Employees' State Insurance Corporation v. Hyderabad Asbestos Cement Products, Ltd., Hyderabad

Chinnappa Reddy, J.:— In this civil miscellaneous appeal the Regional Director, Employees' State Insurance Corporation, Hyderabad, questions the decision of the Employees' Insurance Court which held that “incentive bonus” paid to employees under a scheme formulated by the employer and employees in a memorandum of settlement was not “wages” as defined in S. 2(22) of the Employees' State Insurance Act. The management and the workmen of the Hyderabad Asbestos Cement Products, Ltd., entered into a settlement, dated 23 July, 1965, providing for a “production bonus scheme.” The scheme provided for payment of bonus every month if production exceeded a minimum target. The scheme contained no clause enabling the management to withdraw or modify the scheme at the discretion of the management. However, it contained the following two clauses:

“IV. It is agreed that if the production is affected by the inability of the management to obtain the necessary raw materials or by failure of power or machinery or failure to obtain the requisite orders or by any economic or technical reason or other unforeseen circumstances, the workmen shall not be entitled to the benefits of this scheme if production does not exceed the minimum target set out in Cl. VII of this annexure.

V. It shall also be a clear term of the production bonus scheme that it is based on the present circumstances and if at any time the methods of production are rationalized or additional equipments are installed resulting in the rising of production, then the basis of this production bonus scheme shall be subject to revision by mutual discussion.”

2. The question for consideration is whether payment of “production bonus” pursuant to the memorandum of settlement between the management and workmen is “wages” within the meaning of S. 2(22) of the Employees' State Insurance Act. The expression “wages” is defined as follows:

“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 respect of any period of authorized leave, lockout, 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;

(c) any sum paid to the person employed to defrary special expenses entailed on him by the nature of his employment; or

(d) any gratuity payable on discharge.”

3. The first part of the definition shows that in order to be treated as “wages” the payment should be cash remuneration and it should be paid or payable, if the terms of the contract of employment, express or implied were fulfilled. Since the payment of “production bonus” pursuant to a scheme like the present depends on the workers achieving certain targets and is, therefore, a reward or prize to be paid for the work done by the workers it has to be held to be “remuneration.” The payment was, of course, not a term of the original contract of employment, but, merely because it is not a term of the original contract of employment, it cannot be said that it is not remuneration paid or payable in fulfillment of the terms of contract of employment, express or implied. It is to be noted that the contract of employment may be express or implied. It is to be further noted that the contract of employment is not an unalterable instrument. The terms of the contract of employment may always be altered by mutual agreement. If, therefore, the management and the workmen arrive at a settlement to the satisfaction of both of them, there appears to be no reason not to treat the terms of the settlement as implied terms of every contract of employment between the management and a workman. This appears to follow from a plain reading of the definition of “wages” in S. 2(22) of the Employees' State Insurance Act.

4. According to the learned counsel for the respondent “production bonus” paid or payable under a scheme can never be said to be remuneration. In any case it cannot be said to be remuneration in fulfilment of the terms of the contract of employment. He relied on a decision of the Supreme Court in Braithwaite and Company v. Employees' State Insurance Corporation [A.I.R 1968 S.C 413] and a decision of the Andhra Pradesh High Court in Employees' State Insurance Corporation v. Vazir Sultan Tabacco, Ltd. [1972—II L.L.J 602]. In the case before the Supreme Court, the management initiated a scheme — it should be noted that it was not a settlement between the management and workmen for payment of “inam” if production exceeded certain targets. The question arose whether the payment of inam came within the definition of “wages” in S. 2(22) of the Act. The Supreme Court found that the payment of inam did not become a term of the contract of employment for several reasons. The first was that it was not a term of the original contract of employment. The second was that it was merely an offer to make an incentive payment if certain conditions were fulfilled by the workmen. But, under the very terms of the scheme the management had the right to withdraw or revise the scheme at its sole discretion. The third was that the scheme itself provided for exemption from payment on grounds for which the employees would not be blamed. The Supreme Court held that these features of the scheme showed that the payment of inam was not enforceable as one of the terms of the contract of employment, whether implied or express. The Supreme Court observed:

“Thus, though there was a payment to the employees and since that payment depended on their achieving certain targets, it has to be held to be remuneration, this payment of inam cannot be held to have become a term of the contract of employment.”

The statement of the Supreme Court that—

“since the payment depended on the workmen achieving certain targets, it had to be held to be remuneration,”

is destructive of the first submission of the learned counsel for the respondent that the payment is not remuneration. The only question is whether the decision of the Supreme Court supports the submission of the learned counsel that the payment of “production bonus” cannot be said to be a term of the contract of employment. There are several distinct features between the scheme in the case before us and that which was before the Supreme Court. The scheme before us is the result of a settlement arrived at between the management and the workmen and it has, therefore, to be read into every contract of employment between the management and a workman as an implied term of the contract. In the case before the Supreme Court, the scheme was one which was voluntarily initiated by the management and which could be abrogated by the management at its sole discretion. The scheme before the Supreme Court was clear that the payment of inam was in no way connected with or part of wages, but, that it was a mere offer for payment if conditions were fulfilled, an offer which under the very terms of the scheme could be withdrawn at any time by the management. The payment of inam was not one which could be enforced as a term of the contract of employment. In the case before us the management cannot unilaterally withdraw the scheme even after the expiry of the period for which the scheme is to be in force. The management can only withdraw the scheme by following the procedure prescribed by S. 19 of the Industrial Disputes Act. So long as the settlement is in force, the workmen have a right to enforce the payment of production bonus. In the case before it the Supreme Court referred to several features of the scheme which indicated that the payment of inam did not become a term of the contract of employment. The Supreme Court was considering whether there was anything in the features of the scheme from which it could be said that the payment of inam became a term of the contract employment. It does not follow therefrom that if one or other of the features of the scheme which was considered by the Supreme Court are present in another scheme for payment of production bonus the latter scheme must necessarily be considered to be outside the contract of employment. That is to lose sight of the fundamental distinction between a scheme which is the result of settlement between the management and the workmen and a scheme which is initiated by the management alone, a scheme which may be withdrawn at any time at the discretion of the management and a scheme which cannot be so withdrawn.

5. It is obvious that payment of bonus may be made a term of the contract between the management and a workman. Where bonus is paid pursuant to the provisions of a statute or pursuant to an award by an Industrial Court, such payment cannot be said to be a payment in fulfilment of the terms of the contract of employment. But, where the payment is in pursuance of an express term of contract of employment or in pursuance of an implied term of the contract (as in a case where there is a settlement between the management and the workmen) it has to be held to be in fulfilment of the terms of the contract, express or implied. The distinction is brought out by the Supreme Court in Bala Subrahmanya Rajaram v. B.C Patil [A.I.R 1958 S.C 518], where it was observed:

“… The opening words of the definition make it clear that ‘wages’ means remuneration that is payable when the terms of the contract of employment are fulfiled. Therefore, that is something certain. One knows ahead of time that if the terms of the contract are fulfilled, then the bonus is payable. It may be that the exact amount has yet to be determined but the fact that bonus is payable and can be claimed as soon as the terms of the contract are fulfilled is a matter that can be predicated beforehand, that is to say, even before the terms of the contract are fulfilled, or indeed, even before the work has started if the contract is made that far ahead. But that is not the case when bonus is awarded by an Industrial Court, for there it is impossible to say ahead of time whether bonus will be awarded or not; indeed, at the time the contract is entered into, it would be impossible to say whether such a claim could be laid at all because a difference of opinion between one worker and his employer about the right to bonus would not necessarily lead to an industrial dispute. When an Industrial Court awards a bonus, independent of any contract, it does so only if there is an available surplus for a distribution of bonus and the amount of the award would depend on the extent of the surplus available for that purpose.

Therefore, the fulfilment or otherwise of the terms of the contract of employment is not an essential ingredient of an award of an Industrial Court.”

6. The second case on which the learned counsel for the respondent relies is the case of Employees' State Insurance Corporation v. Vazir Sultan Tobacco, Ltd. [1972—II L.L.J 602] (vide supra). That was a case of payment of bonus pursuant to the terms of a settlement between the management and the workmen. The learned Judges took the view that payment of “production bonus” was not remuneration at all. That was the very basis of their decision. They said:

“We are of the view that remuneration takes in only all payments paid or payable every month as per the terms of the contract irrespective of the work done, such as wages, daily allowance, house rent allowance, etc. But contingent payments like bonus, increase of production or profit bonus will not, in our considered judgment, come within this definition.”

This statement of the learned Judges is directly opposed to what the Supreme Court had said in Braithwaite and Company v. Employees' State Insurance Corporation [A.I.R 1968 S.C 413] (vide supra), which we may recall once again:

“Since that payment depended on their achieving certain targets, it has to be held to be remuneration.”

We also notice that in that case, under the terms of the scheme the company had the right to vary or cancel the scheme itself and that is a strong distinguishing feature. We are, therefore, unable to rely upon the decision in Employees' State Insurance Corporation v. Vazir Sultan Tobacco, Ltd. (vide supra).

7. In Carborundum Universal, Ltd. v. Employees' State Insurance Corporation, Trichur [1975 — II L.L.N 449], it was observed by a Division Bench of the Kerala High Court as follows (in Para. 2 at page 450):

“Where the management introduces a scheme to pay some incentive to workmen, if it is as a result of a settlement binding on both parties, necessarily the terms of the settlement become terms of the contract of employment between the parties. If, on the other hand, it is introduced under a scheme under which it is open to the employer to withdraw it, alter, vary or modify it without reference to the employees and without their consent or without any binding settlement, it is a payment for which the assent is unilateral and, therefore, cannot be said to be a payment made in accordance with the terms of employment. Consequently, it would not be ‘wages’ within the meaning of S. 2(22). It appears to us that this is the test by which we should determine whether any payment in a given case is wages or not.”

8. We agree with the learned Judges of the Kerala High Court. The result, therefore, is that the appeal is allowed and the application filed by the management under S. 75 of the Employees' State Insurance Act is dismissed. The appellant will be entitled to the costs of the appeal and the costs of the Court below.