Article (May-2019)


S.C. PF judgment : Much confusion, less clarity

H.L. Kumar

Designation : -   Advocate, Supreme Court

Organization : -  New Delhi


186927 Total View        

In its epoch making judgment by the Supreme Court in the Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir and Others, 2019 LLR 339 has created confusion and concern in employer community and sent wave length of enthusiasm and made the department all activist to proceed against the employer who are not paying contribution on certain allowances. The decision in the aforesaid judgment has created panic and has mainly following problems.

1. It has not made clear whether the ruling will have the retrospective or the prospective effect. However, the general feeling is that it will have the retrospective effect and the major impact of it will be for the period after September 1, 2014, for employees with a basic salary of less than Rs.15,000/-. Because prior to that it was applicable for those employees whose basic salary was less than Rs.6,500/-. This ruling has, without doubt, made two categories one is for the period prior to 1st September 2014 and the second one is after 1 September 2014. It is well settled law that unless the judgment states that it will have prospective effect as it was stated in Union of India vs. Mohd. Ramzan Khan, 1991 (78) FJR 207 and Electronic Corporation of India Ltd. vs. B. Karunakar, 1994 LLR 391 (Five Judge Bench of the Supreme Court). It is pertinent to state here that no limitation has been prescribed for recovery of EPF contribution and damages that too from the employers. Reference is made to a judgment of Delhi High Court in Apex Public School vs. Central Board of Trustees, EPF Organisation, 2015 LLR 675 wherein it has been held that there is no limitation prescribed under section 14-B of the Employees Provident Funds and MP Act for recovery of damages for delayed deposit of contributions.

2. The Supreme Court has reiterated the principle laid down by it in 1962 in the case of Bridge & Roof but with regard to the allowances, it has left some gaping holes. Hence, the test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universally e.g. where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. In this decision, it has has been consistently followed by the employers and the employees as well as the PF Department, through the various circulars/guidelines issued not only by the CPFC but also the Govt. of India in exercise of the statutory powers of the Government under the Act, to issue directions for removing difficulties, wherein inter alia, compensatory allowance; special allowance; personal allowance - pay over and above the "basic wages" and DA for skill, efficiency or past good records; subsidy paid to workers in lieu of canteen facilities along with washing allowance had been specifically mentioned as excluded payments not amounting to "basic wages" and dearness allowance. Further as per information supplied by the EPFO dated 03 Oct., 2010 under RTI Act, 2005 which is at page 44 of the additional documents filed by the petitioner, in I.A. No. 109673 of 2018, as per definition of "basic wages" given under Section 2(b) of the Act, HRA; Education allowance; Conveyance allowance; Washing allowance; Canteen or Food allowance; and some other allowances have been specifically stated to be excluded from "basic wages" and not attracting payment of PF contribution except dearness allowance and retaining allowance under Section 6 of the Act. The excluded allowances/payments were, therefore, not being included in "basic wages", dearness allowance and retaining allowance, if any, by all the employers, for payment of the PF contribution in the Fund. However, they would now be required to be treated as "basic wages" for paying PF contribution in the Fund on the said allowances/amounts also.

3. It is more in the nature of the interpretation of the existing law and so it is presumed to be free from the period of limitation. The provident fund authorities will certainly make demands by determining the amount of provident fund contributions (both employer and employee shares) to be payable by the employer. They will also impose damages and interest for the delayed payments as defaulted. The recovery process under Employees Provident Funds & MP Act is different from that as provided under Civil Procedure Code. In Harjaspal Singh Juneja vs. Recovery Officer, Employees' Provident Fund Organisation, 2013 LLR 455 the Punjab & Haryana High Court has held that the Act clearly distinguishes between civil proceedings to ensure recovery and penal consequences as a deterrent, prescribing no provision that one remedy is dependent on the other. The complaints pertain to violation of different schemes constituting separate causes for filing the complaints. Obligation of an employer covered under the Act has been violated. Hence the recovery can be by attachment and sale of the property of the establishment, rest of the employer and his detention in prison, appointment of receiver for management of property of establishment for the employer etc.

There is no doubt that this ruling has come as a windfall for those employees, whose salary was less than Rs. 15,000/- because now their employers will have to make good the short contributions for those years if it is made applicable with retrospective effect. The ruling has certainly clarified that the allowances (a) which are variable in nature, (b) linked to an incentive for production resulting in greater output by an employee, or (c) which are not paid across the board to all employees in a particular category will form the part of the salary for PF purposes. Till now the employers have been calculating provident fund contribution on the basic salary only. However, this ruling has not dealt with the Provident Fund Scheme applicable to the domestic workers.

Another matter which a cause for concern is that if the Provident Fund contributions are payable for the past, then the employers will have to deposit it using the employees' Universal Account Number and EPF Account Number. But then who will bear the cost for past compliance and who will handle the problems related to the same? These are again the points, for which the clarifications can be issued only by the Ministry.

The uncertainty that was faced by the employers was accentuated by the fact that the EPFO had come with a circular dated 30.11.2012, which inter alia mentioned the term Basic Wages that would include allowances for contribution. The said circular was kept in abeyance vide circular dated 18.12.2012. Therefore, for the last more than 6 years, the industry has contributed PF on basic pay and DA only without considering allowances. This cannot and should not be treated as a non-compliance.

The implication now is that the industry will be called upon to pay the contribution to Provident Fund on a higher quantum of wages including allowances. The employee also has to pay a higher amount since he/she is required to contribute an equal share to the fund. This will deplete the take-home pay of the employee. Considering (a) that this is a matter of interpretation of the law, and (b) the large financial implications would adversely impact the financial performance of the industry it would be prudent to take measures so that industry is not penalized for past periods (prior to the judgment) when the interpretation was not clear. If it is not done, then it would be a huge stumbling block in the avowed aim of the government of helping Ease of Doing Business (EODB). Therefore, it would be prudent for the Government of India to take measures to ensure that the Judgment is only implemented prospectively, and the PF contributions already made prior to this ruling are not called into question.

Periodical inspections of the establishments have been made by the Enforcement Officers and the objection if any have been removed. In some cases the disputed amount has been determined and decided and in case the employer has to pay, the payment have been deposited.  Even then such employers will not have escape from the arrears as payable for the past period pertaining to certain allowances.

The litigation on the issue has travelled to various courts of law and finally to Supreme Court for more than 10 years, thus infusing uncertainty in computing the liability for the employers, who have not provided for the same, in their books of accounts is not conducive for the healthy development of the industries and other establishments. In the past, different High Courts have held different views, which added to a higher degree of uncertainty, with respect to the position of law, on the matter. The retrospective implementation will also bring forth additional financial liability to the tune of more than 37% per year (interest plus penalty under the PF Act), by way of interest and damages to the employer, for no fault on theirs. This additional liability will push up the employees' cost steeply, thus affecting the competitiveness of the industry.

The EPF Act is a common law in the country, the prospective implementation will ensure uniformity across the country without arbitrariness in claiming additional contribution, from the employers and the employees. Global competitiveness provided an opportunity for the employer and employee to choose their compensation structure, based on the flexi-pay system. The thrust has been, in enhancing the take-home pay and providing windows of opportunity for the employee to choose long term investments, be it social security, insurance or asset creation etc.

The retrospective compliance will give a severe setback to the momentum created in ease of doing business with the huge financial burden being imposed on the industry and also on the MSME sector. The MSME sector contributes approximately 4% to GDP of the country. The wages and allowances that are fixed consequent to long term agreements between representative Trade unions and Management, wherein specific inclusions are identified for the purpose of contribution to Provident Fund, will be challenged leading to a plethora of litigations.

Specialized industries in the manufacturing ecosystem viz. logistics, utilities, power generation etc. contribute to the success of the primary industry and have a highly mobile workforce across the regions and industries. Retrospective implementation will make the specialized industries liable to pay the contribution, for the past period which they cannot claim from the primary industry by shear efflux of time, and on account of their disconnect with the primary industry. Such fresh liability will lead to the closure of the specialized industries.

Explaining the verdict, the court said 'No material has been placed by the establishments to demonstrate that the allowances in question (special allowance) being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail of the opportunity’. The top court judgment is unlikely to impact those with basic salary and special allowances above Rs.15,000 a month. An employee contributes 12% of his basic salary to EPF along with a matching contribution (8.33%+3.67%) from his employer. As per section 2(b) of PF act, basic wage refers to all emoluments given to an employee excluding the following :

1. Dearness allowance, house rent allowance, overtime, bonus, commission on business sourcing or any other allowance.

2. Cash value of food coupon.

3. Any present made by the establishment.

Here what the Court has done is that it has directed for the inclusion of even the special allowance as a part of basic pay and it has created more confusion than clarity. The EPFO must come with some practical and viable solution instead of accumulating money for unidentified workers. It is also relevant to state here that the contribution towards employer-employee contribution is on much higher side and needs to be reduced 8.33%. The ESI is also reducing both the shares of contributions i.e. employer and employees. It would reduce the burden upon the employers and employees. The low paid employees are least concerned as to what they will get at the fag and their career. This is possible since the EPFO is over flowing money at its disposal. This will also reduce the delayed payment of deposit of contributions by the employers.

As long as the above judgment continues to prevail, the employers have to realign their wages structure by introducing variable incentives and commissions to be earned by the low paid employees in order to exclude the payment of provident fund contributions.