Article (October-2019)


Way Forward after SC judgment on PF


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The Supreme Court in a landmark case delivered on 28th February, 2019 (The Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir & Ors.) examined an important question of law - 'if the special allowances paid by an establishment to its employees would fall within the expression "basic wages" as defined under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952' ("Act"). To answer the said question, the Court laid emphasis on the crucial test of universality and observed that in order to qualify as an exclusion from the term 'basic wage', the said payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all employees. Accordingly, any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term 'basic wages'. In view of the said observations, special allowances being paid by employers as a part of the salary breakup (being payable to all employees), not having any nexus with employee's extra output shall be construed as a part of 'basic wage' and notwithstanding the nomenclature used with respect to such components/allowances, they will attract statutory provisions of the Act.

Further developments

Pursuant to the said judgment ("PF Judgment"), an important question which cropped up in the employer fraternity was whether the PF Judgment carries a retrospective effect or not. Implementation of the PF Judgment from a retrospective basis appeared to be a very troublesome proposition for the employers both from financial and functional perspective. However, keeping aside the impact factor, we had taken a view that the observations made by the Court should be read and interpreted to have a retrospective effect. The said opinion was based on the following grounds : (i) the PF Judgment does not amount to introduction of a new law or amendment to the existing ones, rather this should be seen as an exercise of interpretation whereby the Court clarified the principles which were already into existence; (ii) the principles laid down by the Court cannot be construed as a new development, as the same happens to be reiteration of the principles laid down earlier in the case of Bridge and Roof Co. (India) Ltd. vs. Union of India (1963).

Pursuant to the PF Judgment, on 12th May, 2019 the 'Association of Industries & Institutions' had written to the government seeking a prospective implementation of the PF Judgment. However, the Employees' Provident Fund Organization ("EPFO") refused to issue a clarity in this regard, stating that the PF Judgment is self-explanatory and needs no clarification. Subsequent to the PF Judgment, a review petition was also filed by the management of Surya Roshni Ltd. against the said Judgment before the Supreme Court of India. The said petition sought to declare the PF Judgment to have prospective effect only, so as to avoid causing any unbearable financial burden upon the employer as well as administrative chaos. However, the Supreme Court on 28th August, 2019 dismissed the review petition, once again implying that the PF Judgment should be read and construed to have a retrospective effect.

Way forward

Where on one hand dismissal of the review petition may said to be a setback for employers, on the other hand, the Ministry of Labour and Employment has proposed certain significant amendments to the Act, the enforcement of which may offer a sigh of relief to the employers - especially those being adversely impacted by the PF Judgment. Amongst others, the two most critical amendments proposed vide the Employees' Provident Funds & Miscellaneous Provisions (Amendment) Bill, 2019, which may mitigate the impact of the PF Judgment have been discussed below.

Introduction of the definition of 'wages' and substituting it with 'basic wages' : The proposed change in the definition of wages has aligned the definition of wages as provided under the Code on Wages, 2019. The proposed amendment seeks to fix computational basis at 'wage' with the further stipulation that allowances paid above 50% or as notified percentage, of all remuneration will be included in wage as against the existing law wherein the computational basis for determining provident fund contribution is basic wages, dearness allowance and retaining allowance. The said amendment shall introduce a new formula with respect to calculation and determination of 'wages' for the purposes of calculating provident fund and therefore, with effect from the date on which the Bill is notified, notwithstanding the principles laid down under the PF Judgment, only such part of allowances shall be construed to be a part of wages which are paid above 50% (or as notified percentage) of all remuneration.

Limitation period of enquiry under Section 7A : The Bill proposes to amend sub-section (1) of Section 7A to introduce a limitation period of five (5) years to initiate inquiry. Currently, Section 7A of the Act does not provide any limitation period for initiation of inquiries. The said amendment will indirectly introduce a cap with respect to the period for which employers shall be required to comply with the implications of the PF Judgment on a retrospective basis.

In addition to the proposed amendments, the EPFO on 28th August, 2019 issued a notice to all central and regional Provident Fund Commissioners, wherein referring to the Judgment and the said review petition, the EPFO observed that 'there is no reason or justification to initiate roving inquiries into the wage structure of the complying establishments on the surmise that certain allowances in the nature of basic wages might not have been treated as part of pay for EPF contributions'. It was further directed that investigations shall only be carried out after taking permission from the Central Analysis Intelligence Unit (CAIU) constituted by the EPFO and no coercive action should be taken for recovery of dues till disposal of the said review petition filed in Supreme Court. Strangely, the said notice was issued on the very same date on which the review petition was dismissed. The said notice clearly demonstrates that the EPFO is not in a mood to take a very stringent approach with respect to recovery of provident fund (for past years) based upon the interpretation offered by the Judgment.

The Employees' Provident Funds & Miscellaneous Provisions (Amendment) Bill, 2019 and the aforementioned notice issued by the EPFO signify that the concerns raised by employers received a positive reaction from the Government.