Author: Dhriti Bole, fifth-year learner of BBA.LLB (Hons. in Business Law) from School of Law, Narsee Monjee Institute of Management Studies, Bengaluru.

The article attempts to understand the present-day provisions with respect to the Employees’ Provident Fund from the Supreme Court Rulings of the recent past. It analyses how the Labour-oriented approach of the Court leads to decreased ease of business, contrary to India’s goals. 

The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“the Act”) is a social welfare, beneficial legislation intended to provide adequate social security benefits to member employees. The Act provides a safety net for employees to fall on, in their old age while promoting the idea of a shared burden between the employee and the employer. It is mandatorily applicable to all employees in a covered establishment (employing 20 or more employees) who draw monthly pay of up to Rs. 15,000. The employee and employer contribute 12% of each of the monthly pay. Out of this 12%, 3.67% goes towards the Provident fund while the remaining is deposited in the Pension Scheme, the employers have a liability of an extra 0.5% to be paid to the EPFO in the form of administrative costs. Whilst mandating applicability of the Act, the startup culture of India has been equally protected as an infancy period of three years has been offered therein. The article discusses the case which widened the ambit of the act with respect to the term “basic wages” by the Supreme Court of India along with its impact on the stakeholders. It further attempts to understand the approach of the judiciary and legislature over the Act’s implementation.

“Basic wage” under the EPF Act

The aforementioned decision broadens the ambit of the term “basic wages” to include any and all allowances which pass the dual test of universality and variability. This dual test is what will metamorphosis several employers balance sheet and employee’s lifestyles as whenever there is an increase in the amount of basic wage, the amount of contribution by both the employer and the employee also increases. However, this increased amount of contribution by the employee decreases their in-hand salaries leading to lifestyle changes. For the employers, it induces additional cost to the company. The term universality suggests that those emoluments which are paid by all organisations, across the board and are not based on a specific opportunity availed by the employee in the course of employment would be included under “basic wages”. Further, variability can be explained as uneven amounts paid to a class of employees based on their production of results and commitment to work. Hence, such allowances which are universal and not variable will be included in the calculation of the rate of basic wages. Several labour law practitioners opine that the said test is a mere reiteration of previous judgments. However, a key concept might have been overlooked i.e., the addition to the pre-established principles- the expression “in a particular category”. Earlier, employers had learnt their way around to bypass the pre-established rules i.e., by diversely naming allowances. The inclusion of the abovementioned expression largely affects both the employer and employee as henceforth, employers will have to reason the special allowances based on each employee’s diligence and efficiency to surpass the same from computation of contribution and the employees’ lifestyle will be adversely affected due to decrease in take-home salary. Further, the court’s dual test has reverberated on proceedings under Section 7A due to a dilemma over its retrospective and prospective application.

An attempt to redress the subsequent hike in fishing and roving expeditions was made by the Employee Provident Fund Organisations’ circular dated 28.08.2019 wherein it placed certain conditions such as the limitation period of 5 years for initiation of inquiries under Section 7A of the Act, limiting its scope of expansion, establishment of a Prima Facie case before initiation of such inquiry and the likes. However, this did not reduce the number of inquiries brought about without the identification of the beneficiaries. Such proceedings certainly violate the fundamental purpose of the Act and orders in such a case lack applicability of mind. It was held in the case of Regional Fund Commissioner v. Nand Lal & Co. that payment of arrears of fund contribution cannot be anticipated unless benefactors are determined with clarity. However, lessons from this case have not been implemented in the Code on Social Security, 2020 (“the Code”) as a provision necessitating identification of beneficiaries prior to initiation of inquiry lacks in the Code. There is another major concern abandoned by the Code i.e., limiting the burden of establishment as principal employer in cases where the contractor has independent EPF code. This situation has time and again knocked the doors of various Indian courts and a specific provision under the Code could have toned down the piling of such cases.

Labour oriented approach

Of late, a pattern of labour-oriented stance is noticed in the governmental policies and amendments recently such as the permit to withdraw basic wages and dearness allowance up to three months or 75% of the amount, whichever is less from the funds accumulated during COVID-19 or providing flexibility with regards to their contribution towards the fund.

Prioritising worker dues

In the case Precision Fasteners Ltd. v. Employee Provident Fund Organisation, the court decided favouring the employees. It associated the assets of establishments pending liquidation with the right to life of workers and upheld the same over the creditor’s right. The overriding clause of the Insolvency and Bankruptcy Code was held to have no bearing over employee’s dues. The resolution plan can be questioned unless it includes payment towards the employee’s arrears.  Further, the quantum of penalty proposed under the Code is ten times the earlier.[i]

Skill upgradation

Moreover, the NEEM trainees are given notable recognition to promote technical education and are differentially treated from other trainees. Including trainees who get stipend but do not hold the right to employment under the term “apprentices” furthered protection under the Act.

Decreasing ease of business

Excessive scrutiny towards exempted trusts

There exist certain provisions under the Act which are clearly going against India’s aim to ease businesses. To begin with, the “exempted establishment” provision under the Act which was supposed to ease establishment and further employee’s interests by providing better returns on their contribution is a tale of exercising arbitrary power against such establishment. This essentially is the reason for departure from the exercise of this provision by several establishments. The provision aimed to provide autonomy of investment to the establishments and better control due to localisation. However, the order frustrating use of “reserves and surplus” to cover losses and further, provision of covering each investment’s loss disregarding its overall profitability appears draconian when the same is not followed by the EPFO itself.

Spike in fishing investigations by EPFO

Another is the hike in investigations under Section 7A asking for records of the last 15 years is unfair as the Companies Act, 2013 warrants the preservation of records for up to 8 years only. Finally, in the case of Modern Transportation Consultation Services Private Limited & Anr. v. Central Provident Fund Commissioner Employees Provident Fund Organisation & Ors., the Apex Court bounded the definition of “excluded employees” to except those employees who had withdrawn from their general provident fund as the Act mentions “the Fund” and not “any Fund” within the provision. This further added to the already exorbitant burden of liability on the employers. It must be noted that each step towards an employee-centric regime marks a step backwards in the ease of businesses to operate owing to increased compliances.

Keeping in mind the socially beneficial welfare character of the Act, the Supreme Court has held that a consumer complaint can be filed against the EPFO being the service provider and the employee is a consumer. Further, any deviation from the principles of natural justice by the EPFO is strictly condemned. Opportunity to plead the case, speaking orders are necessitated, at the same time exparte orders without basis are held illegal. However, this drift has become the run-of-the-mill.

Way forward

This turning of heat towards the employers needs to be significantly reduced in order to achieve India’s better rank in the ease of doing business index along with nurturing a progressive labour market. A balance between labour and business-oriented regimes is the need of the hour. The Code on Social Security, 2020 has attempted to maintain the equilibrium to a certain extent by inclusion of provisions such as the “voluntary coverage” option for employees which promises employees larger retirement corpus, at the same time providing employers’ flexibility to opt out of the added burden of responsibility.[ii] Further, defining “wage” uniformly under the four codes is a welcome move.[iii] Granting an opportunity to rectify errors made in the computation of contribution is another vital provision.[iv] The Code also advances the protection of a safety net for gig workers, supporting this emerging economy and forbidding violations will further the purpose of employee welfare even in the unorganised sector. However, an apparent lacuna of the Code is the mandatory observation of the Principles of Natural Justice. A provision mandating the linking of Aadhar card can also raise some concerns for the government. Nevertheless, all that now awaits is its enforcement.

[i] Section 133, the Code on Social Security, 2020. 

[ii] Section 1 (5), the Code on Social Security, 2020. 

[iii] Section 2(88), the Code on Social Security, 2020. 

[iv] Section 137, the Code on Social Security, 2020. 






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