The Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) mandates every employer employing 20 or more persons to pay contribution in respect of members of the EPF Scheme employed by him directly or through a contractor.
The Supreme Court of India in its recent judgment relating to PF held that where the wage component is universally, necessarily and ordinarily paid by the employer to all its employees across all levels, such emoluments would constitute part of basic wages for the purpose of PF contributions, except HRA and payment made for work over and above standard work. A review petition against the same was dismissed on 28.08.2019. Thus, the judgment has become final. This judgement has a significant impact in as much as the employer would be under an obligation to add up all such allowances of identified employees, which were hitherto excluded, to their basic wages to make up for the shortfall in PF contribution on a wage limit of up to Rs 15,000/ with the exclusion of HRA.
Since the time the review petition was dismissed, the PF department has been pro-actively issuing notices to establishments pertaining to PF compliance on grounds of non-consideration of all relevant wage components for the accurate calculation of PF contribution. The chart below highlights marked increase in such notices sent by EPFO after the PF judgment by Supreme Court, wherein Enforcement Officers have issued orders for payment of arrears of up to ₹ 700 crores. (BCP Associates data sample taken across several major establishments in 10 major cities)
The notice dated 28.08.2019 issued by the EPFO to the PF Commissioners provides that investigations should be carried out after taking permission, only in those cases where credible basis is available for forming a view that the employer has prima facie indulged in illegal practice of avoiding EPF liability by splitting the basic wages. In view of this, PF Authorities are undertaking preemptive measures through their internal sources and random inspections to identify defaulting establishments.
Accordingly, it would be important for every employer to revisit the compensation structure of its employees and identify gaps in compliance with regard to PF contributions to avoid claim for arrears contribution, levy of interest and damages.
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