Written by Shubhranshu & Shivam Verma students at NALSAR University of Law, Hyderabad.
After a prolonged wait, the four new Labour Codes were finally notified on 21 November, 2026. One of their primary aims is to modernise and simplify labour law compliances. Though a significant number of provisions have been continued as they are, or have undergone only minimal changes. One such provision is the definition of wages, where certain changes, most notably the fifty percent cap rule on exclusions, have been introduced. However, one exclusion which has been retained as it is appears in Section 2(y)(e) of the Wages Code, which reads: “any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment.”
What exactly counts as a “special expense” in this context, has never been straightforward and the question carries more weight now than it once did. Under the new Codes, whether a particular payment falls within, or outside clause 2(y)(e) directly affects how the fifty percent cap is calculated, with real downstream consequences for wage-related compliances. This paper works through that question by examining the jurisprudence that developed under earlier labour legislation, particularly the Employees’ State Insurance Act, 1948 which carried an identically worded exclusion. That body of case law, given the textual similarity remains the most reliable interpretive guide to what the provision means under the new Codes as of now.
The principle that can be inferred from and runs through the case laws is not hard to articulate. What has proven harder, across decades of litigation, is its application. A payment qualifies as special expense only when it responds to a cost that the employee is unavoidably required to bear because of the specific nature of his duties or working conditions. Expenses arising from or rooted in general convenience, personal need or circumstances which are unrelated to the character of the work itself do not qualify. The Courts have particularly rejected those allowances that any employee in any workplace could have reasonably received regardless of what they are labelled. Kerala High Court rationale in K.P.L. Oil Mills (P) Ltd. v. Employees State Insurance Corporation puts across this point well. The employer, the court held must show that the payment is on account of or arises from “the nature of his employment and not by the nature of the place of posting.” A City Compensatory Allowance paid simply because a employee is posted in an urban area fails this test as here the trigger is incidental circumstance (location/geography), not the character of the work itself.
What Qualifies
Where courts have upheld the exclusion, there is usually a clear and demonstrable link between a specific occupational condition and the expenditure being compensated. In Employees State Insurance Corporation v. Gedore Tools India (P.) Ltd., the Punjab and Haryana High Court excluded a milk allowance paid exclusively to workers in forging, grinding, heat-treatment and electroplating sections observing that the employees in those sections were exposed to hazardous atmospheric conditions and the payment was a targeted health response, the one that “clearly fell within exception (c).” A Similar approach was taken in Hyderabad Asbastos Cement Products Ltd. v. The Regional Director, E.S.I. Corporation, where a washing allowance paid to cement factory workers was excluded on the basis that the nature of the work itself made uniform spoiling unavoidable. The court reasoned that had the employer arranged the washing itself, the cost would never have been characterised as wages; so routing the same amount through the employee should not change its character.
Similar logic gets carried forwarded in Regional Director v. Taurus Security Services where the Kerala High Court upheld allowances paid to security guards for their uniform maintenance, raincoats, boots and inspection travel. The court reasoned that wearing a uniform is indispensable to the role, that guards are required to work round the clock through all weather conditions and must be suitably equipped without spending from their own pocket, and that supervisory officers who travel to inspect deployment sites incur those costs purely in discharge of their official duty. All three heads were held to fall within the exclusion as costs incurred “considering the nature of their employment to defray special expenses incurred for discharging their duty.” The Madras High Court in E.S.I. Corporation v. Mount Mettur Pharmaceutical Ltd. extended the principle to meal and tiffin expenses paid to employees, holding that such amounts are to be considered special expenses exempted under Section 2(22)(c) of ESI Act. More recently, the Delhi High Court in Godambari Raturi v. Employee State Insurance Corporation Ltd. held that a special incentive paid during the Covid-19 pandemic to enable workers to bear expenses on masks, gloves, sanitizers, and travel so that the work could go on, ensuring minimum damage to economy, fell squarely within the exclusion. The court noted its temporary and purpose specific character as main decisive factors.
What Does Not Qualify
The jurisprudence also draws a firm line against allowances that however genuinely useful to the employee, are there just to respond to a universal need rather than a work-specific one. In Kesoram Industries Ltd. v. E.S.I. Corporation, the Calcutta High Court refused to exclude a milk allowance paid uniformly to all workers, observing that there was “nothing on record to show that the nature of the work demanded a milk supplement to maintain health.” In the absence of evidence establishing a nexus between the allowance and any special employment-related expenditure, the allowance could not be treated as a payment made to “defray special expenses entailed by the nature of employment.”. A similar outcome followed in Hind Art Press, Mangalore v. E.S.I. Corporation, though the court’s reasoning rested on different grounds. The Karnataka High Court rejected the contention that the midday meal allowance fell within the special expense exclusion under clause (c) of Section 2(22) of the ESI Act, holding instead that the allowance of Rs. 10, paid under a bipartite settlement, constituted an amount paid in terms of the contract of employment and fell within “other additional remuneration” under the wages definition, drawing an analogy to the allowances the Supreme Court had included within wages in Harihar Polyfibres v. ESI Corporation.
Reconciling the Conflicting Decisions
The most instructive aspect of this body of case law lies not in the settled cases but in the conflicts. On meal allowances the Karnataka High Court in Hind Art Press and the Kerala High Court in Malabar Fruit Products Co. v. E.S.I. Corpn. arrived at opposite conclusions on broadly similar facts. The Karnataka court reasoned from the source of the obligation, that the payment was made under a settlement, and treated it as additional remuneration. The Kerala High Court took the opposite view, reasoning from the purpose of the payment. The court held that the meals allowance was paid to meet the employee’s need for food during working hours, in lieu of canteen facilities. It further observed that treating it as wages would produce a ludicrous result: a fraction of the very amount meant to feed the worker would have to be deducted as the employee’s contribution.
On washing allowances, the Karnataka High Court itself issued divergent decisions: in Graphite India Ltd. v. ESI Corporation, the allowance was excluded because the settlement expressly denied it to workers absent for the entire month, this attendance linkage proved that the allowance was meant to defray the cost of washing work clothes, not a general benefit. In Paramount Detectives v. Regional Director, three decades later, the same court included an identical allowance within wages because the employer could not demonstrate any such conditionality. The common thread in the cases that exclude the allowance is specificity: a targeted payment, tied to a defined occupational condition survives the challenge. The common thread in the cases that include it is generality: a flat, uniform, unconditional benefit (even one paid under a settlement), regardless of what it is labelled.
The Mode of Payment Is Not Determinative
A distinct but practically important question is whether this exclusion requires actual reimbursement against bills or whether a fixed upfront amount suffices. The courts have not left it unanswered entirely. In Taurus Security Services case, Kerala High Court rejected the argument that computing the allowance as a flat percentage of basic pay converted it into wages. It held that “the mode of payment is insignificant” and that it is “the nature of payment and the reason for such payment” that are decisive. Essentially, here the percentage was simply seen as a quantification tool, nothing more. Another relevant case is Hyderabad Asbastos Cement Products , here the employer estimated that approximately Rs. 2.50 per month would be spent by each employee on washing and paid accordingly. The fact that the employer worked out an average monthly figure rather than waiting for employees to submit actual bills, suggests that the amount was disbursed as a fixed sum rather than a reimbursement. The court held this arrangement as one which falls within the exclusion and affirmed that the law looks at the purpose of the payment, not its precise mode.
These cases read together, points in one direction that what an employer chooses to label a payment matters far less than the reason it is being made in the first place. An allowance that responds to a genuine, work-specific cost, one which the employee would otherwise have to bear personally stands on solid footing. On the other hand allowance that simply repackages a routine benefit in the language of special expenses does not. Courts have been drawing this line repeatedly under the ESI Act and employers would do well to take note of it, since now stakes are higher. Under the new Labour Codes the fifty percent cap means that how an allowance is classified has a direct impact on compliance calculations. The question was always important and it is more so today.
Caveat: The views, analyses, and information presented in this article are provided in good faith and for general informational purposes only. No representation or warranty, express or implied, is made regarding the accuracy, adequacy, validity, reliability, or completeness of the information. Readers should conduct their own research and seek professional guidance where appropriate. Neither the author nor the publisher shall be held responsible for any loss, liability, or consequence arising from reliance on this content.
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