Employees Provident Funds and Miscellaneous Provisions Act 1952 – by Dr. Philip Coelho

A recently decided Supreme Court Case regarding the Employees Provident Funds and Miscellaneous Provisions Act 1952

This is the case of Regional PF Commissioner West Bengal vs Vivekanand Vidyamandir and others which has recently been decided by the Supreme Court. To this were joined several other Civil Appeals as the point of law raised was common to all of them.

The question to be decided was, whether the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund.

As per the provisions of the PF act, contributions are  to be remitted on the basic wage, D.A.   retaining allowance and cash value of food concession. Many employers used to therefore split up the wages to be paid into basic wage, D.A. / special allowance and  other allowances, thus saving a lot of money by not paying contributions on these other allowances.

The Supreme Court has now held that:

  • In case a Company is paying a particular allowance to all its employees, such allowance will be considered to be basic wages.
  • The test adopted to determine if any payment was to be excluded from the 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 “universality”.
  • In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.
  • Only specific allowances such as overtime, bonus (other than statutory bonus) as earned by an employee on account of his performance like Performance Linked Incentive, leave encashment, any commissions which are variable and are paid variably to different employees on the basis of their work/performance are liable to be excluded
  • If the ‘allowances’ were to be considered as special over and above the basic salary, the company will have to produce proof to show that the concerned workmen/employees had become eligible for the ‘extra’ or ‘special’ allowance because of their ‘additional’ work. That is, work they have done over and above what was normally expected of them and others in the same category.

This will result in

The contribution towards PF will be on a higher amount and hence will impact every Company financially.

On a month to month basis there will be less take-home pay for the employee.

The retirement fund will see more inflows as higher monthly PF contribution will move into the employee’s PF account.

Despite the fact that all allowances are now to be included in the basic wage, the contribution to be remitted is  only up to  statutory limit. In other words an employer is liable to remit contribution only up to the limits fixed under the Act   which is   Rs.15000/- pm at present.   Any contribution  above the sum  of Rs. 15000/- is voluntary. The EPFO cannot insist on contribution beyond the amount of Rs. 15000/- .

This means that those companies which have basic + DA less than Rs. 15000/- pm but are at present paying different allowances, will be affected.   In these cases the allowances would be treated as a part of basic wage and contribution will have to be remitted on the same up to Rs. 15000/-.  Those companies which have basic + DA more than Rs. 15000/- will not be affected.

It is worth noting that despite the current BJP Govt having said in their manifesto before the 2014 general election that they would make changes in the labour law of the country and modernize the same, very little has so far been done. It was left to the Supreme Court rather than the government of the day to interpret the law so that the common man benefits by a relatively large increase in his retirement pension.

All views expressed are those of the author, not of SIU or SCMHRD or Director Sheorey

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