How to Handle PF Compliance Issues with Subcontractors: Seeking Advice on Liability Protection

Dear All Seniors,

One of our housekeeping subcontractors has been deducting PF from the wages since December 2007. The staff is still working with us, but to date, no PF slip has been handed over to the staff by the subcontractor. We have checked, and the subcontractor is registered with a valid PF registration number.

Upon inquiry by us, the subcontractor says they have some issues with the PF department and will be handing over the slips to the workers in a month or so. This has been happening since September 2010.

Our accounts department has now stopped the bill payments to this subcontractor and has asked us (Admin.) to certify the bills for payment to the said contractor.

Request for Advice on Contractor Undertaking

Please advise on what undertaking should be taken from the contractor to bind them, so that in case of any further claims regarding PF refunds from any sources, our company shall not be liable to clear the dues on their behalf.

Please help…

Regards,

Yes, it is the duty of the principal employer to ensure that the PF for the contract employee is duly remitted.

Regards,
Abbas P.S.

The subcontractor says they submitted the employee and employer contributions to the PF Department.

[QUOTE=Koshish1971;1367361]The subcontractor says they submitted the employee and employer contributions to the PF Department. But you have to make sure of it. If you feel the subcontractor is right, you may hold the PF amount and pay the balance amount to him. Whenever he produces evidence of the remittance of PF, you can refund the same.

Abbas.P.S

Dear Koshish,

It's better to ask him to produce a copy of the annual returns. Additionally, you can deduct the PF contribution from the contractor and remit it through your PF account.

Regards,
Ramnath

Can we take any undertaking from the subcontractor or its employees that will legally bind them, so that we will not be liable for any claims regarding employee Provident Fund refunds?

Regards,
Kosh

Dear Koshish,

It would be beneficial to obtain a copy of the annual returns submitted by the contractor in Forms 3A and 6A, as this will assist in assessing the contractor's compliance. Additionally, ensure to obtain the acknowledgment copy of the submission of returns to the PF authorities.

PF slips may be delayed due to various reasons at the PF department's end. If the contractor provides you with the mentioned forms and acknowledgment copies, it serves as confirmation of PF submission. This process will also provide you with the PF account numbers of individuals, allowing for cross-examination with PF authorities for individual account balances.

Regards,

Contract Termination Due to Non-Compliance

Since December 2007 until today, the subcontractor has been unable to fulfill the compliances. What does this mean? Is it justifiable to terminate the contract, resulting in all the wages being on our payroll? Can we legally explore this option? Would it be the right decision?

Regards,
Kosh

Request for Submission of Acknowledged Forms

Kindly request contractors to submit the acknowledged forms 6a and 3a of their respective employees who have been working with your organization for the corresponding years. It is a common practice in the provident fund department that they issue provident fund slips belatedly.

Regards,
Shish Uniyal
[Phone Number Removed For Privacy Reasons]

Opinion on Contractor Compliance and Precautions

I am very junior, but this is my opinion on this situation and the precautions to avoid such situations. Please listen to the more experienced views. It is the principal employer's responsibility to ensure whether the contractor complied with the statutory requirements. If not, proactively take necessary actions to ensure compliance within their scope. Find out where they failed to fulfill, preferably within your scope. You can stop the payments until the issue is resolved. However, getting an undertaking or bond will not absolve you of the aforementioned responsibility.

Checklist for Contractor Billing Process

In the future, make sure their billing process includes the following checklist:

• Attendance sheet
• Wage sheet
• ESIC challans
• PF Challan
• ESIC Half-yearly return shall be filed later on
• Monthly return of PF
• List of employees with ESI and PF numbers
• An undertaking stating they have paid the full salary for the particular period, and the ESIC PF payments have been made.

Thank you.

Regards,
Sivan A

Dear Sir, If we hold the amount against bills, the employee contribution is more than the payments against bills that are on hold. Please help. The total contribution to PF (both employee & employer) will be only 24%. Then how can the PF amount be more than the bill payment?

Regards, Abbas.P.S

Dear All,

They will provide 6a and 3a and other formalities as informed to me by the gentlemen. After that, what should be done if the employee still comes after resigning to this subcontractor and legally complains to the authorities that the employee has worked with you (as the principal employer's responsibility)?

How Should This Situation Be Handled?

Regards,
Kosh

Delay in Issuance of PF Account Slips

PF offices generally do not issue annual account slips (Form 23) on time; it is often delayed by 2-3 years. If you do not follow up with the PF office, you may not receive your annual account slips. To verify whether the contractor is depositing the PF contributions or not, you can check the combined PF challans submitted in triplicate to the bank when depositing the PF contributions. If the contractor has photocopies of those challans, there is no need to worry. Just ask them to follow up with the PF office to obtain the annual account slips.

Thanks,
Kamal Prasoon Sinha
14.12.2010

Dear Koshish,

Yes, you can do so for your records, but as per the rules, it is the principal employer's responsibility. Therefore, it is advisable to go through the professional contractor or, as I mentioned, deduct the PF amount and remit it through your PF code.

It is straightforward; you have hired the contractor on behalf of your company, so it is essential to be on your safer side.

Ramnath

I would like to suggest that you collect the PF challan on a monthly basis with acknowledgment from SBI, along with a copy of Form 3A and Form 6A for particular employees working in your organization on behalf of the contractor. Check the records monthly for contractual employees, or at your convenience, review the records.

Thanks & Regards,

Sunil Sharma
Sr. Executive HR

Please ensure you get copies of F-12A and paid challans before making the payment for his bills. Alternatively, you may retain 15-20% of his bills pending the finalization of PF accounts. It is the duty of every employer to display the copies of paid challans on the notice board along with the name and address of the PF Inspector. Alternatively, you may contact the concerned PF Office with reference to his Code Number to ascertain proper PF compliance.

Contract Labor (R&A) Act of 1970

In terms of the Contract Labor (R&A) Act of 1970, you are supposed to witness the payment disbursement where the deduction of PF is shown along with the PF number.

Regards

Penalties for Defaulting Contractors Under PF Scheme, 1952

There is a provision in the PF Scheme, 1952 to penalize defaulting contractors. It states that whenever an employer fails to remit the dues under EPF/EPS/EDLI Schemes or any inspection charges within 20 days of the close of the month, the damages on late payments are as follows:

- Less than 2 months: 17%
- 2 to 4 months: 22%
- 4 to 6 months: 27%
- For one year: 37%

The PF Commissioner has the power to raise damages up to 100% of the arrears.

Avoiding any payment or submitting false statements may result in 1-year imprisonment, a fine of Rs. 5000, or both. Defaulting in payment of contributions or inspection charges may lead to 3 years of imprisonment. Defaulting in compliance may result in 1-year imprisonment, a fine of Rs. 1000, or both.

You can act accordingly. If the contractor fails to submit the PF of workmen, a legal notice can be sent by PF authorities.

As a principal employer, you are supposed to comply with PF obligations for workmen working at your location and deduct the amount from the contractor's bills. It is better to obtain PF account numbers of workmen from your contractor and comply with the requirement.

If you terminate the contract and employ the workmen to execute the job, such workmen shall be in your direct employment. If you can afford this direct employment, you may proceed.

Regards,
Kosh

Responsibility of Principal Employer for Subcontractor Compliance

The principal employer is responsible for the non-compliance of statutory provisions by their subcontractors. They should ensure periodic compliance with statutory provisions and remit payment to their subcontractors only if everything is in order. They should insist on the attachment of documentary evidence for the remittance of statutory payments with their bills before making any payments to them.

The distribution of PF slips by departments is always delayed, which is considered normal.

Regards,
L. Kumar

Dear Mr. Koshish, please ensure that PF contributions of employees (both employees' and employers' shares) have been deposited to their respective PF accounts through the designated bank. If the contributions are deposited regularly to the PF account, the department will have no problems issuing PF slips (Form - 23). Please collect bank challans from the subcontractor and verify the deposits.

Thank you.

Dear Koshish,

In case your establishment is also covered under the EPF & MP Act 1952, it is your responsibility to ensure compliance regarding contractor employees, even if the contractor has an independent code number. Now, you may ask for copies of Challan Forms showing deposits made in the bank, as well as copies of Form 3A-6A for employees working at your establishment. You may also seek confirmation from the RPFC regarding the contractor's compliance.

Hold the bills and security amount until confirmation.

With regards,

AK CHANDOK

RPFC (Retd.)

[Phone Number Removed For Privacy Reasons]

Please ask the contractor to submit the copies of paid challans, monthly returns, and paysheets along with the bill. Also, at the end of the year, they should submit the copies of annual returns. It is mandatory for the principal employer to ensure compliance with PF in respect of the contractors. You can deduct and pay to PF authorities as per Section 8 of the PF Act.

Regards,
Rajendra Bhavsar
[Phone Number Removed For Privacy Reasons]

Dear Seniors,

I wish to thank you for providing and contributing many valuable expert advices. However, as a permanent solution to the problem, I will proceed with the termination of the contract, and such workmen shall be included in our direct employment rolls. I am serving notice to the subcontractor and providing some time for any potential solution. If the company has a solution to the problem and would like to retain their contract, they should act promptly. Otherwise, the reimbursement of PF refunds shall be deducted from the subcontractor's outstanding bills held by the company.

Regards,
Kosh

Dear Koshi,

You have to make sure the following documents/compliance from your subcontractor to feel confident:

1. Ask for the Code draft letter (allotment of PF code number letter).
2. Copy of monthly PF challan for payments towards your number of employees.
3. Copy of annual returns submitted to the PF office (Form 6A) pertaining to the year of the contract you have.
4. List of PF account numbers on a monthly basis.
5. Attendance register.

From the above documents, you will fulfill all your queries. Nowadays, all PF offices are upgrading their systems and hence the delays.

Regards,
Satish Nandalaskar
[Phone Number Removed For Privacy Reasons]

Dear Koshi, I understand that you have trusted the subcontractor for too long. As suggested by members, the following steps will help you get out of the mess you are in now:

1. First, check whether the subcontractor has a PF registration number. Ask for the original certificate and a photocopy, retain the photocopy for your records.

2. If the PF number is available, you can check with the EPFO to see whether the subcontractor has remitted monthly contributions.

3. If the subcontractor has a PF number, then seek the PF number allotted to each employee deployed by the contractor at your premises.

4. Ask for a copy of the PF remittance challan each month. The challan for November should be submitted by the subcontractor along with his December bill.

5. If the contractor is deploying personnel in several companies, request a detailed statement of the PF contributions in each establishment. The sum total of the contribution should have been remitted by him during the month. In short, it is a reconciliation statement.

6. Request the monthly returns submitted by him every month for verification and return.

7. Ask for a copy of the Form 3A concerning employees deputed at your premises along with 6A highlighting the names of persons deployed at your premises.

Please remember, as the Principal employer, you are duty-bound to verify statutory payments by your contractors.

I trust these steps will help you resolve the problem.

Regards, M.V. KANNAN

Dear Kosh, I think you should ask for Form 3A & 6A along with the annual return acknowledgment copy from the PF.

Please take the monthly PF challans from the contractor starting from September 2007 onwards.

No undertaking will absolve you as the principal employer if the contractor fails to pay the PF contribution of their employees. If the contractor fails to pay the PF contribution, then as the principal employer, you have to remit the PF contribution and deduct it from their subsequent bills.

Regards, Avinash K.

Responsibility of the Principal Employer for Subcontractor Compliance

The principal employer is responsible for the non-compliance of statutory provisions by their subcontractor. They should ensure periodic compliance with statutory provisions and remit payment to their subcontractor only if everything is in order. It is important to insist on the attachment of documentary evidence for the remittance of statutory payments with their bills before making payment to them.

The distribution of PF slips by the department is always delayed, which is considered normal.

Regards,
L. Kumar

Dear Koshish,

Understanding Compliance with the Contract Labour (Regulation & Abolition) Act

Bare Acts of all applicable Acts/Rules are available in the market. Please get a copy of the Contract Labour (Regulation & Abolition) Act and read the provisions laid down in it to ensure compliance.

Legally, no employees should be engaged through a contractor if the nature of the job is permanent. However, in most organizations, housekeeping activities are carried out through contractual workers only. The principal employer must ensure compliance with all relevant rules and provisions under the CL(R&A) Act. Furthermore, if the people working with the subcontractor at your premises since 2007 remain the same, even if you terminate the subcontractor's contract, you cannot remove their employees; you can only change the contractor.

You may seek advice from your legal counsel on whether to hire them directly.

All the best

Recent Judgment on Principal Employer Responsibility

There is a recent judgment by the Delhi High Court making the Principal Employer solely responsible for remitting contributions. Paragraph 30 of the Schemes does not allow contractors to report and ensure compliance through their own code number, irrespective of the fact that the contractors are separately and independently covered.

It has also been provided in the Act that the Employer will first remit the contribution and then recover it from the wages of the Employees, though this is not commonly practiced. The future course of action for you is to ensure the payment of wages in your presence, remit the ESI/EPF contributions using your code number only, and deduct the same from the payable amount to the contractor.

The recent judgment of the Delhi High Court is very crucial and a turning point as far as compliance with EPF in respect of Contract Labour is concerned.

Dear Koshsish,

The principal employer will be held liable for the negligent act or omission by the subcontractor.

Steps to Address Non-Compliance with PF Requirements

The first and foremost thing that you need to do is send a registered letter to the contractor asking why legal action should not be instigated against him by your company for his repeated failure to file PF with the PF authority, thus failing to comply with a statutory requirement. Ask your contractor to reply within 3 working days to your registered mail. Inform him that if he fails to reply within three working days, the company would be forced to file a criminal complaint for PF fraud and also a labor complaint for wrongful labor practice and non-compliance with labor laws of the land.

If the contractor doesn't comply after sending the above letter, then kindly terminate his contract with immediate effect. After the contract has been terminated, please inform the local PF authority about the same. The above procedure will help you and your company avoid getting into unnecessary legal issues.

After the above acts have been performed, kindly send a notice to the contractor seeking the amount of PF that he had shown as deducted, to be refunded to the company. The intention to seek the money back should be to refund it to the employee to whom it rightfully belongs. Also, inform him again that failing to return the amount would cause an action for civil complaint and criminal proceedings against the contractor and his company for fraud and cheating.

The above procedure is also important because it can be used to show that the company has exercised due diligence and was not a party to the non-compliance and fraud act of the contractor directly, indirectly, or knowingly. It also goes to show that the company had taken extensive care in securing third-party contract labor's rights.

Regards,
Octavious

Dear Satishji, I have gone through the reply. However, you are not considering future problems that may arise and lead to complications. It is alright to follow the judgment, but this will lead to other complications that will have a bigger effect on the organization. I hope that you understand it.

Regards, Avinash K.