Can Principle Employer deduct 5% as penal charges from the Contractor’s bill amount, for delayed payment of provident fund contribution to be paid under Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952, when the Contractor has independent code number and registration? Besides the above, the contractor himself has to bear interest and damages as specified under the act.
The Principle Employer action is a based on invoking agreement clause, signed by both parties, which reads as follows.

“ The contractor will deposit Employee and employer share of contribution along with applicable admin charges in respect P.F to the concerned authority and the requisite proof for the same would be furnished to us on monthly basis ahead of due dates. The proof of payment of previous month must be attached along with the current month bill. In case of late deposit, 5% of monthly service charges will be levied as penalty”

Is it legally binding on the Contractor?

From India, Madras

The doctrine of Double Jeopardy, will it be applicable, in this case is a discussion point being submitted. For opinion from respected Seniors / HR fertility / legal experts .
From India, Madras
There is a misspelled word. Please read HR Fraternity against the wrong spelling used.
From India, Madras
Dear Colleague,

This is a very interest question raised by you where in lot of discussions may be invited from other Colleagues of HR to take part and give their valuable expertise views further.

I give my humble view on this matter as below which other colleagues may have a different dimension also which we will early wait for to learn further:

The Employees' Provident Fund & MP Act 1952 defines " Employer" as under section 2(e) of the said Act which fixes towards Owner/ Occupier / Manager etc ( Kindly refer below the relevant provisions)

Further under Section 8A the Act provides right to the employer/ contractor to recover the employee contribution payable and to remit to the EPFO organization.

Further reading of Section 7Q and 14D imposes Fine ( to the extent of 12% ) and Damages in case of delays in payment by the employer.

1. Here in the instant matter of discussion, in the contract agreement between Employer and Contractor, there is a clearly agreed clause.... that in case of any delay in remitting the statutory dues, the employer will impose penalty to the extent of 5% of the service charges only in those months where the contractor defaults by himself and on his own fault.

2. The intention and the clause of the Contract reduced into writing between both parties is valid as the intent is good and only to make sure that the contractor is complying with legal provision without any gaps or delay.

3. This penalty is entirely different from what the penal provision under the PF Act and the right of the employer arise out of the contract entered by mutual agreement between the parties. Independent of it, the contractor is liable to pay Interest and Damages to the Employees' Provident Fund Organization by facing due enquiries under relevant provisions of the Act which is a separate process administered by the EPFO.

4. The penalty imposed by the Employer is an independent action and will not amount to double Jeopardy in the instant case.

5. The employer need to exercise controls in line with agreed contract clauses with a good intention of ensuring that the contractor is making timely PF contribution. Any violation here is a violation under the agreement clause.

6. In case of the EPFO imposing interest and Penalty, the violation arise under the EPF & MP Act 1952 and both actions are independent of each other.

7. Hence in nutshell, the employer may exercise the agreement clause or provision to impose such penalty or such other action action on the defaulting contractor based on singed agreement clause.

Reference :

2 [(e) “employer” means—
(i) in relation to an establishment which is a factory, the owner or occupier of the factory,
including the agent of such owner or occupier, the legal representative of a deceased owner or
occupier and, where a person has been named as a manager of the factory under clause (f) of
sub-section (1) of section 7 of the Factories Act, 1948 (63 of 1948), the person so named; and
(ii) in relation to any other establishment, the person who, or the authority which, has the
ultimate control over the affairs of the establishment, and where the said affairs are entrusted to a
manager, managing director or managing agent, such manager, managing director or managing agent

7Q. Interest payable by the employer.—The employer shall be liable to pay simple interest at the
rate of twelve per cent. per annum or at such higher rate as may be specified in the Scheme on any
amount due from him under this Act from the date on which the amount has become so due till the date of its actual payment: Provided that higher rate of interest specified in the Scheme shall not exceed the lending rate of interest charged by any scheduled bank.

[8A. Recovery of moneys by employers and contractors.—(1) 12[The amount of contribution
(that is to say the employer's contribution as well as the employee's contribution in pursuance of any Scheme and the employer's contribution in pursuance of the Insurance Scheme)], and any charges for meeting the cost of administering the Fund paid or payable by an employer in respect of an employee employed by or through a contractor may be recovered by such employer from the contractor, either by deduction from any amount payable to the contractor, under any contract or as a debt payable by the contractor.

(2) A contractor from whom the amounts mentioned in sub-section (1) may be recovered in respect of any employee employed by or through him, may recover from such employee the employee's contribution [under any Scheme] by deduction from the basic wages, dearness allowance and retaining allowance (if any) payable to such employee.
(3) Notwithstanding any contract to the contrary, no contractor shall be entitled to deduct the
employer's contribution or the charges referred to in sub-section (1) from the basic wages, dearness allowance, and retaining allowance (if any) payable to an employee employed by or through him or otherwise to recover such contribution or charges from such employee

14B. Power to recover damages.—Where an employer makes default in the payment of any
contribution to the Fund 3 [, the 2 [Pension] Fund or the Insurance Fund] or in the transfer of accumulations accumulations required to be transferred by him under sub-section (2) of section 15 4 [or sub-section (5) of of section 17] or in the payment of any charges payable under any other provision of this Act or of 5 [any Scheme or Insurance Scheme] or under any of the conditions specified under section 17, 6[the Central Provident Fund Commissioner or such other officer as may be authorized by the Central Government, by notification in the Official Gazette, in this behalf] may recover 7 [from the employer by way of penalty such damages, not exceeding the amount of arrears, as may be specified in the Scheme:] [Provided that before levying and recovering such damages, the employer shall be given a reasonable reasonable opportunity of being heard]:

all the best and God bless,
Tamil Nadu

From India, Chennai

Appreciate sharing, your valuable views. I do agree the same, as same is agreeable from the Principal Employer's point of view.

Look at the contractor,

Admitting without accepting knowledge / vocabulary in English, some of the Contractors, especially in south, learned only to sign in English, have signed contract agreement, may or may not have understood the full implications, for survival in tough competition / serious negotiations signed an agreement. I am not denying the validity of the contract agreement clauses signed.

He, the Contractor, as an Independent Contractor, his or her liabilities get increased vis-à-vis the employees. On allotment of code number, the Provident Fund Authorities recognize the contractor as ‘establishment’ since he has complied with all the prescribed conditions. A principal employer cannot be held responsible for the omissions and commissions of the contractor’s employees.

As agreed, the service charges what he could claim from the Principal Employer, is after long negotiation, survived / gained a contract for placement of workmen, with struggled tough competition. The service charges claimed is supposed to be for the service rendered, which includes his identifying /sourcing expenses, salary / wages for one or more supervisor, depending on the number of manpower, placed at the site, and administrative expenses, including stationary and Maintenance of computer and printer charges. No doubt the payment / crediting of ESI, PF, GST so on, are also can be defined as part of services.

The services of payment / crediting by the Contractor as an establishment, can also avail the benefit of payment of contributions in respect of his employees, after the due date, belated payments, with interest and penal charges as prescribed under the various welfare acts and rules framed thereunder, which is available both for Principle Employer and the Contractor equally

Further service charges also part of consideration payable for the services rendered, which includes wages, ESI, PF contributions management contribution and GST payable for the services rendered.

No contractor as establishment, would intentionally / understanding the interest and damages payable, which would be an amount close to double the contributions payable by him in time.

Especially after the judgement pounced, “the contractors, who are registered with the Provident Fund Department, having the independent code number, they are to be treated as independent employer. And therefore, cannot be treated to be ‘principal employer for the purposes of those contractors. “ Steel Authority of India Ltd. vs National Union Water Front Workers, 2001 LLR 961 (SC). 5th October 2019 “

After the above judgement, off late the enforcement authorities, in audit assessment assess the Contractor establishment, as follows.

Total calculated legal percentage under the act, from the bill received, against the heading wages, and actual contributions already paid as on date, and the difference (less some exemption eases as applicable for exempted employee) would be assessed as contributions payable, with interest payable, after the audit. OfCourse the penal charges notice will certainly follow once you cleared the payment, by voucher / E.chellan , as per the assessment.

Further as per the Amendment in Section 43B under Indian Income Tax Act,1961, the allowability of exemption, of ESI and EPF contributions, cannot be availed, if the assessee paid the same after due date ,as applicable under the respective acts

Imagine a contractor’s liability. In these circumstances, which contractor would like to pay the contributions, even if he received it from the Principal Employer in time. In some cases, the contractor had to pay, and claim reimbursement for having paid.

In the above predicament I feel, that the contractor is being punished, too much His act mostly may not be intentional, and is beyond his capability, and the business recession / exigencies he is facing.

Risk or disadvantage incurred from two sources simultaneously. Why not the remedy could be availed by invoking concept of Double Jeopardy /“audi altermn partum rule” with a crucial requirement for attracting the Article is that the offences should be the same, should be identical.

Kindly share your thoughts and views and if any legal citation similar / allied circumstances.

From India, Madras
Dear Colleague,

Excellent Analysis given by you on the subject matter and many will get benefit out of the discussion. Thanks a lot and it is a great subject close to me too like to many other colleagues. I got more insights from your discussion.

I give few links of very good reference, here under which gives deeper clarity on the subject as you desired which may be added to your view point. Great Thanks to you.

The right applies only when a person tried for an offence for which a conviction order has already been passed by a trial court. In Venkataraman v. Union of India, the accused was first subjected to a departmental enquiry and suspended from work, and subsequently tried for a criminal charge. The court held that the previous sanction does not amount to trial or conviction but a mere departmental proceeding. (Venkataraman v. Union of India, AIR 1954 SC 375)

The above cited two articles and analysis given by leading advocates in journals gives us great clarity which might be very useful for you.

In the instant matter the action of imposing penalty is like Departmental action and later when he faces Proceedings under EPF & MP Act 1952 he has to face the actions that are empowered by the Act to the Officials of EPFO. There articles bear many case Laws reference which might be useful for reference
All the Best and God Bless,
Dr P.Sivakumar
Tamil Nadu

From India, Chennai
Dear Colleague,

Quote “In the instant matter the action of imposing penalty is like Departmental action and later when he faces Proceedings under EPF & MP Act 1952 he has to face the actions that are empowered by the Act to the Officials of EPFO”

My submission is why Contractor should alone be subjected to penalty, on the consideration received inclusive of ESI & PF from the Contractee Factory?

When the same is made amply clear that under both the ESI/PF Laws, the Principal Employer is the contractor and not the Contractee Factory and therefore the obligation and legal responsibility to remit the ESI/PF to the concerned Department is on the Contractor.

As per Sec 15 (1) of the CGST Act, value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

If so, when the Labor contractor is collecting total amount as consideration of his supplies and Sec 15 (1) does not speak about inclusion of such elements as ESI/PF explicitly?

There’s also a question whether it will be covered under Pure Agent Principle and thus exempted in the hands of the Contractor of the portion comprising ESI/PF in the consideration received from the Contractee Factory.

From India, Madras
I am also inclined to look at the particular clause of the contract of agreement, as executed:

“ The contractor will deposit Employee and employer share of contribution along with applicable admin charges in respect P.F to the concerned authority and the requisite proof for the same would be furnished to us on monthly basis ahead of due dates. The proof of payment of previous month must be attached along with the current month bill. In case of late deposit, 5% of monthly service charges will be levied as penalty”

As per Contract Act, any consideration should be a new obligation. Performance of an existing legal duty is no consideration in the eyes of law. It should be something more than a person is already required to do.

The contract clause may also, look as if, it lack consideration as one or more of the parties agreed to something he or she already was obligated to do

Contract clause may also be considered as unconscionable. 'If there is a gross inequality of bargaining power, so the weaker party to the contract has no meaningful choice as to the terms, and the resulting contract is unreasonably favorable to the stronger party. A court will also look at whether one party is uneducated or illiterate, whether that party had the opportunity to ask questions or consult'.

From India, Madras
Dear Colleague,
Excellent discussion and analysis by you and thanks again.

There are few additions :

The contract clause is clear and we impose many such penalty in the contract clause say for example - Violation of Safety, Violation of Compliance, non-adherence of Environmental or EHS Compliance by the employees of the Contractor (of course provided the Principal Employer (PE) provide all such amenities / aids as may be required etc). In case if the Principal employer is not remitting the payment for the bills on time and the delay is due to the delay on the part of PE, then in such case PE does not have any moral or legal right to impose such penalty. When PE is adhering to all requirements of the contract, and still Contractor is violating, then the Departmental Action can be taken without any bar. Similarly if there are delay from PE in paying the Cheque or any other payment, resulting in delay in the part of the contractor, then PE has no right to impose any penalty.

The other insight is that there are 2 types of situation in practicality:

1. PE- Contractor arrangement -
Where the contractors are petty in nature and lack professional management skills/ local contractors of the location, here more closer monitoring by PE on the Contractor is required to run the show effectively without any risk of legal compliance. If there are loose monitoring and clauses in the contract are not departmentally ad mistered, it might lead to not only compliance gap but also IR challenges for which PE will also become party before any forum

2. In case of Principal( Organization) to Principal ( Contractor)

These type of contracts ( where in the Contractor is Professionally running his Establishment, by having a structured setup / Code numbers/ compliance/ professional managers/ managing all audits and inspections on their own/ having internal audits within their organization and the payments are made as a whole sum without breaking up of cost into compliance cost, administrative cost, operating cost etc, then the Principal employer need not impose any such penal provision as things will go right always. There are leading such Outsourced agencies are available who manage very perfect business and compliance. Here the PE need not have any worry or monitoring but all thins will go right.

In both cases, the unless otherwise the clauses are balanced between both parties in the contract and it is not one sided to Party A or Party B then there is no challenges foreseen in invoking the clause of agreement for a good cause and good intent to make compliance going right to protect the interest of Contract Workers in line with sprit of the Act and in line with Provisions of the Act

All the best and God Bless,
Tamil Nadu

From India, Chennai
Dear Colleague,

Admitting without accepting your argument, I feel the Principle Employer cannot levy / impose penal / fine on the bill / consideration claimed, except in the case of willful damage to any of the PE’s property or products.

Let us look into similar another component of consideration, payable to Contractor by the Principle Employer. GST is required to be paid by the Service Provider (Contractor) on services rendered by the Contractor (Service provider). The Principal Employer (Recipient) cannot levy penal charges / withhold the GST payable to the Contractor (Service provider) as the same is Tax payable to the Government under CGST Act, 2017 .

When the Service Provider raises a bill he simultaneously files GSTR-1.
Same would get reflected in GSTR-2A and GSTR-2B of the Recipient of Services, When the Service Provider did not remit the Tax collected to the account of the Government, the Recipient cannot withhold / levy penal charges, on subsequent month GST / bill amount, claimed by the Service Provider, claiming the Service Provider has not filed GSTR-3B, for claiming credit. Remedy for the Service Provider, is available in the Act that, where the Service Provider HAS NOT REMITTED THE TAX COLLECTED on services rendered, apart from payment of Interest and Penalty, the Registration Certificate COULD BE CANCELLED. He will not also be allowed to generate E-Way.
Whereas the Recipient can always claim credit on the GST already paid to the Service Provider and not a looser.
The judiciary, including the Madras High Court, wherein their Lordships had held, in the case of Woolworths Wholesale Limited Vs The Assistant Commissioner (CT), Koyambedu Assessment Circle, dated 06.11.2014, held that ITC cannot be disallowed to the Recipient on grounds that the Service Provider HAD NOT REMITTED THE TAX TO THE ACCOUNT OF THE GOVERNMENT. However, this remedy would be available before the judicature of respective Higher Courts.
Similarly ESI & PF are also part of consideration, on which GST payable. The Labor contractor is collecting total amount as consideration of his supplies as per Sec 15 (1), which does not speak about inclusion of such elements as ESI/PF explicitly.

I appreciate and happy to note a Colleague, Dr.P.Sivakumar, from my own state is sharing his / knowledge/ideas.

I am at this age of 72, is very happy to learn / sharing of knowledge, basically having put in 35 years as HR knowledge from Textiles / Cement/ Engineering industry, and retired. I am also waiting / expecting, some input from Seniors / HR Fraternity.

I am finding, off late, the vibrancy of the forum is getting diminished. I am confident and read and learned / appreciated, some of the regular active member’s contribution, to this forum.

From India, Madras

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