wages to be paid in current coin or currency notes, by cheque, by crediting the employee's bank account, or by electronic mode.