The Supreme Court ruled that compensatory allowances, including HRA, Transport Allowance, Clothing and Washing Allowance, and Small Family Allowance, form part of overtime wage calculations under Section 59(2) of the Factories Act, 1948. Union ministries cannot impose divergent interpretations.
NEW DELHI : The Supreme Court has determined that compensatory allowances including House Rent Allowance (HRA), Transport Allowance, Clothing and Washing Allowance, and Small Family Allowance must be included in the calculation of overtime wages, as they are encompassed within the term “ordinary rate of wages” defined in Section 59(2) of the Factories Act, 1948.
The Court interpreted the straightforward language of the 1948 Act, asserting that Union Ministries cannot apply different interpretations to a parliamentary act. It dismissed the Union of India’s argument based on executive instructions and office memoranda that sought to exclude these compensatory allowances from overtime calculations.
In a ruling by a bench of Justice Rajesh Bindal and Justice Manmohan, which upheld the High Court’s interpretation.
Background of the Case:
The dispute arose from claims raised by Heavy Electricals Factory Employees’ Union sought claims for overtime wages challenging the exclusion of compensatory allowances such as House Rent Allowance (HRA), Transport Allowance (TA), Clothing and Washing Allowance (CWA), and Small Family Allowance (SFA) from the calculation of overtime wages arguing that their exclusion violated Section 59 of the Factories Act, 1948.
The Central Administrative Tribunal (CAT), Madras Bench, had upheld the Union of India’s stand that such allowances were not part of the “ordinary rate of wages” under Section 59(2) of the Factories Act, 1948. However, the Madras High Court reversed the CAT’s decision, holding that such exclusions were impermissible under Section 59(2) of the Factories Act, 1948. Aggrieved, the Union of India preferred appeals before the Supreme Court
LEGAL ISSUE : “Whether compensatory allowances, such as House Rent Allowance3, Transport Allowance4, Clothing and Washing Allowance5 and Small Family Allowance6, would fall within the term “ordinary rate of wages” for calculation of overtime wages in terms of Section 59(2) of the Factories Act, 1948?”
Arguments of Appellant and Respondent
Appellant: The Union of India contended that compensatory allowances cannot be treated as part of “ordinary rate of wages” for the purpose of calculating overtime wages under Section 59(2) of the Factories Act,
It contended that,
- Historically, overtime wages in defence factories were calculated only on basic pay and dearness allowance, relying on various Office Memorandums issued between 1959 and 2009.
- The Union maintained that these allowances are reimbursement-oriented and compensatory in nature, varying from employee to employee. Their inclusion would lead to unequal and anomalous outcomes.
- Their inclusion would cause disparities and impose a significant financial burden on defence establishments.
- Reliance was placed on precedents such as Bridge and Roofs Co. Ltd. v. Union of India, Govind Bapu Salvi v. Vishwanath Janardhan Joshi, and Union of India v. Suresh C. Baskey, to argue that not all allowances automatically form part of wages for statutory computations.
Respondent: The employees’ unions countered that Section 59(2) of the Factories Act is explicit and unambiguous, mandating inclusion of all allowances to which a worker is entitled, except those expressly excluded namely bonus and overtime wages themselves.
It argued that,
- Section 59(2) clearly mandates inclusion of all allowances except those expressly excluded, namely bonus and overtime wages.
- Executive circulars cannot override a parliamentary statute and that the Factories Act, being beneficial legislation, must be interpreted liberally in favour of workers.
- The unions also highlighted inconsistent interpretations within the Union Government itself and relied on statutory definitions of “wages” and judicial precedents to assert that allowances form an integral part of remuneration.
- Judicial precedents such as Rajasthan State Industrial Development Corporation v. Subhash Sindhi Cooperative Housing Society and Gujarat Mazdoor Sabha v. State of Gujarat were cited to assert that executive instructions cannot override statutory rights
Analysis of the Court:
The Court stated,
“The High Court has rightly opined that it is well-settled principle of statutory construction that the Legislature never wastes its words.”
The Court noted that the statute only specifies two exclusions bonuses and wages for overtime work. In the absence of formal rules governing the exclusion of additional entitlements, the Executive cannot unilaterally impose further exclusions through an office memorandum that the Legislature did not foresee.
The High Court also observed that employees had received overtime pay calculated to include allowances like HRA, TA, SFA, etc., for an extended period. Thus, the abrupt exclusion of these allowances via the Office Memorandum dated June 26, 2009, was deemed lacking in legal authority and contradictory to the explicit language of Section 59 of the 1948 Act.
The Court clarified that neither the Central Government nor the State Governments can dilute or override the statutory requirements of Section 59 through executive instructions or rules; any interpretation that contradicts the clear language of the statute is impermissible.
After examining the provisions of the 1948 Act and the submissions from both parties, the Court concluded that the statutory language was explicit and unambiguous, reiterating that executive instructions cannot override the statute’s provisions.
The bench emphasized that the powers granted to the State government are separate from those of the Central government as outlined in the relevant Act. They indicated that a combined reading of the Factories Act, 1948, and the General Clauses Act, 1897, makes it clear that the power to create rules, issue exemptions, or present orders under the Act is vested exclusively in the “State Government,” as defined in Section 3(60) of the General Clauses Act after the Seventh Constitutional Amendment.
Additionally, Sections 64 and 65 of the 1948 Act confer the authority for rule-making and exemption solely to the State Government (and the Chief Inspector under its oversight), particularly regarding matters related to determining the “ordinary rate of wages” for overtime, as stated in Section 59(2). Chapter XI, which includes Sections 112 and 113, does not grant the Central Government the authority to frame rules or issue clarifications, limiting its responsibilities to issuing directions to State Governments for the implementation of the Act.
The Court rejected the Union of India’s reliance on executive circulars, establishing that various Ministries cannot adopt differing interpretations of a central statute, especially when the legislative intent is clear. As a result, the appeals filed by the Union of India were dismissed, and the High Court’s interpretation was upheld.
Case Title: Union of India v. Heavy Electricals Factory Employees’ Union (Neutral Citation 2026 INSC 74)
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