In a significant ruling affecting thousands of industrial workers, the Supreme Court has clarified how overtime wages must be calculated under the Factories Act, 1948. The court held that compensatory allowances like House Rent Allowance (HRA), Transport Allowance (TA), and similar benefits cannot be excluded while computing overtime pay.
The judgment came in a long-pending dispute between the Union of India and employees of defence production units, settling years of uncertainty over wage calculations.
Background of the Case
The case arose from a batch of appeals filed by the Union of India against a 2011 judgment of the Madras High Court. The High Court had upheld the Central Administrative Tribunal’s decision directing that allowances such as HRA, Transport Allowance, Clothing Allowance, and Small Family Allowance must be included while calculating overtime wages.
The dispute stemmed from multiple office memorandums issued by different government departments over the years. These circulars had attempted to exclude such allowances from overtime calculations, arguing that they were “compensatory” in nature.
Employees’ unions challenged this interpretation, claiming it violated Section 59(2) of the Factories Act, which defines how overtime wages are to be calculated.
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What the Law Says
Section 59(2) of the Factories Act states that overtime wages must be paid at twice the “ordinary rate of wages.” The law defines this as:
“Basic wages plus such allowances… as the worker is for the time being entitled to.”
Only two exclusions are specifically mentioned:
- Bonus
- Overtime wages themselves
There is no mention of excluding HRA, TA, or other compensatory allowances.
Court’s Observations
The Supreme Court, while examining the case, made several important observations:
- The power to interpret or modify provisions of the Factories Act lies with the legislature, not with government ministries.
- Ministries cannot issue office memorandums that effectively rewrite a statute.
- Different departments of the government cannot give conflicting interpretations of the same law.
The bench noted:
“When the statute clearly defines what is included and excluded, the executive cannot add new exclusions through circulars or office memorandums.”
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The court also pointed out that the Ministry of Railways itself had been including such allowances while calculating overtime, showing inconsistency in government practice.
Rejection of Government’s Arguments
The Union of India argued that including allowances would lead to unequal pay because employees receive different benefits based on housing, transport, or posting.
However, the court rejected this reasoning, stating that the Factories Act is a welfare legislation meant to protect workers from exploitation.
Referring to earlier judgments, the bench observed that:
“Any interpretation that reduces statutory benefits to workers must be avoided.”
The court also clarified that only State Governments - not Central Ministries - have limited rule-making powers under the Act, and even those do not permit altering the definition of wages.
Final Decision
Upholding the Madras High Court’s ruling, the Supreme Court dismissed all appeals filed by the Union of India.
The court held that:
- Allowances such as HRA, Transport Allowance, and similar benefits must be included in calculating overtime wages.
- Executive circulars cannot override the Factories Act.
- Workers are entitled to overtime wages based on their full entitled pay, not a reduced component.
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The bench concluded:
“No case for interference is made out. The appeals are dismissed.”
Case Title: Union of India & Ors. vs Heavy Vehicles Factory Employees’ Union
Case No.: Civil Appeal Nos. 5185–5192 of 2016
Decision Date: 20 January 2026
