Are PF and ESI Deductions Required on Arrear Wages After Wage Revisions? Seeking Legal Insights

Dear all senior members,

If the factory is registered under the Factories Act 1948, are PF and ESI to be deducted on arrear wages?
a) If wage revision is due to an increase in the minimum wage by the state government from a back date.
b) If wage revision is due to an increment from a back date.

Please answer with supporting material such as the section number of the act or any judgments by any court of law. This is very serious in terms of finances.

Regards,
Manish

Dear Akhil, In the ESI Act, where is it mentioned? My local inspector is saying that arrear wage is a wage and thus ESI should be deducted.

Regards, Manish Gupta

Mr. Akhil is correct as ESI is not to be deducted from arrears wages. We have contacted the ESIC Noida regional office in Sector 57, and its director, Mr. Sanjay Sinha, has informed us that ESI should not be deducted from arrears wages.

Regards,
Deep

Yes, sir. Even our Joint Director in Andhra Pradesh has informed us that there is no need to deduct ESIC contributions on arrears. However, we are still deducting as nobody will provide it in writing, and there is no clarity in the Act.

Regards,
Prasad SBR

Dear Mohan Pal and Prasad, I had the same view on ESI that "it should not be deducted on arrear wage," but where is it mentioned in the act or any notification in this regard? Retired Director ESIC, Dr. Kheterpal, also mentioned that ESIC should not be deducted on arrear wage but failed to mention the section number in the act.

Mr. Prasad, you know how much money we are wasting of the employees as well as the employer because we are not clear in this regard. We have to find the exact rule!!!

Regards,
Manish Gupta

Section 2(9) and Section 2(22) stipulate certain items for forming part of wages for the purpose of coverage and payment of contributions. In the said list, arrears are not included, and hence contributions need not be paid on arrears.

Regards,
Kanna Vijayakumar

Sec. 2(22) reads as follows: (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 authorized leave, lockout, strike which is not illegal, or layoff, 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 traveling allowance or the value of any traveling 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.

Clarification on "Other Additional Remuneration"

In the above definition, the term "other additional remuneration, if any," what does it indicate?

In a general view, also the arrears paid to the employee are also considered as Wage/Salary. Due to some administrative problems, if the company is paying his/her annual increment after two or more months from his/her annual increment due date. In such cases, the amount paid to him is wage or not? If wage, then it should be deducted. If not, there may be a notification from ESIC.

Regards,
Prasad

Arrears and ESI Considerations

In case the management makes a decision in writing or in an agreement with the employees' union and provides any arrears, the arrears belonging to the date of such decision will not be taken into account for the purpose of ESI.

If the decision was made earlier and the arrears are paid now, then such arrears will attract ESI.

Hence, the employer has to provide evidence regarding these circumstances.

I know that ESIC does not deduct from arrears, but that amount cannot be booked in the balance sheet. Otherwise, in an ESIC inspection, you may face problems regarding the arrear amount.

Dear Prasad, well said! However, there must be some rule or judgment that specifically proves that arrears paid on the revision of wages are considered as "wages" or "other additional remuneration, if any."

It is clear in the act that any wage paid or payable with an interval not exceeding 2 months is considered a wage. I believe "or payable" is sufficient justification that arrears on wages should be categorized as "wages."

We cannot argue that arrears on wages are paid once a year due to a revision of minimum wages or an increment and therefore, the interval condition exempts us from paying the ESI amount. However, a question arises: if the government wants to revise the minimum wages from 5 months back, should we, as employers, be liable to pay ESI on those increased wages as the time period in question exceeds 2 months, and this is not the fault of the employer?

Seniors, please reply!

Regards,
Manish

Please find the attached document which clarifies all your queries.

Thank you.

Can you kindly upload the complete Employer's Guide? This would be very helpful to all.

Previously, we were required to deposit contributions on arrears whenever the current contribution period was concerned. This means that if there was a rise in any period, we were asked to deposit the contribution where returns were to be filed. This was because employees were benefiting from it for the same contribution period.

Regards

Dear Prasad,

I agree with you that arrears are just a part of the salary which was not paid to the employee on time; no other fundamentals are applicable to this.

Understanding "Other Additional Remuneration"

Sec. 2 (22) reads as follows:

(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. It includes any payment to an employee in respect of any period of authorized leave, lock-out, strike which is not illegal, or lay-off, and other additional remuneration, if any, paid at intervals not exceeding two months. However, it does not include:

- (a) any contribution paid by the employer to any pension fund or provident fund, or under this Act;
- (b) any traveling allowance or the value of any traveling 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.

In the above definition, the term "other additional remuneration, if any," what does it indicate?

In a general view, arrears paid to the employee are also considered as wage/salary. Due to some administrative problems, if a company is paying the annual increment after two or more months from the due date, is the amount paid considered as wage or not? If it is wage, then it should be deducted. If not, is there any notification from ESIC?

Regards,
Prasad

Please visit ESI Contributions | Contributions for arrears of wages to know the instructions of the ESI Corporation for the purpose.

As far as EPF contribution is concerned, you have to deduct the contribution on the arrears of wages subject to the condition of employer contribution on wages of Rs. 6,500 (including the wages of the month for which arrears are being paid). If the contribution was already paid on Rs. 6,500 earlier, no additional contribution is payable.

Best of luck.

I too agree with your view. As mentioned by you, "OR Payable" is enough for the justification that arrears on wages are "wages."

Here the logic is the benefit period against the contribution period. Employees will get benefits based on contributions paid during certain periods, i.e., April to September and October to March. After the completion of the benefit period, even if we release arrears, there is no use as the corresponding benefit period is over.

Regards,
Prasad SBR

ESI Contribution on Salary Arrears

One employee's salary was $20,000 in January. He received an increment of $2,500, making the total $22,500. However, the increment was not paid in January. An ESIC deduction of $150 was made on the $20,000.

This month, in March, we are paying arrears of $2,500 for January and February.

Now, I need to pay the January ESI contribution on $22,500. How much ESI do I need to pay this month, considering he is not eligible for ESI?

For January and February, how much do I need to pay on arrears of $2,500 + $2,500?

Please suggest.

Thank you.

Regards, Malleshwar
[Phone Number Removed For Privacy-Reasons]