Provident Fund Contributions Under the New Labour Codes

 

Madhu Damodaran
Simpliance COE

Biography

Animay Singh
Simpliance COE

Biography

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PF - New Labour Codes

Introduction

The new labour Codes have brought in several changes to India’s labour law framework by codifying numerous Central laws. Amongst these is the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 which establishes three national social security programs, those being as follows:-

The Act has been subsumed under Chapter-III of the Code on Social Security, 2020 which must be examined with the definition of employee and wages respectively to understand its full import. Additionally, the Supreme Court’s verdict in the case of Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir & ors. wherein it also discussed four similar appeals sheds light on the jurisprudence surrounding provident fund contributions.

This article shall first examine the statutory provisions relating to provident fund contributions under the new labour Codes and then proceed to analyze the jurisprudence pertaining to the same to provide the reader with a holistic understanding of the subject-matter.

Statutory Provisions

The first important provision under the Code on Social Security, 2020 relating to provident fund is the definition of contribution under Section-2(21). It defines the term as the sum of money payable by the employer to the Central Board and includes any amount payable by or on behalf of the employee. Chapter-II relates to social security organizations under the Code and establishes the Central Board of Trustees of the Employees’ Provident Fund under Section-4.

Chapter-III is the main portion of the Code that focuses on Employees’ Provident Fund and its related aspects. Section-15 empowers the Central Government to frame three schemes by notification, those being the same schemes that are under the current Act. The Central Government is also given leeway to establish any other schemes for providing social security benefits under the Code to self-employed workers or any other class of persons.

Section-16(1)(a) relates to funds for the Provident Fund Scheme and states that contributions paid by the employer to the fund shall be ten percent of the wages payable to each of the employees (whether employed by him directly or through a contractor). The employee’s contribution shall be equal to the contribution payable to the employer in respect of him, however, if an employee desires to pay an amount exceeding ten percent of the wages he may do so. In such a case the employer is under no obligation to pay any contribution above the statutory rate.

The proviso to the above subsection empowers the Central Government to increase the rate of contribution to twelve percent in respect of any establishment or class thereof.

Section-17 relates to contribution in respect of employees and contractors, stating that the amount of contribution i.e. both employer’s and employee’s and any administrative charge paid by an employer in respect of an employee employed by or through a contractor may be recovered by the employer from the contractor. This may be done either by way of deduction from any amount payable to the contractor or as a debt payable by the same.

A contractor, from whom the amounts mentioned above may be recovered in respect of any employee employed by or through him, may recover from such employee the employee’s contribution under any scheme by deduction from the wages payable to such employee.

This provision essentially allows the employer to pay contract labour as part of his EPF registered establishment and claim the amount from the contractor. Thus providing an alternative means of ensuring full compliance.

Effect of Definition of Wages and Employees on Provident Fund

The terms wages and employee have been defined uniformly across the new labour Codes. While previous articles on this forum have examined the impact of the definition of wages on statutory benefits, this article aims to go deeper into the subject matter. The definition of employee under the Code on Social Security, 2020 is also interesting as it contains three provisos specific to the enactment i.e., they are not present in any of the other three Codes.

Proviso-I is relevant for the purposes of this article; the former provides that except in case of the Employees’ Provident Fund and Chapter-IV (relating to Employees’ State Insurance), the term employee shall mean such employee drawing wages less than or equal to the wage ceiling as notified by the Central Government. This aims to remedy some of the existing confusion over Section-11(4) of the Employees’ Pension Scheme, 1995 that allows members to contribute on a salary higher than the Rs. 15,000 and receive pension based on the higher salary.

With regards to the definition of wages it is important to reiterate that the provision can be analyzed in three parts, those being, the inclusive aspects, the excluded allowances, and the proviso. The inclusive aspects of the definition under the Code are similar to that under the current Act and comprise of basic, dearness allowance and retaining allowance. To understand the excluded allowances under the Code and their scope we can analyze the jurisprudence surrounding the same as laid down in the aforementioned cases.

Basic Wages and Scope of Allowances vis-à-vis Jurisprudence      

The case of Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir & ors. can be considered a landmark judgement with respect to understanding the logic behind what constitutes basic wages and when an allowance can be considered a part thereof. The judgement does not necessarily develop any novel concept with regards to the same, however, it relies on earlier cases such as Bridge and Roof Co. (India) Ltd. vs. Union of India; Muir Mills Co. Ltd., Kanpur vs. Its Workmen; Manipal Academy of Higher Education vs. Provident Fund Commissioner and Kichha Sugar Company Limited through General Manager vs. Tarai Chini Mill Majdoor Union, Uttarakhand to affirm and reiterate certain basic principles.

These basic principles can be summarized as follows:-

  • Whatever is payable to all employees or earned by all permanent employees must be included in basic wage for the purpose of deduction as contribution under Section-6 of the EPF Act.

  • The crucial test to determine if a payment must be excluded from basic wage is that the payment must not be common to all. In other words, it must not be universal, if any such payment is made to all employees then it shall be part of basic wages.

  • For example, even though overtime wages are generally in force for all employees in an establishment, it is not earned by all of them. It is also earned in accordance with the terms of the contract, but because it may not be earned by all employees, it is excluded from basic wages.

  • Basic wage never includes additional emoluments which some workmen may earn on the basis of a system of bonuses relating to production/productivity.

  • Thus, those wages which are universally, necessarily, and ordinarily paid to all the employees across the board are basic wage. Therefore, in the aforementioned example relating to overtime wages, if such wage is paid to all employees ordinarily as a practice, then the same would fall under the scope of the universal-necessary-ordinary test and would thus be considered part of basic wages.

From the above the definition under the Code becomes clearer as it includes aspects such as dearness allowance and retaining allowance but excludes commission-based payments and bonuses payable under any law. To that end, we may conclude that even performance-based bonuses fall under clause-(i) of the excluded allowances, namely commission as per the definition of wages under the Code and are thus not included under the scope of wages. This is subject to the operation of the proviso which states that if the quantum of excluded allowances under the Code exceed 50% of total remuneration, then the difference between the two shall be deemed wages and added thereto.

Conclusion

Whether the jurisprudence drawn from the definition of wages under the new labour Codes conforms to the above remains to be seen. This is because the above jurisprudence was developed because dearness allowance was excluded under the definition of basic wages but included under Section-6 relating to calculation of contribution in the EPF Act, 1952. Nevertheless, the above has guided the manner in which the definition of wages under the new labour Codes has been drafted.

Do you believe the new definition of wages clears much of the confusion contained in the language of the EPF Act, 1952? Is there a need for further clarity on the excluded allowances under the same?

Drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney.
Simpliance makes no representations or warranties in relation to the information on this article.

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7 thoughts on “Provident Fund Contributions Under the New Labour Codes”

  1. The definition should be clear. They should clear the meaning of contribution of which allowances. That this allowances should be included and this will not..So that every one can make the contribution accordingly.

  2. Thank you team Simpliance,

    This article is very informative in simple language. As now almost all companies follows CTC (cost to Company) basis employment. I think in this case, take home salary of employee will be reduced.

  3. Thank you team Simpliance.
    Kindly advice whether House Rent Allowance is required under New Labour Codes to be considered for computing Provident Fund of an employee.

    1. Hi,
      HRA or House rent allowance forms a part of excluded allowances under the definition of wages under Section-2(y) therefore it will only be considered for PF if it exceeds the 50% threshold of excluded allowances as mentioned under the definition. In ordinary circumstances it would not be considered for computing provident fund contributions of an employee.

      Regards
      Animay

  4. Kindly advice whether Basic & DA as declared in Minimum wages is linked to EPF contribution, I mean Split of Minimum wages which was kept on obeyance by SC in case on Group4 Security vs Provident fund

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