Compensatory Allowances Must Be Considered While Computing Overtime Wages Under Section 59 Factories Act : Supreme Court

The Supreme Court held that compensatory allowances such as House Rent Allowance (HRA), Transport Allowance (TA), Clothing and Washing Allowance (CWA) and Small Family Allowance (SFA) form part of the “ordinary rate of wages” for the purpose of calculating overtime wages under Section 59(2) of the Factories Act, 1948.

A Bench comprising Justice Rajesh Bindal and Justice Manmohan dismissed a batch of civil appeals filed by the Union of India, thereby affirming the Madras High Court's judgment which had set aside an order of the Central Administrative Tribunal (CAT) excluding such allowances from overtime wage calculations.

As per Section 59(1), where a worker works in a factory for more than nine hours in any day or for more than forty-eight hours in any week, he shall, in respect of overtime work, be entitled to wages at the rate of twice his ordinary rate of wages.

The term "ordinary rate of wages" is defined in Section 59(2) as meaning the "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 has held that to compute overtime wages, compensatory allowances will also have to be taken into account.

Background

The controversy arose from a series of Office Memorandums and letters issued by different Ministries of the Union Government, particularly the Ministries of Defence, Labour and Employment, and Finance, between 1959 and 2009. These communications took the position that overtime wages under Section 59(2) of the Factories Act should ordinarily be calculated only on basic pay and dearness allowance, excluding compensatory allowances like HRA, TA, CWA and SFA.

Employee unions from defence production factories challenged this interpretation before the CAT. While the Tribunal accepted the Union Government's stand, the Madras High Court reversed it, holding that such executive instructions could not override the clear language of the statute.

Supreme Court's View

Upholding the judgment of the High Court, the Supreme Court emphasised that Section 59(2) of the Factories Act defines “ordinary rate of wages” as basic wages plus “such allowances” as the worker is entitled to, expressly excluding only bonus and overtime wages.

The Court held that neither Chapter VI (Working Hours of Adults) nor Chapter XI (Supplemental) of the Act confers any power on Union Ministries to issue clarifications restricting the scope of Section 59(2). Powers to make rules or grant exemptions under the Act vest exclusively with State Governments, subject to the statutory framework.

“Different Ministries of the Government of India cannot assign different meaning to a provision in an Act of Parliament, which otherwise is clearly evident from the plain reading of Section 59(2),” the Bench observed.

Executive Instructions Cannot Override Statute

Rejecting the Union Government's reliance on past circulars, the Court reiterated that executive instructions lacking statutory force cannot curtail rights conferred by legislation. It noted that Parliament had consciously used broad language by including “such allowances” in the definition, while providing only two explicit exclusions.

The Court also took note of the fact that the Ministry of Railways had itself adopted an interpretation including HRA and TA in overtime calculations, highlighting the inconsistency in the Union Government's stand.

Beneficial Legislation Must Be Liberally Construed

Relying on its earlier jurisprudence, including Gujarat Mazdoor Sabha v. State of Gujarat(2020), the Court underscored that the Factories Act is a beneficial legislation aimed at protecting workers from exploitation. Any interpretation that restricts or curtails benefits available to workers under Chapter VI must be avoided.

The Bench further declared that a contrary view taken by the Kerala High Court in V.E. Jossie v. Flag Officers Commanding-in-Chief did not lay down the correct law.

Concluding that no case for interference was made out, the Supreme Court dismissed the Union of India's appeals, holding that compensatory allowances must be included in computing the “ordinary rate of wages” for overtime under the Factories Act. Pending applications were also disposed of, with no order as to costs.

Case : Union of India v Heavy Vehicles Factory Employees Union and Another

Citation : 2026 LiveLaw (SC) 70

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