Orissa Cement Ltd. vs Union Of India

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 14 March 1962

Coram: B.P. Sinha, J.R. Mudholkar, K. Subba Rao, N. Rajgopala Ayyangar, Venkatarama Aiyar

In this case, the Court recorded that the petitioner was Orissa Cement Ltd., a company engaged in manufacturing cement in the State of Orissa, and that two of its directors were also petitioners. They filed a petition under Article 32 of the Constitution, challenging the validity of two notifications dated 15 January 1958 and 2 December 1960 issued by the Central Government under subsection 7(1) of the Employees' Provident Funds Act, 1952, which the Court refers to as “the Act.” The judgment first set out the statutory provisions relevant to the dispute. The Act was enacted to provide for the institution of provident funds for employees in factories and other establishments. Section 5 of the Act authorises the Central Government, by notification in the Official Gazette, to frame a scheme called the Employees' Provident Fund Scheme for establishing such funds for employees or any class of employees, and to specify the establishments to which the scheme shall apply; once the scheme is framed, a fund must be established in accordance with the Act and the scheme. Sub‑section (2) of the same section provides that any provision of the scheme may be made to take effect prospectively or retrospectively on a date specified in the scheme. Section 6(1) prescribes the contributions that must be made by the employer to the fund; it states that the employer’s contribution shall be six and a quarter per cent of the basic wages, dearness allowance and retaining allowance, if any, payable to each employee, while the employee’s contribution shall be equal to the employer’s contribution and, if the scheme permits and an employee desires, may be an amount not exceeding eight and one third per cent of his basic wages, dearness allowance and retaining allowance, if any. The provision also allows rounding off fractions of a rupee to the nearest rupee, half rupee or quarter rupee. Section 7 empowers the Central Government, by notification in the Official Gazette, to add to, amend or vary any scheme framed under the Act. Finally, Section 14 prescribes penalties for any contravention of the provisions of the Act or for default in compliance with them.

In exercising the authority granted by section five of the Employees' Provident Funds Act, the Central Government issued, on 2 September 1952, the Employees' Provident Funds Scheme, 1952. Clause 2(f)(iii) of that Scheme defines the term “Excluded Employees” to refer to persons who are employed by a contractor or through a contractor. Clause 3 of the Scheme provides that the provident‑fund balance that is credited to an individual employee becomes the property of the authority or authority‑body that is established under the Scheme to administer the fund. Clause 26 stipulates that every person who works in a factory or other establishment, unless that person falls within the definition of an excluded employee, must become a member of the provident‑fund scheme once he has completed one year of continuous service in that factory or establishment. The clause also contains a proviso stating that an employee who has actually worked for at least two hundred and forty days in the factory or establishment shall be deemed to have satisfied the requirement of one year of continuous service. Clauses 30 to 32 set out the rules governing the contributions that are to be made by the employer. Clause 30 directs that the employer shall initially pay both the portion of the contribution that is attributable to the employer—referred to in the Scheme as the employer’s contribution—and, on behalf of the employee who works for him, the portion that is attributable to the employee—referred to as the member’s contribution. Clause 31 provides that, notwithstanding any contrary agreement between the parties, the employer is not permitted to deduct the employer’s contribution from the employee’s wages or to recover that amount from the employee in any other manner. Clause 32 deals with the recovery of the employee’s share of the contribution. Sub‑clause (1) of clause 32 states that the amount of the member’s contribution that the employer pays may be recovered from the employee by deducting it from the employee’s wages, despite any provisions of the Scheme, any existing law, or any contract to the contrary. The clause adds several conditions: no deduction may be taken from wages that do not correspond to the period for which the contribution is payable; the employer may also recover the employee’s share from wages of a different period if the employee, at the time of joining, has falsely declared in writing that he was not already a member of the Fund; and, where a deduction was omitted because of an accidental mistake or a clerical error, the employer may make the deduction from later wages if the Inspector gives written consent. Sub‑clause (2) requires that deductions made from wages paid on a daily, weekly or fortnightly basis be aggregated so as to show the total monthly deduction. Sub‑clause (3) declares that any sum deducted by the employer from an employee’s wages under the Scheme shall be deemed to have been entrusted to the employer for the purpose of paying the contribution that corresponds to the deducted amount. Finally, the combined effect of section six

Paragraphs 30 to 32 of the Provident Fund Scheme specified that the contribution to the Fund was to be calculated at a rate of twelve and one‑half per cent of the employee’s basic wages together with dearness allowance. The Scheme required that this contribution be shared equally between the employer and the employee. The statutory language directed that the employer should actually pay the entire amount, allocating half of it to his own account and the remaining half to the employee’s account, and that the employer could recover the employee’s share by deducting it from the employee’s wages. Such a deduction could be effected only in those situations where the employer himself was the person who actually paid the wages to the employee. For this reason, the Scheme defined “excluded persons” in Paragraph 26 to include employees who were employed by or through a contractor, because those employees received their wages from the contractor and therefore the principal employer – the person who owned or managed the factory or establishment – would not be in a position to make a wage deduction from them.

It was observed that, in order to escape the obligation to make Provident Fund contributions under the Act, some employers increasingly resorted to employing workmen through contractors. In response, the Government decided that it was necessary to amend the Scheme so that the benefits of the Act would also extend to employees hired through contractors. Accordingly, a notification dated 15 January 1958 (No. S.R.O. 331) replaced Paragraph 2(f)(iii) of the 1952 Scheme with new language stating that an employee employed by a contractor in any operation not directly connected with a manufacturing process in the factory or other establishment would be covered, and it added an explanation that where such an employee was not an excluded employee, the principal employer would be responsible for complying with the Act and the Scheme. The effect of this amendment was to bring within the ambit of the Act all employees hired by contractors who were directly involved in any manufacturing process carried out in the factory or establishment. To give effect to the change, Paragraph 26 was amended on 11 May 1959 to conform with the 1958 notification. Nevertheless, the Government considered this amendment still insufficient to achieve the legislative purpose. Exercising the powers conferred by Section 7(1) of the Act, the Government issued a further notification on 2 December 1960 (No. G.S.R. 1467), which repealed the existing Paragraph 2(f)(iii) and introduced a new Paragraph 73A. Paragraph 73A provides that wherever an employee is employed by, or through, a contractor in connection with the work of an establishment, the principal employer shall be responsible for complying with both the Act and the Scheme with respect to that employee. This later amendment eliminated the distinction previously created by the 1958 amendment between contractors’ workmen who were directly connected with manufacturing and those who were not, thereby extending the benefits of the Scheme to all such employees.

After the amendment, both the workers who were directly involved in the manufacturing process in the factory or establishment and those who were not directly connected became eligible for the benefits of the Scheme. The authorities created under the Act then served notices on the first petitioner, drawing its attention to the changes introduced by the notifications and requiring it to comply with the new provisions. In response, the management pointed out the practical difficulties that would arise in implementing the provisions with respect to workmen supplied by contractors. A lengthy exchange of letters followed, during which the respondents eventually warned that they would initiate penal proceedings under section fourteen of the Act if compliance was not achieved. Consequently, the petitioners filed the present petition, questioning the constitutionality of the two notifications dated 15 January 1958 and 2 December 1960. They argued that the notifications imposed a heavy burden on their business, could not be justified as a reasonable restriction under article nineteen clause six of the Constitution, and therefore should be struck down as an infringement of article nineteen clause one sub‑paragraph g. The respondents, on the other hand, maintained that the notifications represented beneficial legislation enacted in the public interest and therefore fell within the protection afforded by article nineteen clause six.

The Court observed that there can be no doubt that the impugned notifications were conceived with public welfare in mind. The Scheme originally framed under the 1952 Act provided provident‑fund benefits only to workmen directly employed in factories or establishments, while large numbers of workers performing similar work under contractors were excluded from its coverage. This exclusion amounted to an unjust discrimination that lacked any rational justification, and the notifications in question were intended to eliminate that disparity. The petitioners did not dispute that the purpose of the notifications fell within the ambit of article nineteen clause six; rather, they contended that the means adopted to achieve that purpose were unreasonable and consequently violated article nineteen clause one sub‑paragraph g. They argued that when the Government decided to extend provident‑fund benefits to workmen employed through contractors, it simply applied the provisions designed for directly employed workers without tailoring them to the distinct position of contractor‑employees, ignoring the differences in their circumstances. According to the petitioners, this resulted in unforeseen and unjust outcomes, and therefore the Scheme could not be said to lie within the constitutional saving of article nineteen clause six. To assess the merit of this objection, the Court examined the distinction between contract labour and direct labour as it relates to the Scheme. It noted that when a principal employer engages contract labour, there is no direct contract between the principal employer and the individual workers who actually perform the work; the contractor alone hires and pays those workers, and the principal employer thereby lacks a direct relationship with them.

The petitioners argued that the employer’s duty to contribute each month to the provident fund an amount equal to six and a quarter per cent of the wages and dearness allowance of each employee could not be performed. They said the principal employer could not know the wages that had been agreed between the contractor and his workers because the factory or establishment kept no muster rolls for workmen employed through contractors. Consequently, the principal employer could not determine whether a workman was a casual labourer or whether he qualified for the benefits of the Scheme under Paragraph 26 by having performed continuous work for the required period. The Court acknowledged that the difficulties raised by the petitioners were not without merit, but held that they were not sufficient to invalidate the Scheme. The Court noted that the problems could have been avoided if the Scheme had required contractors to give a written statement to the principal employer containing the necessary particulars of the workmen and their wages. Even without such a provision, the Court said, the principal employer could require the contractor to provide those particulars at the time the agreement was made, thereby protecting himself. The Court also rejected the contention that the principal employer could not ascertain whether a workman was a casual labourer entitled to benefits under Paragraph 26. The Court explained that Paragraph 26 allows a workman to claim benefits only if he works continuously for at least 240 days in the same factory or establishment, and that the principal employer is capable of determining whether this condition is satisfied.

The petitioners raised a more serious objection, claiming that the right given to the principal employer under Paragraph 32 could not be exercised against contractors. Under Paragraph 30, the entire provident fund, which is twelve and one‑half per cent of the wages and dearness allowance, must first be paid by the employer. Paragraph 32 then requires the employer to deduct half of this amount, representing the employee’s share, from the employee’s wages. This scheme assumes that the same hand that pays the provident fund under Paragraph 30 also pays the wages under Paragraph 32. In the case of contract labour, the contractor pays the workers’ wages, while the obligation to pay the provident fund rests on the principal employer. The petitioners therefore said the Scheme operates “with an evil eye and an unequal hand” because the principal employer must bear the whole contribution but is not given the corresponding right to recover the employee’s share by deducting it from wages. The respondents replied that the principal employer could, by agreement with the contractor, deduct from the amounts payable to the contractor the sums contributed on behalf of the employees, and could also sue the contractor to recover those sums under Section 69 of the Contract Act. However, the Court observed that Paragraph 32 specifically requires the employer to deduct the employee’s share from his wages “and not otherwise.” Moreover, the Scheme does not impose any duty on the contractor to pay the principal employer the amounts the latter has contributed on account of the employees.

The Court observed that the scheme placed the entire burden of contributing to the provident fund on an employer who engaged contract labour, even though the employer was not granted the corresponding right to recover the employee’s share of the contribution by deducting it from his own wages. The respondents argued that the principal employer could, by agreement with the contractor, deduct from the amounts payable to the contractor the sums that the employer had contributed on behalf of the employees, and could further sue the contractor to recover those sums under section 69 of the Contract Act. The Court, however, noted that paragraph 32 expressly required the employer to deduct the employee’s share of the provident‑fund contribution from the employee’s wages and from no other source. In addition, the scheme imposed no duty on the contractor to reimburse the principal employer for the amounts paid on the employee’s behalf. The Court explained that the legislature, through section 6(1) of the Act, intended to make the employer liable only for one half of the provident‑fund contribution. While the 1952 scheme was crafted to fulfil that intention for workers directly employed, the combined operation of paragraphs 30 and 32 broke down when applied to contract labour because paragraph 32 could not be applied. Consequently, the scheme operated in an unfair and harsh manner against employers who hired contract labour and created a discrimination between employers of contract labour and those who employed workers directly. The Court therefore concluded that the scheme was unreasonable and did not fall within the protection contemplated by article 19(6). In the result, the Court held that the notifications dated 15 January 1958 and 2 December 1960 were unconstitutional and void, awarded costs to the petitioners, and allowed the petition.