Mon, 18 Mar, 2019

Sc on provident fund contributions

The recent Supreme Court judgement on PF contributions may have a substantial impact on your provident fund kitty and even your take-home pay

12th March 2019, 03:02 Hrs


The 28th of February this year carried some bad news for at least five establishments. 

The Supreme Court increased their Provident Fund (PF) burden. The decision came in an appeal filed by the Employees Provident Fund Office (EPFO) against a school, and this was considered by the Supreme Court along with four similar cases. 

These five establishments were paying several allowances to their employees which, according to the law, need to be included in the calculation of PF contributions as mandated by the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the Act); these establishments were found to be excluding the allowances from the said calculation, only to reduce their statutory contribution to the PF. 

It would be interesting to find out how many thousands of other employers are adopting similar techniques… confirming Justice Krishna Iyer’s observation in a case in 1978 (though in a different context): “Myriad devices half-hidden in fold after fold of legal form depending on the degree of concealment needed, the type of industry, the local conditions and the like may be resorted to when labour legislation casts welfare obligations …. “   

The present judgement stipulates that these allowances clearly form part of the “Basic Wage” as defined in Section 2 (b) (ii) read with Section 6 (which deals with “Contributions and matters which may be provided for in Schemes”) of the Act.   

The case, however, raises several interesting questions.   

In defining “Basic Wage” the Act excludes Dearness Allowance (DA), House Rent Allowance (HRA), Overtime Allowance (OTA), Bonus, commission etc, the cash value of any food concession, and any presents made by the employer. 

Section 6, on the other hand, states that the contribution by the employer and the employee shall be a percentage of “basic wages, dearness allowance and retaining allowance, if any”, ….and goes on to explain that dearness allowance includes cash value of any food concession allowed to the employee. 

It was argued on behalf of the EPFO that, inter alia, an allowance can be excluded only if it is directly linked to the employee’s output, but an allowance payable to all employees across the board are liable for deduction under Section 6. 

The Supreme Court noted that no evidence was brought on record to show that the additional allowances were related to an employee’s output or other special conditions (like OTA paid for extra hours of work put in by specific employees), and agreed with the EPFO that the said allowances need to be included for calculation of contribution to the Fund/Schemes under the Act.   

The establishments, on their part, were at great pains delving into the nuances of “exclusion” of Dearness Allowance (DA) in the definition of Basic Wage and its “inclusion” in the Contributions provided under Section 6; also that the exclusion of Dearness Allowance (DA) from the Basic Wage is an exception which has been “corrected” by including it in Section 6. 

Is it being suggested here that the Legislature noticed a mistake in its drafting of S.2(b) and “corrected” it in a subsequent section of the same Act? That would be the first question.   

The second question is: Why this complexity in bringing out basic concepts of the law? It is generally accepted that the concept of Basic Wage is intrinsic to all labour legislation, as it is intended to determine the eligibility of employees for benefits under respective Acts. 

There is a definition of Basic Wage in the Act which excludes Dearness Allowance (DA)– which is understandable because, it is likely that employers will pay a large amount of DA to avoid falling under the ambit of the Act – except that Section 6 (which provides the calculation of contribution) includes Dearness Allowance (DA). 

But to determine eligibility, we have to go to the EPF Scheme, 1952, where “eligibility” has been defined in a reverse sort of way, in S.2(f)(ii) of the EPF Scheme, 1952: it says that an employee is excluded from the purview of the Act/Scheme if his pay exceeds fifteen thousand rupees per month. 

The concept of “Pay” here does not appear in the Act, and is defined here as “basic wages, dearness allowance, retaining allowance (if any) and cash value of food concessions” – which is identical to the provision in Section 6 of the Act. The concepts could have been defined clearly in one location.   

The complexity, among other things, led to convoluted arguments about “inclusion” in one place and “exclusion” in another; simplification would have resulted in better advice to the respective establishments.   

A last question by way of conclusion: With the inclusion of these allowances, won’t the employees of those establishments (and thousands of others) exceed the limit of Rs.15,000 – thus putting them outside the purview of the Act? 

Will the establishments now opt to withdraw the membership of those 

employees from the Schemes under 

the Act?     

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