By Ankit Parhar
The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) is a social welfare legislation enacted to provide social security to employees in the form of retirement or old age benefits. The EPF Act extends to the whole of India, except the State of Jammu & Kashmir, and applies to every establishment which is a factory engaged in any industry specified in Schedule I to the EPF Act, and in which twenty or more persons are employed. The EPF Act also applies to any other establishment employing twenty or more persons or a class of such establishments as notified by the Central Government from time to time.
In exercise of the powers conferred by the EPF Act, the Central Government has framed the Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”). The EPF Act and the EPF Scheme provide for the establishment of funds, membership of the fund, contributions by employers and employees, administration of the fund, payments and withdrawal from the fund etc.
As per the EPF Act read with the EPF Scheme, it is mandatory for employees of a covered establishment drawing basic wages, dearness allowance and retaining allowance of less than Rs. 15,000/- to become members of the fund created under the EPF Scheme. Consequently, it is mandatory for such employees and their employers to make contributions at the rate of 10% / 12% of the basic wages, dearness allowance and retaining allowance as per the EPF Act and EPF Scheme. For employees of a covered establishment drawing basic wages, dearness allowance and retaining allowance of more than Rs. 15,000/- per month it is mandatory to make contributions upto the limit of Rs. 15,000/- and it is voluntary to make contributions beyond the said limit.
It may be noted that, recently, the Supreme Court[See endnote 1] reiterated the position that ‘special allowances’ or other allowances that are paid across the board to all employees in a particular category are liable to be construed as part of ‘basic wages’ unless it is demonstrated that these allowances are variable or linked to some incentive for production.
The EPF Act also provides for the framing of the Employees’ Pension Scheme, 1995 (“Pension Scheme”) and the establishment of a Pension Fund. The Pension Scheme and Pension Fund have been established for the purpose of providing for superannuation pension, retiring pension or permanent total disablement pension to the employees of covered establishments and widow or widower's pension, children pension or orphan pension payable to the beneficiaries of such employees.
The EPF Act and Pension Scheme do not contemplate any additional contributions by the employer or the employee towards the Pension Fund over and above the contributions to be made in terms of the EPF Scheme. The corpus of the Pension Fund is met from a part of the employers’ contributions towards the Provident Fund subject to a cap of 8.33% of the basic wages, dearness allowance and retaining allowance of the employees. The Central Government also contributes at the rate of 1.16% of the pay of the employees.
Initially, the maximum pensionable salary on the basis on which pension is calculated, was capped at Rs. 5,000/- and the contributions payable by the employer and the Central Government were capped at this level. The Pension Scheme was amended with effect from 16.03.1996 and a proviso was added to Para. No. 11(3) of the Pension Scheme giving an option to employers and employees to make contributions in respect of pay in excess of Rs. 6,500/-. The cap was subsequently increased to Rs. 6,500/- w.e.f. 01.06.2001.
Several employees who were drawing salaries in excess of the prescribed limit opted to pay contributions on the basis of their actual salaries. However, many of these requests were rejected on the ground that the option was exercised beyond the cut-off date of 01.12.2004. These employees approached the Kerala High Court challenging this rejection. The High Court held that the proviso was retrospective in operation and was applicable from the date of the commencement of the Pension Scheme, therefore, a joint application by the employer and the employee to make contributions in excess of the prescribed limit could be made at any time. This judgment was upheld by a Division Bench of the Kerala High Court as well as the Supreme Court. The Employees Provident Fund Organisation (“EPFO”) reluctantly implemented this judgment.
Accordingly, several employees exercised the option granted by the proviso to Para. No. 11(3) of the Pension Scheme. These employees were required to contribute the difference between the actual contributions made in the past and the contributions that would have been payable on the salaries above the prescribed limit. However, these employees were also entitled to arrears of the higher pension from the date of retirement.
Subsequently, the Pension Scheme was further amended with effect from 01.09.2014. As per the amendments, the proviso to Para. No. 11(3) was deleted and the maximum pensionable salary was capped at Rs. 6,500/- upto 01.09.2014 and at Rs. 15,000/- from 01.09.2014 onwards. Effectively, the amendments sought to negate the option of making contributions in excess of the prescribed limit in terms of the proviso to Para. No. 11(3). However, the amendments also provided that employees who have been contributing in respect of salaries above the prescribed limit may, on a fresh option to be exercised jointly by the employer and employee within six months, continue to contribute on salaries above the prescribed limit by making an additional contribution of 1.16% towards the salary exceeding Rs. 15,000/-.
These amendments were challenged before the Kerala High Court[See endnote 2] on several grounds. It was contended by the Petitioners that the amendments are arbitrary and illegal and that they drastically reduce the pension payable to employees and cause serious prejudice to them. It was also contended that an amount of about Rs. 32,000 Cr. was already lying as unclaimed pension in the fund and there was no justification for reducing the pension payable to the employees. On the other hand, the Central Government defended the amendments stating that no liability to make any contributions over and above the prescribed limit was ever assumed by the Government and if pension is computed on the basis of actual salaries, then employees would be drawing higher pension than the contributions made by the employers and employees which would ultimately deplete the fund.
After considering the submissions of the parties, the High Court was pleased to set aside the amendments. The High Court held that since the EPF Act did not contemplate any additional contributions by the employer or the employee towards the Pension Fund, therefore, neither the contention of depletion of the Pension Fund nor the condition of additional contribution of 1.16% by employees could be sustained. The High Court held that the amendments brought out by the Central Government exceeded the powers granted by the EPF Act. The High Court also held that the amendments create arbitrary classes of pensioners such as those: (i) who exercised the option to make contributions on actual salaries and continued in service beyond 01.09.2014; (ii) who did not exercise the option and continued in service beyond 01.09.2014 (iii) who did not exercise the option and retired prior to 01.09.2014; and (iv) who exercised the option and retired prior to 01.09.2014.
The judgment of the Kerala High Court was challenged by the Central Government before the Supreme Court by way of a Special Leave Petition. However, the Supreme Court dismissed the petition as being without merit.
Now that the judgment of the High Court has attained finality, it is likely that several employees will exercise the option to make contributions towards pay in excess of the prescribed limit and get the benefit of higher pension. However, it remains to be seen as to whether the EPFO will implement the judgment swiftly.
[The author is a Joint Partner in Commercial Dispute Resolution practice, Lakshmikumaran & Sridharan, New Delhi]
- RPFC(II) West Bengal v. Vivekananda Vidyamandir and Ors. [C.A. No. 6221 of 2011 decided on 28.02.2019]
- P. Sasikumar & Ors. v. Union of India & Ors. [W.P. (C) No. 13120 of 2015 decided on 12.10.2018].