Jay Engineering Works Ltd And Others vs The Union Of India And Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 64 of 1962

Decision Date: 12 December 1962

Coram: K.N. Wanchoo, P.B. Gajendragadkar, K.C. Das Gupta, J.C. Shah

In this case the Supreme Court of India delivered its judgment on 12 December 1962 in the matter of Jay Engineering Works Ltd and others versus the Union of India and others. The bench hearing the petition consisted of Justice K.N. Wanchoo, Justice P.B. Gajendragadkar, Justice K.C. Das Gupta and Justice J.C. Shah. The petitioner, Jay Engineering Works Ltd together with other workmen, contested the order of the Union of India and other respondents. The judgment is reported in 1963 AIR 1480 and 1963 SCR (3) 995. The issues raised concerned the interpretation of the Employees’ Provident Funds Act, 1952, particularly section 2(b), in relation to industrial disputes involving a provident‑fund scheme, production bonus, basic wages, the concept of quota, the norm, and the treatment of payments made for production above the quota or the norm for the purpose of computing provident‑fund contributions. The petitioner also invoked Article 32 of the Constitution of India. The factual background disclosed that following major engineering‑industry awards issued in 1948, 1950 and 1958, the petitioner company entered into a written agreement with its workmen in 1958. That agreement created a remuneration scheme in which a certain proportion of the total production was assigned to correspond with the minimum basic wages and dearness allowance fixed by the awards; this proportion was described as the “quota”. Production that exceeded the quota was compensated on a piece‑rate basis. In addition to the quota the scheme fixed a higher “norm”. The agreement stipulated that any workman who failed to attain the norm would be deemed guilty of misconduct and could be dismissed. The petitioner argued that all payments made for production beyond the quota constituted a production bonus and therefore, relying on the earlier decision of this Court in Bridge and Roof Co. Ltd. v. Union of India, should be excluded from the definition of basic wages for the purpose of calculating contributions to the provident fund. The petitioner further submitted that even if the payment for production between the quota and the norm did not qualify as a production bonus, it should be treated as an “other similar allowance” under clause II of section 2(b) of the Employees’ Provident Fund Act, 1952. Conversely, the workmen contended that the scheme operating in the petitioner’s establishment was unusual and did not correspond to any standard production‑bonus arrangement because it operated on two separate bases. They maintained that, under the scheme, a production bonus began only after a worker attained the norm, and that the remuneration for production between the quota and the norm should be considered basic wage as defined in the 1952 Act. The Court held that a straight piece‑rate plan represents the simplest form of an incentive‑wage system. Accordingly, in a scheme of that character every component of remuneration, whether paid for work up to the quota, between the quota and the norm, or above the norm, must be treated as basic wage within the meaning of section 2(b) of the Employees’ Provident Fund Act, 1952. The Court cited the decision in M/s. Titaghur Paper Mills Co. Ltd. v. Its Workmen (1959) Supp. 2 S.C.R. to support this conclusion.

In the wage structure of the petitioner company, a worker was not permitted to cease production once the quota had been satisfied; the employee was required to continue working until the higher level known as the norm was reached, and failure to do so could be treated as misconduct. Consequently, the norm functioned as the true benchmark that defined a typical production‑bonus arrangement. Any remuneration paid for work performed up to the norm—whether the work was produced under the quota or under the norm—was characterised as basic wage for the purposes of the Employees Provident Funds Act. Payments that exceeded the norm, however, were treated as a genuine production bonus and therefore fell within the scope of the earlier decision of this Court in Bridge & Roof Company. The Court distinguished the earlier case of Ziakh v. Firestone Tyre and Rubber Co. Ltd., noting that the amount paid for production between the quota and the norm did not possess the qualities of an allowance; rather, it represented a straight payment for the daily work and therefore had to be included within the definition of basic wage. By contrast, the portion of remuneration that the petitioner paid for output above the norm was identified as a production bonus and, under the precedent set by Bridge & Roof Company, was excluded from the definition of basic wage.

The writ petition originated under Article 32 of the Constitution for the enforcement of fundamental rights and was filed as Petition No. 64 of 1962. The petition was heard together with Petition No. 62 of 1962, which concerned Bridge and Roof Company (India) Limited v. Union of India, because both petitions presented the same concise question: whether a production bonus formed part of “basic wages” as defined in section 2(b) of the Employees Provident Funds Act, 1952. During the hearing, the Court also considered an ancillary question concerning the specific nature of the production‑bonus scheme employed by the petitioner company, and the parties were allowed to submit additional affidavits to clarify that issue. The principal issue raised in the two petitions had already been resolved by the decision in Bridge and Roof Company (India) Limited v. Union of India. The remaining question for the Court was whether the production‑bonus arrangement in the petitioner’s company was of the same character as that in Bridge & Roof Company. If the schemes were found to be alike, the earlier judgment would control and the production bonus would be excluded from the definition of “basic wages.” The Court noted that the parties had filed further affidavits and therefore the next step was to determine the exact nature of the petitioner’s production‑bonus system and to decide whether the precedent set in Bridge & Roof Company should be applied to the present case.

In the matter before the Court, it was noted that the petitioner‑company had introduced a production bonus arrangement as early as 1947, and that arrangement was said to have operated largely on a straight piece‑rate basis. Subsequently, major engineering awards were issued in the years 1948, 1950 and 1958, each of which fixed basic minimum wages and a dearness allowance. Following those awards, the petitioner‑company entered into an agreement with its workmen in August 1958 that formally established the scheme presently in force, although a form of production bonus on a more or less straight piece‑rate system had apparently existed since 1947. Under the 1958 agreement, a specified proportion of the total production was identified to correspond to the minimum basic wages and dearness allowance fixed by the awards; this portion was labelled the “quota.” Any production that exceeded the quota was remunerated on a piece‑rate basis. In addition to the quota, the agreement fixed a “norm,” which was considerably higher than the quota, and each workman was ordinarily expected to achieve the norm as the minimum level of output. The agreement further provided that failure to attain the norm would constitute misconduct and could give rise to dismissal, because any deliberate deviation from the production norms was characterized as “go‑slow” tactics. The standing orders of the company likewise declared that go‑slow tactics amounted to misconduct and could lead to dismissal of the employee concerned. Consequently, the scheme in the petitioner‑company possessed two distinct bases for remuneration: (i) the quota, which was relatively low, and (ii) the norm, which was substantially higher. Because of the wording of the agreement and the explicit definition of “go‑slow,” it was clear that workers were required to meet the norm as the minimum output and that any intentional shortfall could be treated as misconduct, possibly resulting in dismissal. Under the arrangement, the minimum wages and dearness allowance fixed by the engineering awards were payable for production up to the quota, and any production beyond the quota attracted additional payment on a piece‑rate basis up to the norm, and even beyond the norm where the workmen exceeded that level. The issue for determination was whether this dual‑basis system constituted the ordinary type of production bonus scheme described in the earlier decision of Bridge and Roof Company. The principal dispute centered on the portion of production that lay between the quota and the norm. The petitioner asserted that the entire amount paid for production above the quota represented a production bonus and therefore should not be treated as “basic wages” for the purposes of the Employees Provident Funds Act, relying on the Bridge and Roof precedent. In contrast, the workmen maintained that the scheme in the petitioner‑company was unusual and did not correspond to any standard scheme of production bonus, arguing that in such a scheme the production bonus, as understood in the industry, began only after the norm was reached, and that the payments made for production between the quota and the norm should be treated as basic wages under the Act, with the exemption for bonus applying only to the portion paid for production above the norm. The workmen also pointed out that the straight piece‑rate system had been in operation before the major engineering awards established the minimum basic wages and dearness allowance, and that once those awards became applicable to the petitioner‑company, the quota system was subsequently devised to represent production for which the minimum wages and dearness allowance would apply.

In this dispute, the workmen argued that the payment arrangement in the petitioner‑company did not correspond to any recognized production‑bonus or incentive‑wage scheme described in standard texts, because the scheme operated on two separate bases. They maintained that, under the scheme prevailing in the petitioner‑company, a production bonus—as it is understood in industry—only arose after the "norm" of output was reached, and that any remuneration for output between the "quota" and the "norm" constituted merely basic wage as defined in the Act. Accordingly, the exclusion of bonus from basic wage would apply solely to the portion of pay that related to production above the norm. The workmen further observed that a straight piece‑rate system had been employed by the petitioner‑company before the major engineering awards established minimum basic wages and dearness allowance. When those awards—cited as (1) [1963] 3 S.C.R. 978—came into force, the petitioner‑company became bound by them, and a new system was devised in which a quota represented the quantity of work for which the minimum basic wages and dearness allowance would be paid, while any additional output was remunerated on a piece‑rate basis. This evolution replaced the pure piece‑rate arrangement with a hybrid that also provided a guaranteed time wage. The workmen contended that the quota, intended to signify payment for production up to the minimum basic wages and dearness allowance, was set arbitrarily and bore no relationship to the workers’ productive capacity, which normally determines the base or standard in a typical production‑bonus scheme. Consequently, they alleged that the petitioner‑company, even before the 1958 agreement defining a fair day's work, expected substantially higher output than the quota and paid extra for that excess production. The 1958 agreement later stabilized the situation by fixing normative output levels, obligating workers to meet production up to those norms, and classifying any deliberate shortfall as a go‑slow tactic amounting to misconduct that could justify dismissal. The union therefore asserted that, in a genuine production‑bonus scheme, the true base or standard for the petitioner‑company was not the quota but the norm, and that payments between the quota and the norm should be treated only as basic wages within the meaning of the Act, while payments above the norm represented the production bonus recognized in industry. The workmen conceded that any remuneration for production above the norm would qualify as a production bonus and would fall under the Court’s judgment in Bridge and Roof Co. (1) [1963] 3 S.C.R. 978. They also referred to the Court’s earlier consideration of a typical production‑bonus scheme in M/s. Titaghur Paper Mills Co Ltd. v. Its Workmen, (1).

The Court observed that the principle earlier affirmed in Bridge and Roof Company had been reiterated. It further noted that the straight piece‑rate arrangement represented the most elementary form of an incentive‑wage system. Under such a straight piece‑rate plan, every amount paid to the workman would be treated as basic wage within the meaning of section two, sub‑section one of the Act, even though the employee’s remuneration was linked to his output. However, the Court recognized that the straight piece‑rate method could not be applied in every circumstance. In the situations where the simple piece‑rate mechanism proved unsuitable, employers introduced a production‑bonus scheme that could be based on total tonnage produced or on any other agreed standard of output. The Court explained that the essential feature of a production‑bonus plan is the existence of a base or standard level of work; once production exceeds that base, the worker receives an additional payment for the excess output. The basic wage continues to cover the work performed up to the base, while the extra amount constitutes the bonus for production beyond the base. Typically, such a scheme guarantees a time‑wage component that covers work up to the standard performance level and, at the same time, gives the employee a share of the savings that result from any superior performance. Consequently, a normal production‑bonus scheme possesses a single base or standard, and the time‑wage is assured up to that point; any output beyond that base is compensated as a production bonus. The Court further emphasized that, under this kind of arrangement, workers are not obligated to produce beyond the established base, and no disciplinary action may be taken against a workman for failing to exceed that base. The counsel for the petitioner was unable to cite any recognised production‑bonus model that incorporated two distinct bases or standards, such as the quota and the norm that existed in the petitioner’s company, where the quota was set considerably lower than the norm. The Court therefore identified the question that required determination: whether, in the peculiar dual‑standard system operating in the petitioner’s enterprise, the production bonus – as it is ordinarily understood – should commence immediately after the first base, identified as the quota, or whether it should only start after the second, higher base, identified as the norm.

The petitioner argued, relying on authorities cited as (1) 1959 Supp. 2 S.C.R. 1012 and (2) [1963] 3 S.C.R. 9, that production‑bonus arrangements normally contain safeguards designed to protect both employer and employee, and that the requirement for production up to the norm, in addition to the quota, merely functions as such a safeguard in the scheme employed by the petitioner’s company. To support this contention, the petitioner’s counsel referred to a passage on page 164 of the International Labour Office publication “Payment by Results,” which states: “No employee will be compelled to produce more than the union has stated was fair, but continued failure of an employee to co‑operate in establishing a fair standard or to meet the agreed rate of production of an established standard or the rate of production as stated by the union as fair, without a reason mutually satisfactory to both union and company will result in dismissal or, if the circumstances warrant unusual treatment, transfer to another department.” The Court noted that this excerpt appeared under the heading “Management Safeguards” and appeared to address primarily issues relating to time‑wage arrangements rather than to the structure of a production‑bonus scheme. Accordingly, the passage could not be taken as evidence that a typical production‑bonus system is capable of fixing two separate bases or standards; at most, it indicated that disciplinary measures might be justified where an employee consistently fails to meet an established standard without a mutually acceptable reason.

The Court noted that the excerpt concerning the use of time studies was meant only for the purpose of establishing production standards and therefore could not be taken as evidence that a normal production‑bonus scheme is able to fix two distinct bases or standards; at most, the excerpt indicated that disciplinary action could be taken in cases where a workman failed to achieve the established standard without a reason acceptable to both the union and the employer. The Court further observed that learned counsel had relied upon a book that discusses a wide variety of incentive‑wage and production‑bonus plans, but counsel was unable to point to any example in that book that actually sets two separate bases or standards. The Court accepted that, when employers determine a base or standard, they sometimes set it below the normal production level derived from time studies. It is not uncommon for such a base to be fixed at 80 per centum of the normal production identified by time studies, and in certain instances the base has been recorded as low as 67 per centum. The Court explained that the decision to fix the base or standard somewhat below the normal level is a matter of agreement between employer and employee and depends on various factors. The rationale for a lower base is to provide an allowance for workers who may be slightly slower than the average and to create an incentive for workers to increase output even before the normal level is reached, thereby encouraging them to strive for production that exceeds the normal. By fixing the base below the normal level derived from time studies, the employer gives workmen a greater motive to produce not merely up to the normal but also beyond it. However, the Court held that the fact that a base may be set below the normal production determined by time studies did not assist the petitioner, because the scheme in the present case was not a typical production‑bonus scheme if the quota were regarded as the base. The Court reiterated that, in a usual production‑bonus arrangement, a worker is not compelled to produce beyond the base or standard, although he may choose to do so in order to increase his earnings. In contrast, under the scheme operating in the petitioner’s company, the worker could not stop at the quota; he was required to produce up to the norm, and failure to do so could result in a charge of misconduct described as “go‑slow” and could lead to dismissal. Accordingly, the Court concluded that the true base or standard that forms the core of a typical production‑bonus scheme, in the context of the petitioner’s company, was the norm rather than the quota. Any remuneration for production that exceeded the norm would constitute a genuine production bonus under the scheme, while production up to the norm represented the standard that was expected of the workman.

A workman employed by the petitioner‑company receives remuneration that must be treated as basic wages within the meaning of the Act. Although the remuneration is divided into two components, the first component comprises basic wages and dearness allowance fixed by the awards for output up to the quota, and the second component is a piece‑rate payment for output up to the norm, the two components together constitute, in the Court’s view, the base or standard of a conventional production bonus scheme. Consequently, only remuneration that exceeds the norm can properly be described as a production bonus in the context of the petitioner‑company. The fact that a portion of the basic wage is paid as a time wage and another portion as a piece‑rate wage does not alter the characterization of the total amount as basic wage under the Act. The Court therefore held that the operative base of the production bonus scheme in the petitioner‑company is the norm rather than the quota, and that any payment made for output up to the norm—regardless of whether it is paid as a time wage or as a piece‑rate wage—must be treated as basic wage for the purposes of the Act.

The petitioner argued that an employer may penalise a workman for “go‑slow” even when wages are paid on a piece‑rate basis, relying on the decision in Mr Ziakh v Firestone Tyre and Rubber Co Limited (1) where it was held that go‑slow is possible under a piece‑rate system. Assuming that proposition to be correct, the Court indicated that it does not affect the conclusion reached regarding the base or standard in the present scheme. It may indeed be possible to punish a workman for go‑slow when a piece‑rate system is in operation if the employee deliberately fails to produce the quantity he normally produces. However, the present case is governed by an agreement that has already crystallised the definition of go‑slow; under that agreement any intentional departure from the production norm is immediately classified as go‑slow and subjects the workman to disciplinary action, which may even lead to dismissal. Because the agreement provides a precise definition of go‑slow, the Court found that the norm, and not the quota, is the true base applicable to all typical production‑bonus schemes. Only when a workman receives payment for output above the norm can it be said that he is earning a production bonus as commonly understood in the industry. The Court warned that it would be erroneous and unrealistic to label payments for output that lies between the quota and the norm as production bonus, especially when the employee is obliged to produce up to the norm under threat of dismissal.

In this case, the Court observed that it would be incorrect to treat the payment made for output that falls between the established quota and the established norm as a production bonus, because the employee is compelled to achieve at least the norm or else faces dismissal. The petitioners further argued that the established norms applied only to a small segment of the workforce employed by the petitioner‑company, and consequently they contended that any amount paid above the quota – which appears to be common to all workers – should be regarded as a production bonus for those employees who are not covered by the limited set of norms. The Court found this argument to be disingenuous. The union’s response demonstrated that, although the written agreement expressly fixed norms for only a limited group of workmen, in practice the scheme operated with norms applicable to every workman, these norms being derived from the normal level of performance that existed before the 1958 agreement. The Court noted that it was not contested that these practical norms were substantially higher than the quota. The petitioners also submitted that, even if the payment for work performed between the quota and the norm could not be classified as a production bonus for purposes of excluding it from the definition of basic wages under the Act, such payment should nevertheless fall within the category of “other similar allowance” mentioned in section 2(b)(ii). The Court rejected this submission. It held that the allowances listed in the relevant clause were dearness allowance, house‑rent allowance, overtime allowance, bonus and commission, and that any “other similar allowance” must be of the same character as those items. The payment in question, however, was merely a direct remuneration for the daily work performed between the quota and the norm and did not possess the character of an allowance. Accordingly, the Court concluded that such payment must be included within the expression “basic wage”, defined as all emoluments earned by an employee while on duty or on leave in accordance with the terms of the contract of employment. Having examined the scheme, the Court held that the petition succeeded in part. It directed that the portion of remuneration paid by the petitioner for output exceeding the norm should be treated as a production bonus and therefore fall under the precedent set by the Court in Bridge and Roof Company. Conversely, the portion of remuneration paid for output up to the quota and for output between the quota and the norm must be treated as basic wage within the meaning of the term in the Act. Consequently, the petition was allowed in part, no order as to costs was made, and the petition was partially granted.