Article (April-2019)


Splitting of Wages for PF

Ram Niwas Bairwa

Designation : -   Regional PF Commissioner (II)- Retired

Organization : -  Jaipur


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The Supreme Court Judgment dated 28.02.2019 in the a Civil Appeal case of Regional Provident Fund Commissioner, West Bengal Vs. Vivekanand Vidya Mandir and others - [2019 LLR 339] linking 4 other appeals by companies against the orders of the High Courts, has attracted the attention of the employers covered under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.  This judgment, in fact, once again brought on surface the definition of wages as given in Section 2(b) of the EPF Act.

The wages was initially defined in the Act in 1952, when the structure of wages was such which entailed allowances calculated and given on the basis of the Basic wages. Subsequently, the definition of wages was amended in 1988 by inserting a phrase 'on leave or on holidays with wages in either case' rest remained the same and the wage structure remained the same. In the said definition of wages, of course, bonus is in excluded in the Basic Wages, though, the Bonus Act was not brought on the book of Statute, however, and it was being paid in different name and nomenclature. Till then, the employment sectors and conditions remained same. Hence, no remarkable dispute on Basic wages came up except few, which were decided by the Supreme Court in the case of Bridge and Roof Co. India Ltd. Vs. UOI [AIR 1963 SC 1474; 1963 (1) SCR 330; 1962 (1) LLJ 490] and another was Jai Engineering Works Ltd. Vs. UOI [AIR1963 SC 1480; 1963 (2) LLJ 72] and were dealing with the payment element of Bonus paid in different kinds. Again, in the case of Daily Pratap vs. Regional PF Commissioner, Punjab Haryana and Chandigarh [1999 LLR -1 (SC)] the Supreme Court also dealt with the payment wage of Production Bonus.

In all these cases, it is witnessed that the payment made in the name of Bonus of different kinds, even after passing of the Bonus Act, which was being paid in addition to the bonus payable under the Act or otherwise. No other major dispute on Basic wages came up except that the wages earned on duty and beyond duty - [Amal Kumar Ghatak vs. RPFC [1980 (2) LLJ 308].

After globalization, the sector of employment changed remarkably with emergence of "service Sector". The service sector is nothing but diversion towards employment by contractors - not through a contractor, to belie the laws creating "Burdon" on the employers. For coverage under the EPF Act, of such contractor, a class of establishments as "Expert service" was notified on 17.05.1971 for contractors engaged for specific purposes mentioned in the said notification (GSR 805). In its scope, the notification does not cover all contractors as being done today. But for the sake of Globalisation, all the contractors are being covered under 'service sector' hence being covered under the PF Act also. This change has facilitated the industrial and other companies and employers to save more and more revenue or money curtailing the cost of employment. Therefore, the concept of basic wages become irrelevant to wage structure and the new concept of CTC (Cost to Company) has emerged, in which each every payment to an employee is considered as cost to company including the Bonus, the Gratuity, the employer's share of Provident Fund and similar other legal liabilities. Those, who are not paid CTC, but paid minimum wages, especially to the contractors' workers, a trend to treat the minimum wages as CTC has emerged. This practice could not be allowed by Section 12 of the EPF Act, 1952 hence, the way of subterfuge by way of bifurcating the minimum wages into such element which do not attract Provident Fund. This was the easiest way for the contractors and also for the principal employers to save money, but, the department could, but the EPFO could not relish it despite allowing illegal coverage of contractors without any scheduled head and relying on the above judgments, the bifurcation of even minimum wages was denied hence, the ground for order of the Supreme Court arose.  Now, the following queries may come-up-

How it will affect Salary structure?
The judgment will definitely affect the wage/salary structure and compel the employers to maintain relation with ceiling that is fixed by law for PF contribution. The concept of basic wages is not relative with the Provident Fund only, but also relatively effect the Bonus payable, the Gratuity which is almost calculated on the basis of Basic wages. That is why every employer will be under obligation to restructure the salary payable to its employees. It is also relevant to mention that pay structure is applicable only where a set of rules or standing orders are in existence and followed. This pay structure becomes irrelevant where the minimum wages is paid because, such workers are mostly employed by contractors in the name of providing service and also the regular employers who use to keep daily-paid or minimum wages paid employees away from their regular pay structure. Therefore, it will become necessary to keep minimum wages as basic wages at least. Any other payment that is paid over and above the minimum wages may be shown as any other allowance to suit their revenue resource.

Scope of application with respect to past period -
A question is generally raised that from which date the judgment would be effective; because it relates to liability for the past period. Some may claim that such judgment to be effective from the date of judgment, but the enforcing agency i.e. the EPFO may go back as suitable to them. In such a situation, law and practices regarding retention of document or record is always referred. The government offices are oblige to keep the record as per law of retention, but under RTI Act, record for 20 years is kept alive. In some other case, record is preserved for 7 or such period after the audit is done. But in private sector, generally records required to be preserved under Income Tax Act is followed.  In a case, the Supreme Court of India ruled in the case of Employees State Insurance & others vs Jardine Henderson Staff Association & others on 25 July, 2006 in CASE NO.: Appeal (civil) 1726 of 2005 that-

"618. If the respondent is now allowed to recover from the erstwhile covered employees; it would severely affect industrial relations. Reversal of the impugned order would lead to prosecution, penalty and also interest against the respondent without any fault of the respondent. The decision of this Court in ITDC Employees Union (supra) is clearly distinguishable as unlike in the present case. In that case, the High Court did not give any positive direction. The decision of the High Court was not reversed by this Court.'

"The High Court under Article 226 and this Court under Article 136 read with Article 142 of the Constitution of India have the power to mould the relief in the facts of the case. Likewise, the judgment cited by learned counsel for the appellant-Corporation are in a different context altogether and the ratio of the said cases are not applicable to the present case. This apart the maxim of equity which is founded upon justice and good sense was applied as well as other maxim: lex non cogit ad impossibilia (i.e. the law does not compel a man to do what he cannot possibly perform). The applicability of the aforesaid maxim has been approved by this Court in Raj Kumar Dey and Others vs. Tarapada Dey and Others, (1987) 4 SCC 398 and Gursharan Singh and Others vs. New Delhi Municipal Committee and Others, (1996) 2 SCC 459. The act of Court can prejudice no party either the ESI or the respondent-companies. We, therefore, relieve the respondents from making any contributions for the period in question and direct them to make the contribution as directed by the Division Bench of the High Court."

This was a specific order relating to contribution under ESI Act which is REVENUE in nature, whereas the PF contribution is money of an individual being contributed under a specific enactment providing social security for old age. Hence the application of this judgment would apply, at least from the period the demand for the disputed contribution was raised which now settled by the Supreme Court. No excuse that since the employees have left, their PF accounts settled, persons are not identifiable, or so. But, such excuse may work for contractors who have gone away from the service screen, however companies are required to keep its employees employment record till he or she retires and final settlement is done.

Recovery of members' contribution for past period-

Above contention that this judgment is to be applied retrospectively or prospectively i.e. from the date of judgment is due to the liability of paying contribution for the past period, may be from 2001 or prior or later. Under EPF Act, for payment of both shares of contributions for the past period is the responsibility of the employer, as Para 32 of the EPF Scheme, 1952 does not permit him to recover the members' contribution for the past period. Those provision of para 32 is invokable where it is established that the employer avoided payment for the past period, but where, non-deduction and non-payment of member's share is due to clerical error, member's share of contribution is deductible from the subsequent month's pay of the employee with permission of the Inspector.  Here, cases covered by this judgment, will not attract the provisions of 32 as the non-deduction or non-payment of contribution has been under judicial scrutiny for over a period of 15 years. However, no relief can be granted for payment of employer's share of PF contribution. The Supreme Court has also come across such situations in past during 1980s. The first case was with respect to coverage of the educational institutions, which was decided on 08.1.1988 and thereafter in a series of judgment which covered the issue of realization of members' contribution from the date of coverage to the date of judgment. Another case was in respect of Cinemas in the case of District Exhibitors' Association vs. UOI [ (1991) 3 SCC 119; 1991 SCC (L&S) 822; 1991 (2) LLJ 115-SC)] wherein it was ruled that "The payment of employees' contribution by the employer with the corresponding right to deduct the same from the wages of the employees could only for the current period during which the employer has also to pay his contribution. In the instant case, for the period from October 1, 1984 up to the date of impugned notification the employer has paid full wages to the employees since during that period, there was no scheme applicable to his establishment. By retrospectively applying the scheme, the employer cannot be saddled with the liability to pay the employees' contribution for the retrospective period, since he has no right to deduct the same from the future wages payable to the employees."

Whether the Supreme Court order dated 28.02.2019 will help to the employers or not, it depends on the intelligence of the employers or the authorities of the EPFO's how they take it.

How PF contribution of left employees would be regulated?

If the demand of contribution for the past period is created, it will be the main concern of the employers that they will be bound to pay contribution even for the employees who left and/or whose PF accounts stands settled. Legally, there is no embargo in raising demand in respect of such employees and the authorities may compel to pay employees share as well as the employer's share. The logic of Non-identifiable or non-existing employees may not work. However, looking to the discussions in above paragraph, the demand of members share can be suspended or waived as the matter was subjudice with different High Courts and finally with Supreme Court. This is fully justified to demand employers' share only, even in respect of the live or working employees. Deduction from their salary can be made for the prospective period.

Secondly, the demand will be in respect of those employees whose salary was more than the ceiling and PF contribution was paid on the amount less than the ceiling amount i.e. Rs. 15000 (earlier Rs. 6500) by splitting the salary into different name and heads. If the employer is already paying PF contribution on the ceiling amount and the salary with such allowances was or becomes more then the ceiling, then there will not be any justification in demanding extra contribution on such extra elements of the pay. Obviously, no one can compel the employer to bear a demand which cannot be justified legally.

Effect on pensioners!

In case, employers share of PF contribution is pad, in compliance to the Supreme Court judgment, of course, within the ceiling limits, such contribution will lead to revision of pensions of those how are in receipt of pensions, either Monthly Member Pension or Widow Pension on the basis of salary/wages less than the ceiling amount. By the implementation of the Supreme Court Orders, PF contributions will be up to ceiling amount of 6500 or 15000 as the case may be, PPOs of a large number of pensioners will also be subject to revision, though the amount of pension may be little. However, pension of those pensioners which is within the range of minimum of Rs. 1000 (w.e.f. 01.09.2014) may not require revision, but, if the pension is commenced prior to 01.09.2014, there is no reason not to revise the pensions. Definitely, every pension case commenced prior to 01.09.2014 will be subject to revision.