Wednesday, June 4, 2014

Guest Post: Reduction of Provident Fund Contributions to Statutory Limits

[The following post is contributed by Madhusudan Bose, who is a lawyer and company secretary by profession, at PRA Law Offices, New Delhi]

Introduction

Recently, the Employees Provident Fund Organization (“EPFO”) issued a communication dated May 27, 2014, directing all Regional PF Commissioners not to force employers to contribute over and above the statutory wage ceiling in respect of their employees. The said communication has been widely reported in leading newspapers.

The tersely worded communication in effect appears to reiterate what is already provided in the EPF Scheme. 

Para 26-A(2) of the EPF Scheme provides that where the monthly pay of a Member exceeds Rs.6,500/-, the contribution payable by the employer will be limited to the amount payable on a monthly pay of Rs.6,500/-. Rule 29 separately provides that an employee may make EPF contribution exceeding 12% of this monthly pay; however, the employer shall not be under an obligation to pay any contribution over and above his contribution payable under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the “EPF Act”). 

So what then was the purpose of the above communication by EPFO?  In the said letter, EPFO has separately stated that it will not be going in for review against the judgement of the Hon’ble Supreme Court of India in the matter of Marathwada Gramin Bank Karamchari Sangathan & Ors. Vs. Management of Marathwada Gramin Bank (2011). 

The Curious Case of Marathwada Gramin Bank Employees’ Union

Facts of the case

In the above case, the employer was a bank which once had its own PF Trust for the benefit of employees. Subsequently, the permission granted to the employer to operate its own PF Trust was withdrawn. Thereupon, the employer started making contributions as per the EPF Scheme.

Pertinently, in both the above situations, the employer was voluntarily making its PF contributions, in excess of the statutory limits.

Owing to losses, the employer sought to discontinue payment of provident fund in excess of its statutory liability.  The workers contested the action taken by the employer before the Industrial Tribunal under the Industrial Disputes Act, 1947. 

One important argument taken by the employees was that the employer was prohibited from reducing the amount of PF contribution under Section 12 of the EPF Act.  Section 12 of the EPF Act provides as under:

“No employer ... shall, by reason only of his liability for the payment of any contribution to the Fund ... reduce, whether directly or indirectly, the wages of any employees to whom the Scheme or the Insurance Scheme applies or the total quantum of benefits in the nature of old age pension, gratuity provident fund or life insurance to which the employee is entitled under the terms of his employment, express or implied.”

Based on the provisions of Section 12, the Industrial Tribunal ruled in favour of the employees, and directed that the employees shall continue to draw equal amount of contribution from the employer towards provident fund without any ceiling on their wages.

Courts rule in favour of the employer

On examination of Section 12, the Bombay High Court observed that the employer would be barred from reducing its PF contribution, only if the same were contrary to the terms of employment of the employees. In the present case, the terms of employment of the bank’s employees expressly provided that the provident fund contributions would be in accordance with the EPF Act. In other words, there was no provision in the terms of employment which required the employer to make PF contributions beyond its statutory obligations.

The Supreme Court, on appeal, concurred with the judgement of the Bombay High Court and observed that the employer cannot be compelled to pay PF contributions in excess of its statutory liability just because it started making PF contributions in excess of its statutory liability for some time. 

Epilogue

It appears that EPFO had internally examined the feasibility of filing a review petition against the above Supreme Court judgement. Ultimately, EPFO has taken a call not to go in for a review, and this has been communicated vide EPFO’s letter dated May 27, 2014 discussed above.

Conclusion

To conclude, employers always had the right to limit their provident fund contributions to the limits laid down under the EPF Act. Subject to anything to the contrary in the terms of employment, if the employers are making provident fund contributions above the statutory limits, there is no bar on them from reducing the same to the limits under the EPF Scheme. The EPFO now appears to be in agreement with this position. 

On a different note, the above discussion would not be relevant in case of PF contributions of international workers. So far as international workers are concerned, their provident fund contributions are calculated on their total monthly pay. In other words, the contribution of the employer is not limited to the amounts payable on a monthly pay of Rs.6500/-.

- Madhusudan Bose

1 comment:

Anonymous said...

Thank you for this