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Jan  20- 2026

Compensatory Allowances Must Be Included While Computing Overtime Wages Under the Factories Act, 1948

CASE: UNION OF INDIA V. HEAVY VEHICLES FACTORY EMPLOYEES UNION & ANR.

Introduction

In a significant reaffirmation of workers’ rights, the Supreme Court of India has held that compensatory allowances form part of the “ordinary rate of wages” for calculating overtime wages under Section 59 of the Factories Act, 1948. The ruling clarifies a long-standing dispute concerning whether allowances such as House Rent Allowance (HRA), Transport Allowance (TA), Clothing and Washing Allowance (CWA), and Small Family Allowance (SFA) should be included while computing overtime.

By dismissing the Union of India’s appeals, the Court affirmed the pro-worker interpretation adopted by the Madras High Court, strengthening the principle that beneficial labour legislation must be interpreted liberally in favour of employees.

Statutory Framework: Section 59 of the Factories Act, 1948

  • Section 59(1) of the Factories Act provides that where a worker works for more than nine hours in a day or forty-eight hours in a week, he is entitled to overtime wages at twice the ordinary rate of wages.
  • Section 59(2) defines “ordinary rate of wages” as:
  • Basic wages, plus
  • Such allowances (including the cash equivalent of concessional benefits),
  • Excluding only bonus and wages paid for overtime work.

The interpretative question before the Court was whether compensatory allowances fall within the phrase “such allowances”.

Background of the Dispute

For decades, various executive instructions and Office Memorandums issued by Union Ministries particularly Defence, Labour and Employment, and Finance took the view that overtime wages should 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 position before the Central Administrative Tribunal. While the Tribunal accepted the Union Government’s interpretation, the Madras High Court overturned it, holding that executive instructions could not override the clear and unambiguous language of Section 59(2).

Supreme Court’s Analysis and Findings

A Bench comprising Justice Rajesh Bindal and Justice Manmohan upheld the High Court’s ruling and dismissed the appeals filed by the Union of India.

  1. Plain Meaning of Section 59(2)

The Court emphasised that Parliament deliberately used expansive language by including “such allowances” in the definition of ordinary wages, while expressly excluding only two components bonus and overtime wages. Compensatory allowances, being part of the remuneration to which a worker is entitled, clearly fall within this definition.

  1. No Power with Union Ministries to Restrict Statutory Rights

The Court noted that neither Chapter VI (Working Hours of Adults) nor Chapter XI (Supplemental) of the Factories Act confers any authority on Union Ministries to issue clarifications or instructions limiting the scope of Section 59(2). The power to make rules or grant exemptions rests with State Governments, subject to the Act.

“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.

  1. Executive Instructions Cannot Override Law

Reiterating settled constitutional principles, the Court held that executive circulars or memoranda lacking statutory backing cannot curtail rights granted by legislation. Administrative convenience or long-standing practice cannot prevail over the express mandate of Parliament.

  1. Inconsistency in the Union Government’s Stand

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

Beneficial Legislation and Liberal Interpretation

Placing reliance on its earlier decision in GUJARAT MAZDOOR SABHA V. STATE OF GUJARAT (2020), the Supreme Court reiterated that the Factories Act is a welfare legislation intended to protect workers from exploitation. Any interpretation that narrows or restricts benefits under Chapter VI must be avoided.

In this context, the Court expressly disapproved the contrary view taken by the Kerala High Court in V.E. JOSSIE V. FLAG OFFICERS COMMANDING-IN-CHIEF, holding that it did not lay down the correct law.

Conclusion

The Supreme Court’s decision in UNION OF INDIA V. HEAVY VEHICLES FACTORY EMPLOYEES UNION conclusively settles the law that compensatory allowances such as HRA, TA, CWA, and SFA must be included while computing overtime wages under Section 59 of the Factories Act, 1948.

By rejecting restrictive executive interpretations and reaffirming the primacy of statutory language, the judgment strengthens labour protections and reinforces the principle that beneficial legislation must receive a liberal and purposive construction. The dismissal of the Union of India’s appeals ensures that workers receive the full measure of overtime compensation envisioned by Parliament.