March 2024
1. Introduction
India is one of the fastest growing economies in the world with an equally staggering workforce. With this, the rights and obligations of employers and employees take center stage. For numerous organizations, the state specific Shops and Establishment Act (“S&E Act”) assumes importance as it stipulates the employer’s duties towards employees. The S&E Acts apply to shops and commercial establishments within the state, subject to certain exceptions. Some states provide an applicability threshold for minimum 10 employees. Under all S&E Acts, a commercial establishment is defined as one which carries on any trade, manufacture, or business. However, each state has exemptions for certain types of establishments, such as factories, IT establishments (under Karnataka S&E Act), or educational institutions (under the Maharashtra S&E Act). Factories are solely governed by the Factories Act which is a comprehensive law on for those working in a factory. Some states also exempt persons in managerial and supervisory positions from the purview of the S&E Acts.
Employees have a right under the S&E Act to be paid wages for overtime hours. This newsletter focuses on the legislative framework on overtime wages in four states which have a substantial business base, jurisprudence on the subject, and underscores the criticality of ensuring implementation.
2. Law on overtime wages
The right of employees to be paid overtime wages in these 4 states is governed by the respective S&E Acts. These are Karnataka Shops and Commercial Establishments Act, 1961, Delhi Shops and Establishment Act, 1954, Maharashtra Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2017, and Punjab Shops and Commercial Establishment Act, 1958 (collectively “Applicable Laws”) which apply to establishments carrying on any trade, manufacture, and business within the state and shops. Only Maharashtra stipulates a minimum threshold of 10 employees. In Karnataka and Maharashtra, the S&E Acts do not apply to persons in managerial or supervisory positions. Under the Applicable Laws, the limit on working hours is fixed at 9 hours/day and 48 hours/week. The other key distinctions are set out broadly below.
- Karnataka – The total work hours, including overtime, must not exceed 10 hours/day and total overtime must not exceed 50 hours/quarter. Under section 8, if thresholds are crossed, employers are mandated to pay overtime wages at twice the normal wages. “Normal wages” means the basic wages plus allowances but excludes bonus. Employers are obligated to adhere to the working hours and the Karnataka Shops and Commercial Establishment Rules, 1963 mandates inspectors to ensure this happens.
- Delhi – The total work hours, including overtime, must not exceed 54 hours/week and aggregate overtime hours must not exceed 150 hours annually. However, overtime work is permitted only for specific instances, some of which are prescribed under the Delhi Shops and Establishment Rules, 1954. These include temporary increases in work due to the absence of any other employee or any emergency, seasonal pressure of work, etc. Any person who does overtime is entitled for remuneration at twice the rate of his normal remuneration calculated by the hour. The term “remuneration” is not defined under the Act. However, the definition of the term “wage” is same as under the Minimum Wages Act and includes any remuneration paid, allowances, gratuity and provident fund.
- Maharashtra – Here, the total overtime hours must not exceed 125 hours/quarter. Unlike the Karnataka and Delhi S&E Acts, Maharashtra statute does not explicitly specify the total work hours including overtime. Under section 15, wages at twice the ordinary rate of wages must be paid for work beyond stipulated hours. The definition of “wage” is same as under the Payment of Wages Act and includes remuneration paid whether in terms of salary, allowances and bonus, with certain exceptions such as contributions towards provident fund, gratuity, house rent etc. The Maharashtra Shops and Establishment (Regulation of Employment and Conditions of Service) Rules, 2017 mandate recording of overtime immediately after completion of the work.
- Haryana – The total number of overtime hours must not exceed 50 hours/quarter. Unlike the Karnataka and Delhi S&E Acts, Haryana statute does not explicitly specify the total work hours including overtime. If thresholds are crossed, employers are mandated to pay overtime at twice the normal wages. “Normal wages” means the basic wages plus allowances but excludes bonus. The Punjab Shops and Commercial Establishment Rules, 1958 require employers to pay overtime wage on the next day itself.
Non-compliance entails a monetary penalty which differs from state-to-state (a) Karnataka: up to INR 250[1], (b) Maharashtra: extending to INR 100,000[2], (c) Haryana: up to INR 100[3], and (d) Delhi: ranged from INR 25-INR 250[4]. Except Maharashtra, the penalties are almost negligible in the other states from less than USD 50 cents to about 1,200. Further, the Applicable Laws require the state government to appoint inspectors who are responsible for ensuring compliance with the respective state act. The inspectors are permitted to enter any premises and assess compliance with the law, as and when required. If they find an organization is non-compliant with the relevant laws, prosecution can be initiated upon a written complaint by the inspector[5] in Karnataka, Maharashtra, and Delhi or by the employee[6] in Haryana. Practically, we have not come across any reports of actions by inspectors in relation to payment of overtime wages. Yet, given the increased focus on compliance as part of overall governance of organizations, it is essential to stay focused and ensure there are no lapses by establishments.
3. Jurisprudence on overtime wages
There is some jurisprudence on overtime wages which dates to the 1980s and it is worthwhile to understand the position of the judiciary in cases that ended up in courts. In the landmark case of Philips India Ltd. v. Labor Court, Madras (1985 AIR 1034), the Supreme Court recognized the right of employees to obtain overtime wages and observed that “if the statute permits employment for a certain number of hours of work and mandates a higher rate of wages for work done in excess of the prescribed hours of work, obviously every employer to whom the Act applies will have to pay overtime wages at the rates prescribed in the statute.”
The case came before the Supreme Court because of two appeals filed by Philips India Limited and State Bank of India. Both entities were situated in Tamil Nadu. In Philips, the total working hours per week was fixed at 39 with daily working hour of 7¾ hours from Monday through Thursday and 8 hours on Friday. The company introduced overtime payment at 1½ times the ordinary wages for overtime work done beyond 39 hours per week, but this was subject to an important condition that whenever the total weekly working hours exceed 48, employees were entitled to overtime wage at twice the ordinary wages, mandated by Section 31 of the Tamil Nadu Shops and Establishment Act, 1947 (“TN Act”). In State Bank of India, the daily working hours was fixed at 6½ and 4 hours on Saturday, totaling a weekly 36 ½ hours. The overtime wage was fixed at 1½ times the ordinary wage.
Section 14 of the TN Act prescribed maximum working hours as 8 hours/day and 48 hours/week. Under Section 31 of the TN Act, overtime wages were payable at twice the ordinary rate of wages for any work done beyond the stipulated hours. The issue was where the employer prescribed lower working hours than the maximum permissible under the statute, was the employer obligated to pay overtime at the rates prescribed under the TN Act.
Claim petitions were filed by employees of both entities in different labor courts for computation of their entitlement to overtime wages. Their contention was they were entitled to overtime at the statutorily prescribed rate of double the ordinary wage for work done in excess of 39 hours (for Philips employees) and 36½ hours (for State Bank employees). The labor courts held that section 14 of the TN Act only prescribes the maximum working hours and organizations are free to prescribe lower working hours. But once the employer chooses to prescribe working hours lower than section 14, the rate of overtime wage would be on the principle of section 31 i.e., double the ordinary rate of wages. Both entities were directed to pay the difference to all employees.
Aggrieved by the order, the entities filed writ petitions before Madras High Court. The High Court rejected the appeal on the same grounds as the lower courts and held the employees would be entitled to the statutorily prescribed rate of overtime wages for work done beyond the hours fixed by the organizations. Thereafter, an appeal was filed before the Supreme Court. The court held that section 14 of the TN Act prescribes the ceiling limit of working hours at 8 hours/day and 48 hours/week. The rate of overtime wage at double the ordinary wage under section 31 only comes into action when 48 hours limit under section 14 is crossed. In the present case, the employers had prescribed working hours much below the maximum limit under the statute. Accordingly, the employers were not required to pay overtime wages at the statutory rates. The appeal was allowed.
In another landmark case of Indian Oxygen Limited v. Their Workmen (1969 AIR 306), the Bihar Government referred five disputes raised by the Indoxco Labor Union to the Industrial Tribunal. One contention of the labor union was that overtime wages should be paid at the rate of 1½ times the ordinary rate of wages. The company’s service conditions provided a total of 39 weekly working hours. It was paying overtime wages at par with the ordinary wage rate. Under section 9 of the Bihar Shops and Establishment Act, 1953, the maximum prescribed working hours in a week was 48 hours. Section 21 mandated that where work exceeded 48, overtime would be paid at double the ordinary wage rate. The tribunal reviewed overtime wage rates of other similar industries in the state and held that for any work done beyond 39 hours, overtime wage at 1 ¼ the ordinary wage rate must be paid. If the work exceeded the statutory limit of 48 hours, then overtime wage would be double the ordinary wage. When the appeal reached the Supreme Court, the court concurred with the tribunal’s decision and observed if the workmen were to be paid overtime at par with the ordinary wage rate then that would effectively mean no extra compensation was being paid to them. Hence, the company was directed to pay overtime at the rate of 1¼ times the ordinary wage for work done between 39 and 48 hours.
4. Conclusion
Under the present legislative framework, nearly all state specific S&E Acts mandate payment of overtime wages. Upon inspection, if an organization is found to be non-compliant or where an employee files a complaint to the inspector, prosecution may be initiated with the appropriate industrial tribunal. While penalties for non-compliance are low, it is still crucial for organizations to comply as overtime wages would be required to be paid from the date they became due, and tribunals may impose costs if proved to be non-compliant.
In the last five years, the Indian government took steps to overhaul the existing labor law regime and introduce four new labor codes encompassing existing laws and introducing stringent norms aimed at enhancing labor welfare. While they have yet to be implemented, the draft Code on Wages, 2019, requires employers to pay overtime wages at twice the normal wage rate for any work more than 8 hours/day. The penalty for non-compliance is increased to INR 20,000 or about USD 235. Inspectors have been granted additional powers to advise the workforce on compliances under the Code. As and when the Code is implemented, there is no doubt a higher emphasis will be placed on overall compliance including overtime wage provisions. So, while the state specific law as it stands today, may appear to be toothless, but that is going to change. We expect a greater degree of enforcement and consequential likelihood of action for non-compliance.
Author
[1] Section 30(2) of Karnataka S&E Act
[2] Section 29(1) of Maharashtra Shops and Establishment (Regulation of Employment and Condition of Service) Act
[3] Section 26 of Punjab S&E Act
[4] Section 40 of Delhi S&E Act
[5] Section 32 of Maharashtra Shops and Establishment (Regulation of Employment and Condition of Service) Act, Section 31(1) of Karnataka S &E Act, Section 45 of Delhi S&E Act
[6] Section 33A of Punjab S&E Act