India’s Provident Fund law: proposed amendments and new circular helps employers see light at the tunnel’s end
The recent Supreme Court ruling on ‘basic wages’ for provident fund (social security) has led to considerable concerns and confusion across the employer community in India. The government has taken note of the same and accordingly proposed the Employees Provident Fund & Miscellaneous Provisions (Amendment) Bill, 2019 (“EPF Bill, 2019”) to amend the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 (“EPF Act”).
Once enacted and made effective, the EPF Bill, 2019 shall amend the EPF Act in respect of the following significant aspects:
Subsequently, the Employees Provident Fund Organization (“EPFO”) has issued an inter-departmental circular dated August 28, 20191 restricting its officers from engaging in inspections in the absence of any prima facie evidence of any illegal practice by an employer of avoiding its provident fund (“PF”) liability by splitting the basic wages.
These developments will considerably benefit the employer community in general across all industry sectors and is expected to significantly uplift the business morale.
The EPF Act is one of India’s most important social security legislations for employees. It applies to every establishment having atleast 20 employees (“Covered Establishments”).
As per the EPF Act, PF contributions are required to be made in respect of (a) all domestic employees of Covered Establishments who draw Contributory Wages (defined below) up to Rs. 15,000 per month (approx. US$ 250)2 and (b) employees who continue to hold a PF account based on their previous employment, irrespective of the Contributory Wages that they draw and (c) employees who fall under the category of International Workers under the EPF Act (“Eligible Employees”).
As per the EPF Act, Covered Establishments are required to make PF contributions for all Eligible Employees, at the rate of 12% of the employee’s monthly ‘basic wages’, dearness allowance, retaining allowance and cash value of any food concession (“Contributory Wages”), subject to a maximum cap of Rs.1800 per month (approx. US$ 25) for domestic employees3.
What constitutes ‘basic wages’ for the purpose of PF contributions has been a highly litigated subject in India. In this respect, the Supreme Court of India (“SC”) passed a landmark ruling on February 28, 2019 (“2019 PF Judgement”) clarifying its position in relation to various allowances forming part of the Contributory Wages. Please refer to our legal alert on the 2019 PF Judgement, available here . Although a review petition was filed with respect to the 2019 PF Judgment, the same has been dismissed by the Hon. Supreme Court of India on August 28, 2019.
Given the confusion surrounding the look-back period for compliance after the 2019 PF Judgement, the Ministry of Labour and Employment has released a notification dated August 23, 2019 containing a preliminary draft of the EPF Bill, 2019 proposing to make certain significant changes to the EPF Act.
Key Amendments Proposed & Related Analysis – EPF Bill, 2019
EPFO’s Inter-departmental Notice (August 28, 2019)
As a result of the 2019 PF judgment, several employers started receiving inspection notices specifically quoting the 2019 PF judgment. The employer’s PF contributions for the past 3 - 5 years were questioned by the regional PF officers, in order to ascertain if any allowances were omitted by employers for the purposes of PF contributions. In light of the same, the EPFO has issued an inter-departmental circular dated August 28, 2019.
By this new circular, the EPFO has directed its officers / inspectors to not initiate any PF inspection unless there is prima facie evidence to support such action. Accordingly to the EPFO, “there is no reason or justification to initiate roving inquiries into the wage structure” as a result of the SC Judgement. Accordingly, the regional PF offices have been directed by the EPFO as follows:
The Indian government continues its thrust towards ease of doing business in India by introducing progressive labour reforms. The biggest take-away and relief for employers once the EPF Bill, 2019 is enacted would be the introduction of a much-needed limitation period under the EPF Act. Although it has time and again been argued that whenever a statute does not provide for a period of limitation, action by the authorities must be taken within a ‘reasonable’ period of time, there have been situations in the past where (section 7A) inquiries for PF non-compliances have been initiated against employers for extended periods, making it a nightmare for employers to produce relevant records.
After the 2019 PF Judgment, the financial liability for employers (for retrospective periods) especially in the case of international workers has been a matter of grave concern. While the liability for the past non-compliances will not be eliminated, the EPF Bill, 2019 will at least help bring about some method in the madness by introducing a fixed limitation period. The EPFO inter-departmental notice of August 28, 2019 is expected to go a long way in ensuring that employers are not subjected to any undue harassment in genuine cases. It is also hoped that the PF authorities consider introducing amnesty schemes which will provide employers an opportunity to rectify any past non-compliances without incurring significant monetary liabilities in the form of interest and damages. The introduction of a fixed timeframe for concluding the inquiry will also help ensure that the power vested with the authorities is not abused.
The alignment of the definition of ‘wages’ with that of the Code on Wages, 2019 is also a prudent step from the perspective of ensuring consistency amongst various labour laws. However, the new definition of ‘wages’ is likely to continue posing challenges in terms of what allowances would be subjected to PF contributions. This question would become more pertinent especially in situations where the allowances are such that they have not been specifically included or excluded under the new definition. For example, items such as production bonus, presents given by an employer etc. (which were earlier excluded under the definition of ‘basic wages’) are not covered under the exclusions in the EPF Bill, 2019 and to that extent, could lead to continuing confusion as to whether such items would continue to stand excluded, although the limit of 50% of wages for PF contributions would come in handy. Given that some employers have already revamped their current practices in relation to the manner of making PF contributions in light of the 2019 PF Judgment, employers may need to re-analyze their CTC structure and wage components in light of the new definition once the EPF Bill, 2019 becomes law.
The option to enable employees to choose between the NPS and the employees’ pension scheme under the EPF Act is also a progressive step which will enable employees to make independent decisions with respect to their retirement savings keeping in mind the benefits that each of these schemes offer. It could indirectly lead to a healthy competition between the EPF and the NPS authorities to provide more competitive service for attracting and retaining their ‘clientele’!
Given that the EPF Act is expected to eventually be subsumed by the Code on Social Security, the government would be looking to quickly implement the proposed changes by way of the EPF Bill, 2019. In any case, the EPFO inter-departmental notice of August 28, 2019 has already provided a huge relief to employers.
2 This limit was revised from INR 6500 to INR 15,000 in September, 2014
3 No such cap for International Workers
4 Section 2 (b) of the EPF Act
5 To be inserted as Section 2 (n) of the EPF Act
6 Published in the Official Gazette on Aug 8, 2019
7 Proviso of new Section 6
8 Para 62 of the Budget Speech
9 Proviso to Section 7A
10 Proviso to Sub-section 1(A) of 7A
11 By inserting Sections 16B and 16C