Ordinary Rate of Wages Overtime: Supreme Court on Allowances under the Factories Act

Case Summary

• Case name: Union of India & Others v. Heavy Vehicles Factory Employees’ Union & Another, Civil Appeal Nos. 5185–5192 of 2016 (2026 INSC 74)

• Date of judgment: 20 January 2026

• Bench: Honourable Justice Rajesh Bindal and Honourable Justice Manmohan

• Counsel / Advocates: Not specified in the provided extract

• Statutes / Sections:

  • Factories Act, 1948 — Section 59(2) (primary); Sections 64, 65 (Chapter VI); Sections 112–113 (Chapter XI – supplemental)

  • General Clauses Act, 1897 — Section 3, Clause 60

  • Payment of Wages Act, 1936 — Section 2(vi)

  • Industrial Disputes Act, 1947 — Section 2(rr)

• Important cited authorities:Bridge and Roofs Co. Ltd. v. Union of India (1962);Govind Bapu Salvi v. Vishwanath Janardhan Joshi (1995);Union of India v. Suresh C. Baskey (1996);Rajasthan State Industrial Dev. & Inv. Corpn. v. Subhash Sindhi Coop. Housing Society (2013);Gujarat Mazdoor Sabha v. State of Gujarat (2020);Kerala High Court — V.E. Jossie & Ors. v. The Flag Officers Commanding in Chief Headquarters (2011);ancillary references to Mamarde and ITC Ltd.

Introduction

The judgment delivered by Honourable Justice Rajesh Bindal (with Honourable Justice Manmohan concurring) in Union of India v. Heavy Vehicles Factory Employees’ Union is a measured restatement of well-established principles of statutory construction and administrative law in the context of labour protection.

At stake was a practical and financially consequential question: whether compensatory allowances such as House Rent Allowance (HRA), Transport Allowance (TA), Clothing and Washing Allowance (CWA) and Small Family Allowance (SFA) fall within the statutory phrase “ordinary rate of wages” for the purpose of calculating overtime under Section 59(2) of the Factories Act, 1948.

The Legal Issue and the Court’s Approach

The Court addressed two interrelated questions:

1. The textual scope of “ordinary rate of wages” under Section 59(2) of the Factories Act, 1948; and

2. The legal effect of executive letters and Office Memoranda issued by central Ministries excluding compensatory allowances from overtime calculations.

The bench resolved both issues by applying textual interpretation and administrative law principles. Where Parliament has explicitly defined a concept and provided limited exclusions, the executive cannot, through internal circulars, introduce additional exclusions.

The Court reproduced Section 59(2):

“Ordinary rate of wages means the basic wages plus such allowances … as the worker is for the time being entitled to, but does not include a bonus and wages for overtime work.”

The statutory language is deliberately expansive. The Court reiterated the settled canon that:

“The Legislature never wastes its words.”

The express exclusion of only bonus and overtime wages indicates a conscious legislative choice not to exclude other allowances.

Administrative and Institutional Dimension

A substantial part of the judgment concerns institutional competence. Chapter VI of the Factories Act confers rule-making and exempting powers exclusively on State Governments (Sections 64 and 65).

Central Ministries’ circulars — including those issued by the Ministry of Defence and the Ministry of Labour and Employment — lack statutory force and cannot modify the meaning of an Act of Parliament. The Court therefore declined to accord legal effect to the series of Office Memoranda relied upon by the Union.

The judgment also highlights inconsistency within the Government itself. Some departments, such as the Ministry of Railways, had adopted an inclusive approach to overtime calculations. Internal executive inconsistency, the Court held, cannot be used to reinterpret statutory provisions.

Interaction with Precedent

The bench distinguished earlier authorities relied upon by the appellants, including Bridge & Roofs, Govind Bapu Salvi and Suresh C. Baskey, noting that those cases arose under different statutory definitions or factual contexts.

Conversely, the Court drew support from precedents cautioning against executive instructions overriding statutory protections, including Rajasthan State Industrial Development Corporation and Gujarat Mazdoor Sabha. The judgment reaffirmed that interpretations which dilute labour protections under Chapter VI of the Factories Act must be avoided.

Practical Consequences and Implications for Practice

For litigators and in-house counsel, the ruling has immediate practical consequences:

• Employers, including government factories and production units, cannot rely on central Office Memoranda to exclude compensatory allowances from overtime calculations. Overtime must be computed by reference to the statutory “ordinary rate of wages” unless a valid legislative exclusion or State rule applies.

• The judgment exposes potential retrospective liability. Where overtime has historically been calculated by excluding allowances, employers may face claims for arrears, subject to limitation and laches.

• The decision reinforces that fiscal or administrative concerns must be addressed through legislative amendment or valid State rule-making under the Act, not executive circulars.

Quotable Passages and Their Import

The ratio is crystallised in several observations:

“The Legislature never wastes its words.”

“Executive instructions which have no statutory force, cannot override the law.”

“An interpretation which restricts or curtails benefits admissible to workers under the Factories Act has to be avoided.”

These observations underscore that labour statutes are protective in nature and must be construed accordingly.

Critical Observations

The judgment is doctrinally sound and cautious. One practical consequence for employers is the possibility of regulatory fragmentation, as States may adopt differing approaches to rulemaking under Chapter VI. The Court implicitly acknowledges this structural reality by reiterating that the executive lacks power to unilaterally alter the statutory formula.

Conclusion

The decision reaffirms core principles of statutory interpretation, labour protection and limits on executive power. For employers, unions and counsel, it necessitates a careful re-examination of payroll practices and historical exposure. For policymakers, the judgment underscores that contentious questions of wage law must be resolved through clear statutory or rule-making action, not executive memoranda.

In the Court’s Words

“59. It is pertinent to throw some light on the definition of ‘State Government’… Clause 60 of Section 3 of the General Clauses Act, 1897 defines ‘State Government’…

9.1 Section 64 empowers a State Government to make rules…

9.3 Meaning thereby, as far as Chapter VI is concerned, there is no power vested with different Ministries of the Government of India to issue any clarification with reference to Section 59(2) of the 1948 Act…

…when the statute provides for only two specific exclusions — bonus and wages for overtime work — the Executive cannot, through a mere Office Memorandum, read additional exclusions into the Act that the Legislature did not contemplate.”