The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is enacted to provide a kind of social security to the industrial workers. EPF Act mainly provides retirement or old age benefits such as Provident Fund, Superannuation, Pension and Deposit Linked Insurance. Both, employee and employer contribute at specified rate for the scheme. As per section 2(b) of the EPF Act, Provident Fund (PF) is to be contributed on “basic wages" which means, all emoluments which are earned by an employee while on duty or in accordance with the terms of the contract of employment and which are paid or payable in cash to him. EPF Act does not specify or define any amount as basic wages and hence, it dependents on contractual agreement between the employer and employee.
DEDUCTION OF PF ON MINIMUM WAGES
On the above subject, Additional Central Provident Fund Commissioner (Compliance), EPFO, New Delhi has recently issued Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011 (hereinafter referred as “Said Circular”) to all Additional CPFCs (Zones) and All RPFCs (In-Charge of Regions/Sub-Regions) instructing the PF authorities to ensure that PF is deducted on applicable minimum wages. The aforesaid circular has escalated the controversies pertaining to the definition of Basic wages on which deduction of PF needs to be made.
BRIEF OVERVIEW OF THE SAID CIRCULAR
- Attention of parties has been invited to an earlier circular No. Coord./4(6)2003/Clarification/13633 dated 6 June 2008, whereby, the PF field officers had been instructed to ensure that P.F. Contributions are remitted on at least the Minimum Wage amounts by the establishments. It was also directed to review all such cases disposed under section 7A of the Act where determination of dues had taken place on wages lesser than Minimum Wages. The Additional Commissioner noted that still an uniform approach was not followed by the field offices, in this regards.
- It has been referred that The EPF and MP Act, 1952 is a beneficial social security legislation. In construing the provisions of the Act, wherever two views are reasonably possible, the view which helps the achievement of the object should be preferred.
- In light of various court judgments in favor of the department, Additional Commissioner has opined that PF should be payable on applicable minimum wages and correspondingly, minimum wage amount should not be bifurcated into different heads except Basic Salary and Dearness Allowance.
- All the assessing officers and field officers have been directed to ensure strict compliance with aforesaid guidelines in regard to subject matter.
In view of the said Circular, the PF assessing officers can scrutinize the records of the employer to ensure deduction of PF on minimum wages and conclude assessment under section 7A of the EPF Act accordingly. Deduction of PF on minimum wages can substantially increase the PF liability of the Company considering the fact that currently, salary paid under the head Basic salary and Dearness Allowance can be less than the applicable minimum wages
VALIDITY OF THE CIRCULAR IN LINE WITH PROVISIONS OF THE ACT AND JUDICIAL PRONOUNCEMENTS
The definition of “basic wages” as per section 2(b) of the EPF Act makes it clear that allowances and incentives are not to be treated as part of the basic wages. This has been upheld by Punjab and Haryana High Court in a writ petition No.15443/2009 between APFC vs.G4 Security vide order dated 1 February 2011. Punjab and Haryana High Court has opined that minimum wages can be bifurcated into allowances and PF contribution is not required to be deducted on allowances even when the same are part of the minimum wages.
- EPF Appellate Tribunal, New Delhi vide order dated 2 June 2011, with reference to A.T.A. no.364 (8)2009 between M/s. BENCHMARK INFOCOM (P) LTD. – APPELLANT Vs. RPFC – INDORE – RESPONDENT has held that the authority has no power to hold that minimum wages amounts to basic wages nor the authority has power to determine the amount of wages to be paid to the employees under Minimum Wage Act. EPF Tribunal has placed reliance on judgment of Punjab and Haryana High Court as mentioned above. It is pertinent to note that the aforesaid judgment of EPF Tribunal is subsequent to the Said Circular of Additional Commissioner dated 23 May 2011.
The following valid arguments are put forth by Employers:
- There can be practical difficulties in implementing the Said Circular even if the same were to be implemented. The minimum wages fall under the State powers and are determined by each State Government independent of each other. Even the definition of minimum wages as adopted by different State Governments varies from state to state. Therefore, it would be difficult to link the same with the EPF and MP Act, 1952, which is enacted by the Central Government.
- An internal circular issued by the EPF department is not binding on the employer and the validity of the same can be challenged in Courts of law.
The Said Circular is a significant step by the PF department to ensure that PF contributions are made on at least the amount of Minimum Wages. Given that most organizations may have significant workforce and thereby large exposure to PF contributions, this circular and the corresponding executive actions based on the same, can be a major cause of concern in case their PF contributions are currently on an amount lower than that calculated on Minimum wages. The authorities may try to act retrospectively on all contributions made after the first circular of 2008. However, the organizations can take shelter under the various judicial pronouncements on the subject and other arguments available to them.
The Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011 regarding splitting of wages for the purpose of PF contribution is kept in abeyance in view of verdict given by Punjab and Haryana High Court in a writ petition No.15443/2009 (LPA 1139 of 2011)between APFC vs.G4 Security vide order dated 1 February 2011 till there is a Supreme Court ruling in the matter SLP(C) NO 20085/2011 filed by EPFO against the above decision of High Court of Punjab & Haryana (Circular No. Coord/4(6)2003/Clarification /vol 111/dated 02/12/2012)