Supreme Court Upholds Inclusion Of Compensatory Allowances In 'Ordinary Rate of Wages' For Overtime

A bench of Justices Rajesh Bindal and Manmohan heard an appeal by the Union of India challenging a Division Bench judgment of the Madras High Court which had set aside orders of the Central Administrative Tribunal. The narrow question before the Court was whether compensatory allowances — including House Rent Allowance (HRA), Transport Allowance (TA), Clothing and Washing Allowance (CWA) and Small Family Allowance (SFA) — formed part of the “ordinary rate of wages” for calculating overtime under Section 59(2) of the Factories Act, 1948.

The Supreme Court dismissed the appeals and upheld the High Court’s interpretation. The Court held that the statutory phrase “ordinary rate of wages” must be read according to its text and scope, and the Executive could not, by administrative memoranda, create exclusions that the Legislature did not provide for. The Court reproduced the statutory language noting that Section 59(2) defined the ordinary rate as “basic wages plus such allowances, including the cash equivalent of the advantage accruing through the concessional sale to workers of foodgrains and other articles, as the worker is for the time being entitled to, but does not include a bonus and wages for overtime work.” The Court, in its reasoning, observed: “As observed by the High Court, the core of the controversy rested upon the interpretation of Section 59(2) of the Factories Act, 1948, which defined the 'ordinary rate of wages' as basic wages plus 'such allowances' as the worker for the time being is entitled to. The High Court has rightly opined that it is well‑settled principle of statutory construction that the Legislature never wastes its words. Notably, when the statute provides for only two specific exclusions: bonus and wages for overtime work, in the absence of any formal rules governing the exclusion of other entitlements, the Executive cannot, through a mere Office Memorandum, read additional exclusions into the Act that the Legislature did not contemplate. The High Court further noted that the employees had been in receipt of overtime allowances calculated by including HRA, TA, SFA, etc., for a considerable duration. The sudden exclusion of these allowances via the Office Memorandum dated 26.06.2009, lacks legal authority and is contrary to the literal mandate of Section 59 of the 1948 Act.” The appeals were therefore dismissed.

Background

The dispute arose from multiple original applications filed before the Central Administrative Tribunal by unions representing employees of defence production factories. Historically, various Ministries had issued letters and Office Memoranda taking differing positions: early communications (1959) indicated overtime should be calculated on basic pay and dearness allowance for limited excess hours; later Ministry of Labour/Finance/Defence memoranda (2000–2009) advised excluding compensatory allowances such as HRA and TA for overtime computation. The CAT, on 24.12.2010, dismissed the unions’ applications (effectively upholding the Executive view); the unions challenged that outcome in writ petitions before the Madras High Court, which set aside the CAT order on 30.11.2011, holding that the statutory text did not permit the Executive to read in additional exclusions.

The Union of India appealed to this Court, urging that differing allowances and modes of provision across establishments would create anomalies and financial burden if included in the ordinary rate. The respondents argued that Section 59(2)’s plain meaning required inclusion of all allowances a worker was “for the time being entitled to,” and that the impugned administrative instructions lacked statutory authority. The Supreme Court examined the scheme of the Factories Act, noted the allocation of rule‑making and exempting powers to State Governments, and found no delegation enabling Central Ministries to carve out substantive exclusions by office memorandum. The Court also relied on earlier decisions emphasising that executive instructions without statutory force cannot override the law and that Chapter VI remedies protect workers from exploitation. The Court affirmed the High Court’s order and dismissed the appeals; no costs were awarded and pending applications stood disposed of.

Case Details: Case No.: 2026 INSC 74; Civil Appeal Nos. 5185‑5192 of 2016 Case Title: Union of India & Others v. Heavy Vehicles Factory Employees’ Union and Another Appearances: (List advocates if available, for both sides using the format) For the Petitioner(s): [Not indicated in the judgment] For the Respondent(s): [Not indicated in the judgment]