The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) is a social welfare legislation which aims to provide social security benefits such as Provident Fund, Superannuation Pension, Invalidation Pension, Family Pension and Deposit-Linked Insurance to employees.
The Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”), Employees’ Pension Scheme, 1995 (“Pension Scheme”) and the Employees’ Deposit-Linked Insurance Scheme, 1976 (“Insurance Scheme”) have been framed under the EPF Act to establish contributory funds where employers and employees contribute their respective share in terms of the EPF Act and the said Schemes. The contributory funds are administered by the Central Board of Trustees (“Board”). The Board is assisted by the Employees’ Provident Fund Organization (“EPFO”). The EPFO is under the administrative control of Ministry of Labour and Employment, Government of India.
In August 2019, the Ministry of Labour and Employment released the draft Employees’ Provident Funds and Miscellaneous Provisions (Amendment) Bill, 2019 (“Draft Bill”). Some of the key proposed amendments under the Draft Bill are analysed in this article.
The definition of ‘basic wages’ to be replaced with the definition of ‘wages’ in conformity with the Code on Wages, 2019
The EPF Act[see endnote 1] provides that the contribution payable by the employer and the employee shall be computed at the specified percentage of the ‘basic wages’, ‘dearness allowance’ and ‘retaining allowance’ payable to the employee. The term ‘basic wages’ is defined[see endnote 2] to mean all emoluments earned by an employee excluding cash value of food concessions, dearness allowance, house rent allowance, overtime allowance, bonus commission and any presents made by the employer.
The interpretation of the term basic wages and the components to be included or excluded from the basic wages have been considered in numerous cases. There has been a lot of litigation as to whether allowances other than those specifically excluded from the definition of basic wages can be excluded from the basic wages. The leading judgments of the Supreme Court in this regard are Bridge and Roof Co. (India) Ltd. v. Union of India[see endnote 3], Muir Mills Co. Ltd., Kanpur v. It’s Workmen[see endnote 4], Manipal Academy of Higher Education v. Provident Fund Commissioner[see endnote 5] and the recent judgment in RPFC(II) West Bengal v. Vivekananda Vidyamandir and Ors.[see endnote 6]. Essentially, the ratio of these judgments is that only the allowances that are variable or linked to any incentive for production can be excluded from the basic wages. Conversely, the allowances that are not variable and are not linked to any incentive for production cannot be excluded from the basic wages.
Now, in the Draft Bill, the definition of ‘basic wages’ is proposed to be replaced with the definition of ‘wages’ as provided under the recently enacted Code on Wages, 2019. The proposed amendment defines ‘wages’ as all remuneration whether by way of salary, allowances or otherwise, expressed in terms of money or capable of being so expressed which would be payable to an employee if the terms of employment, express or implied, were fulfilled. The proposed definition also states that ‘wages’ would include basic pay, dearness allowance and retaining allowance, if any.
The proposed amendment specifically excludes the following from the definition of wages: statutory bonus; value of house accommodation, medical assistance or any other amenity or service specifically excluded from the computation of wages by order; contributions paid by the employer to the pension fund or provident fund and interest thereon; conveyance allowance or the value of any travelling concession; any sum paid to the employee to defray special expenses by nature of the employment; house rent allowance; remuneration payable under any award or settlement between the parties or any order of a court or tribunal; any overtime allowance; any commission payable; gratuity payable on the termination of employment; and any retrenchment compensation or other retirement benefit payable to an employee ex gratia.
The proviso to the proposed definition provides an overall cap on the quantum of allowances that may be excluded from the wages. The proviso provides that if the sum of the payments made towards the aforesaid heads (other than gratuity payable on the termination of employment and any retrenchment compensation or other retirement benefit payable to an employee ex gratia) is over half the total remuneration, then the excess amount would be included in the wages.
The replacement of ‘basic wages’ with ‘wages’ in conformity with the defined in the Code on Wages, 2019 is certainly a positive step and will bring in much needed uniformity across various labour laws. Similarly, the somewhat exhaustive list of exclusions should also bring in the much needed clarity on the components that are to be included or excluded from the ‘wages’. However, there are still some grey areas. For instance, the present definition of ‘basic wages’ specifically excludes ‘bonus’, ‘commission’ or ‘any other similar allowance’ whereas the proposed definition of ‘wages’ only excludes ‘statutory bonus’ and ‘commission’. As such, it is not clear whether productivity linked bonuses other than statutory bonuses would be excluded from the wages or not. Furthermore, though the aforesaid cap on the allowances should prevent employers from camouflaging wages as allowances in an attempt to reduce their contributions, there may be certain cases where the allowances are genuinely over the said cap.
In any case, employers should review their salary structure and examine the impact of the proposed amendment. Employers should also give their suggestions and comments in respect of the proposed amendment. It is suggested that all productivity linked bonuses should be specifically excluded from the definition of ‘wages’. In case an employer camouflages wages as productivity linked bonuses, the competent Provident Fund Commissioner would still have the power to initiate an enquiry under Section 7A of the EPF Act and determine any sums due. Similarly, it is also suggested that an appropriate provision be incorporated to enhance the cap on allowances in genuine cases.
Limitation period of five years for initiating an enquiry under Section 7A of the EPF Act to be introduced
Under Section 7A of the EPF Act, the competent Provident Fund Commissioner is empowered to initiate an enquiry against an employer to determine any amount that may be due from the employer. Section 7C provides that where an order under Section 7A has been passed and the Provident Fund Commissioner has reason to believe that any amount has escaped assessment, he may, within a period of five years from the date of communication of the order passed under Section 7A, re-open the case and pass appropriate orders re-determining the amount due from the employer.
The EPF Act does not prescribe any period of limitation within which the enquiry under Section 7A can be initiated or a time period within which the said enquiry is to be completed. In this regard, reference may be made to the judgment of the Supreme Court in Hindustan Times Limited v. Union of India and Ors.[see endnote 7] wherein the Supreme Court observed that in spite of several amendments to the EPF Act, the legislature did not deem it fit to prescribe a period of limitation for initiating an enquiry under Section 7A.
In the past, we have seen the EPFO initiate proceedings under Section 7A for periods going as far back as eight years or more. Also, enquiries under Section 7A tend to go on indefinitely. The Draft Bill proposes to address these issues by inserting a proviso to Section 7A prescribing a period of limitation of five years for initiating an enquiry under Section 7A and a provision to introduce a time limit of two years for the completion of an enquiry under Section 7A.
The introduction of a limitation period of five years for initiating an enquiry under Section 7A and a time limit of two years for completion of an enquiry under Section 7A are surely welcome amendments. However, the overall period is still quite long. For instance, as per the proposed amendments, an enquiry under Section 7A for defaults committed in April 2015 may be initiated by April 2020. The said enquiry could be completed till April 2022. Thereafter, an enquiry under Section 7C could be initiated till April 2027. Effectively, the overall period upto the commencement of the enquiry under Section 7C comes to twelve years.
It is therefore suggested that the limitation for initiation of an enquiry under Section 7C be reduced to a reasonable period such as one or two years after the completion of the enquiry under Section 7A. Further, it is also suggested that a time limit of two years be provided for the completion of an enquiry under Section 7C.
Penalties under Section 14 of the EPF Act to be enhanced ten-fold and a provision allowing compounding of certain offences to be introduced
The EPF Act provides the penalty for various offences such as:
(i) knowingly making or causing to be made any false statement or representation for the purposes of avoiding any payment to be made under the EPF Act, EPF Scheme, Pension Scheme or the Insurance Scheme[see endnote 8];
(ii) contravention or default in complying with the provisions relating to payment of contributions under the EPF Scheme or with the provisions relating to the payment of inspection charges or administrative charges[see endnote 9];
(iii) contravention or default in complying with the provisions relating to payment of contributions to the Insurance Scheme or with the provisions relating to payment of inspection charges[see endnote 10]; and
(iv) contravention or default in complying with any provision of the EPF Act or any condition subject to which exemption is granted under Section 17 of the EPF Act[see endnote 11].
(v) commission of any offence under the EPF Act, EPF Scheme, Pension Scheme or the Insurance Scheme by a person having been convicted of the same offence[see endnote 12].
Presently, the penalties for the aforesaid offences include imprisonment and fines. The period of imprisonment is specified as not less than six months, not less than one year, not less than two years, upto one year, upto three years and upto five years etc. depending upon the offence. Similarly, the fines are specified as four thousand rupees, five thousand rupees, ten thousand rupees and twenty-five thousand rupees depending on the offence Further, the EPF Act does not presently provide for the compounding of any offences.
The Draft Bill, by way of amendments to Section 14, Section 14AA, Section 14AC and by way of insertion of Section 14AD proposes to increase the fines ten-fold and to make all offences other than the offences under Section 14(1), 14(1A) and 14(1B) compoundable.
These are certainly positive and welcome amendments. The fines were last revised in the year 1988 and were no longer proportionate. Therefore, the upward revision of the fines was long overdue. Similarly, the absence of any provision allowing the compounding of offences led to unnecessary litigation and costs for the EPFO and the employers. However, to further reduce the litigation, we are suggesting that the offences under Section 14(1A) and 14(1B) should also be made compoundable subject to the employer depositing the outstanding contributions, interest, damages, etc., along with the compounding fee.
Satisfaction of specified pre-conditions for grant of exemption under Section 17 of the EPF Act to be made mandatory
Under Section 17 of the EPF Act, an employer can seek exemption from the applicability of the EPF Scheme and establish its own provident fund provided that the rates of contribution and the benefits enjoyed by the employees under the provident fund established by the employer are not less favourable than the benefits provided under the EPF Scheme. All exemptions under Section 17 are subject to the terms and conditions provided in Appendix - A to the EPF Scheme.
Pertinently, no specific pre-conditions for the grant of an exemption under Section 17 have been provided under the EPF Act or the EPF Scheme. The Standing Committee on Labour in a report presented to the Lok Sabha in 2017 had recommended the framing of strong guidelines for the grant of an exemption relating to past performance, net worth, group performance etc. as well as minimum strength of workers, collections, contributions, corpus etc.
The Draft Bill proposes to insert Section 17(1D) which provides that no exemption shall be granted unless the establishment fulfils the conditions for the grant of an exemption that may be specified in the EPF Scheme. Though the conditions have not yet been specified, principally, the satisfaction of reasonable pre-conditions for the grant of an exemption under Section 17 is also a progressive amendment that should ultimately benefit the employees.
Any amount due under the EPF Act to be the first charge on the assets of the establishment and to be paid in priority to all other debts
As per Section 11 of the EPF Act any amount due under the EPF Act shall be deemed to be the first charge on the assets of the establishment and shall be paid in priority to all other debts. Presently, the EPF Act refers to the Presidency Towns Insolvency Act, 1930 and the Provincial Insolvency Act, 1920. These Acts have been repealed by the Insolvency and Bankruptcy Code, 2016 (“IBC”). Therefore, the Draft Bill proposes to delete the reference to the repealed Acts.
Section 53 of the IBC provides for the distribution of assets in the event of liquidation. The highest and equally ranked debts after the insolvency resolution process and liquidation process costs are the dues of ‘workmen’ for twenty four months prior to the liquidation commencement date and the debts owed to secured creditors who have relinquished their security interest to the liquidation estate. The wages and unpaid dues of employees other than workmen for a period of one year prior to the liquidation commencement date are ranked immediately under these debts.
As such, any dues under the EPF Act in respect of any employees, whether workmen or not, will be ranked highest along with the dues of workmen and secured creditors followed by any wages and unpaid dues owed to employees other than workmen. This position has been recently reaffirmed by the National Company Law Appellate Tribunal (“NCLAT”) in State Bank of India v. Moser Baer Karamchari Union & Anr.[see endnote 13]
Employees to be provided an option to opt for the National Pension System instead of the Pension Scheme
The Pension Scheme has been framed under the provisions of the EPF Act for establishing a Pension Fund. The corpus of the Pension Fund is generated from a part of the employers’ contributions towards the Provident Fund. The National Pension System (“NPS”) is a separate pension cum investment scheme launched by the Central Government to provide old age security.
The Draft Bill seeks to provide employees an option to opt for the NPS instead of the Pension Scheme. The Draft Bill also seeks to provide employees an option to exit the NPS and re-join the Pension Scheme if they so desire. Though further details are yet to be specified, overall, the option to opt for the NPS instead of the Pension Scheme is a progressive step that would give employees more choices as to their pensionary benefits.
Rates of employees’ contributions may be reduced for such period and such class of employees as may be specified without any change in the employer’s contribution
The Draft Bill proposes to appropriately amend Section 6 of the EPF Act so as to enable the Central Government to specify establishments or classes of establishments where the rate of contribution shall be ten percent instead of twelve percent. The Draft Bill also proposes to appropriately amend Section 6 so as to enable the Central Government to specify rates of contributions applicable to any class of employees.
The intent behind these proposed amendments is to bring in some flexibility for the employees who may wish to reduce their contributions in order to get a higher sum in hand. It may be noted that the rate of the employers’ contributions shall remain unchanged.
Even in its present form, the Draft Bill is in line with the recent proactive and progressive steps taken by the EPFO and the Ministry of Labour and Employment such as the Circular dated 28th August 2019 wherein the EPFO has asked its field offices not to initiate roving enquiries into the wage structures adopted by establishments by quoting the judgment of the Supreme Court in Vivekananda Vidyamandir (supra) unless there is a credible basis for forming a view that the establishment has prima facie indulged in camouflaging the basic wages as allowances.
Overall, the proposed amendments are likely to resolve some issues that regularly arise in the implementation of the EPF Act. However, some further tweaking is required to ensure that the proposed amendments actually achieve their object. All stakeholders should take this opportunity and provide their suggestions and comments on the Draft Bill. The government is likely to implement the proposed amendments quickly as the EPF Act is going to be subsumed into the Code on Social Security which is also currently in the pre-legislative consultation process.
[The author is a Joint Partner in Commercial Dispute Resolution team, Lakshmikumaran & Sridharan, New Delhi]
- Section 6
- Section 2(b)
- (1963) 3 SCR 978
- AIR 1960 SC 985
- (2008) 5 SCC 428
- 2019 SCC OnLine SC 291
- (1998) 2 SCC 242
- Section 14(1)
- Section 14(1A)
- Section 14(1B)
- Section 14(2A)
- Section 14AA
- Company Appeal (AT) (Insolvency) No. 396 of 2019 decided on 19th August, 2019