The Supreme Court has held that compensatory allowances must be included in overtime wage calculation under Factories Act and the executive circulars cannot override Section 59(2) of the Factories Act.
The bench of Justice Rajesh Bindal has held that compensatory allowances such as House Rent Allowance (HRA), Transport Allowance (TA), Clothing & Washing Allowance (CWA) and Small Family Allowance (SFA) must be included while calculating overtime wages under Section 59(2) of the Factories Act, 1948.
The bench dismissed appeals filed by the Union of India and upheld the Madras High Court’s decision in favour of defence factory employees
The case arose from multiple applications filed by employee unions of defence production factories under the Ministry of Defence. These employees challenged a series of Office Memorandums issued between 2002 and 2009 by the Ministries of Finance, Labour and Defence, which excluded compensatory allowances from the computation of overtime wages.
While the Central Administrative Tribunal (CAT), Madras Bench, upheld the government’s position, the Madras High Court set aside the CAT order, holding that such executive instructions could not curtail statutory benefits under the Factories Act. Aggrieved, the Union of India approached the Supreme Court.
The issue raised was whether compensatory allowances fall within the expression “ordinary rate of wages” under Section 59(2) of the Factories Act, 1948, for the purpose of calculating overtime wages.
Government’s Arguments
The Union of India contended that compensatory allowances are reimbursement-based and employee-specific, leading to disparity. Several Office Memorandums clarified that only basic pay and dearness allowance should be considered. Including allowances would impose a heavy financial burden on defence establishments. Reliance was placed on earlier Supreme Court judgments to justify exclusion.
The employees argued that Section 59(2) expressly includes “basic wages plus such allowances as the worker is entitled to”, with only two exclusions — bonus and overtime wages. Ministries lack statutory authority to reinterpret or dilute parliamentary legislation. The Factories Act is a beneficial labour statute requiring liberal interpretation. The Railways, another Central Government department, includes allowances for overtime—showing inconsistency in executive interpretation.
The Court undertook a detailed examination of the statutory scheme of the Factories Act, powers of State vs Central Government, limits of executive instructions, and social purpose of overtime compensation.
It categorically held that only State Governments are empowered to frame rules or grant exemptions under Chapter VI of the Factories Act. Central Ministries have no authority to issue binding clarifications altering Section 59(2). Executive circulars cannot add exclusions not contemplated by Parliament. Allowances “for the time being entitled to” must be included unless expressly excluded by law.
The Court reiterated that overtime wages at double the ordinary rate act as a safeguard against labour exploitation and cannot be diluted by administrative convenience.
The Supreme Court dismissed all appeals filed by the Union of India, affirmed the Madras High Court’s ruling and held that compensatory allowances form part of “ordinary rate of wages”.
The court declared contrary Kerala High Court precedent as not good law and passed no order as to costs
Case Details
Case Title: UOI Versus Heavy Vehicles Factory Employees’ Union
Case No.: Civil Appeal Nos.5185-5192 Of 2016
Date: 20/01/2026
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