Can Employers Split Minimum Wages for PF Contributions? Here's the Official Clarification

Clarification on PF Contributions and Minimum Wages

Enclosed, please find a clarification given by the Additional Central PF Commissioner regarding PF contributions on Minimum Wages. It was clearly instructed that employers should not split Minimum Wages for the purpose of PF Contribution.

Regards,
Jawed Alam.

Excellent information. I was eagerly waiting for the same as the matter was sub judice in the court of law. I thank you for posting the circular on CITEHR.

Thanks,
Jaikishen

Editor's Voice on Splitting Minimum Wages for PF

Here is an 'Editor's Voice' on the splitting of minimum wages for the purpose of PF.

Regards,
PBS KUMAR

Yes, I agree with Mr. Jawed Alam that the bifurcation of minimum wages is not permitted, as I have also stated in all my previous postings. Secondly, Mr. Alam, we also reside in the same place where you are right now, i.e., Bhojudih Coal Washery.

Thanks & Regards,
Sumit Kumar Saxena
[Phone Number Removed For Privacy Reasons], [Phone Number Removed For Privacy Reasons]

Thanks, Sir,
This document is valuable for defending against the malpractices being implemented by contractors to reduce the EPF contribution of labor.

Regards,
Rajiv Kaushesh
Patiala, Punjab.

Can I know the minimum wage amount that needs to be paid to employees and what components should be shown as part of the minimum wages? Please help me out with this issue.

The component of the minimum wage is basic + DA/VDA, excluding other allowances. Secondly, it is defined by the state from time to time.

Regards,
Sumit Kumar Saxena
[Phone Number Removed For Privacy Reasons], [Phone Number Removed For Privacy Reasons]

Please refer to the judgment of the Punjab and Haryana High Court CWP No. 15443 of 2009 (O and M) in the matter APFC GGN. Vs. M/s G4 Security Services decided on 1st February 2011, wherein it is very clearly defined that splitting of minimum wages as per the definition of the Minimum Wages Act is permissible.

In this regard, the Labor Law Reporter Advocate Mr. H.L. Kumar has requested the Additional Central P.F. Commissioner to forward.

There is no confusion in interpretation; hence, please study both references and act freely.

Dear Mr. Javed, You have posted and shared a very confusing matter about the deduction of PF on minimum wages. I too was always hesitant about the deduction. I sincerely want to express my thanks to you. Please keep posting such valuable circulars.

Regards,
Mangesh Wakodkar
Sr. Executive HRD

Dear All, Thank you for your response. As Mr. Jaikishen mentioned, the matter is sub judice in the court of law. The issue of splitting of Minimum Wages by the PF Authority has been eagerly awaited by HR professionals for a long time. This became even more complicated after the judgment in the Bridge & Roof Case, with contractors citing this reference while splitting Minimum Wages. Thanks to the Additional Central PF Commissioner and PF authority for restricting contractors/employers from splitting Minimum Wages.

Components of Minimum Wages

There are mainly 3 components of Minimum Wages:
1. Basic
2. Dearness Allowance
3. House Rent Allowance

Minimum Wages are fixed by the Joint/Labour Commissioner of every state in India for different industries, considering changes in the Consumer Price Index of 39 food grain items from the last CPI. Since the base year for calculating Minimum Wages was fixed by the Labour Department in 1960, it has become much more complicated to determine the exact portions of Basic, DA, and HRA from the notified Minimum Wages of Scheduled Industries.

When we refer to Minimum Wages payment, it is meant as a lump sum on a monthly basis for 26 days or as a piece rate, generally without segregating it into Basic, DA, and HRA.

Regarding your question, you need to determine the category of industry in which your company falls as per the list of Scheduled Industries and obtain the minimum wages rate from the notified circular for the purpose of Minimum Wages payment. Therefore, there is no need to display different components of Minimum Wages separately. You can refer to the details on how we arrived at Minimum Wages (CPI change).

Dear Sumit Kumar Saxena, I am glad to know you are from BCW. I have visited there a few times, though not for official purposes, and my native place is also Purulia. However, I have recently been transferred to Sagardighi Thermal Power Station (New Project of 500 MW X 2). You are currently working in Noida, so we can share our limited HR knowledge with each other. Thank you for your reply.

Regards, Jawed Alam

Just now, I was giving the same lecture regarding minimum wages where the deduction of PF can be done. It got confirmed. Thanks for the information.

With regards,
Niveditha

There are a lot of confusions taking place regarding PF deduction. Minimum wages vary from industry to industry and also from state to state.

1. ASSUME, minimum wages applicable to a particular state are Rs. 160/- per day. This means an employer needs to pay Rs. 4160/- per month (26 days a month). If the employer exactly pays this, then what should be the PF amount to be deducted?

2. ASSUME in the same case above, the employer pays Rs. 4500/- and splits the salary structure as
- Basic: Rs. 2000
- HRA: Rs. 1500
- Perf Allowance: Rs. 500
- Conveyance: Rs. 500
and deducts Rs. 240/- towards PF. Is it okay by doing so?

I have read both notes (the circular issued by PF authorities among their officers and also the judgment of Punjab and Haryana High Court - a copy of which is enclosed here). If anyone sheds more light on this, we can have conceptual clarity.

Regards,
Balaji

Dear Balaji,

As far as knowledge and information go:

If the Minimum Wages of a particular state is Rs. 160/- per day (Rs. 4160/- p.m/26 days), that means the worker is required to work for 26 days to get Rs. 4160/- in a month @ Rs. 160/- per day. But what happens if the worker works for only 10 days in a month? Whether the company will pay him/her Rs. 4160/- instead of Rs. 160/- X 10 days = Rs. 1600/-? The simple answer will be no, the company will pay him/her Rs. 1600/-. Likewise, if the worker works for 30 days in a month (though it is against the Factories Act), then he/she will be getting Rs. 160/- X 30 days = Rs. 4800/-. So we can say the rate of Rs. 160/- per day is fixed. However, if the company splits this Rs. 4160/- per month into different components for the purpose of arriving at Rs. 4160/-, it is permissible as far as payment of Minimum Wages as per the Minimum Wages Act is concerned (as per the judgment made in the case of Bridge & Roof by the Supreme Court). But this judgment never gave splitting permission for the purpose of PF Contribution.

PF deduction on Rs. 4160/- (Rs. 160/- X 26 days) will be Rs. 499/-

PF deduction on Rs. 4800/- (Rs. 160/- X 30 days) will be Rs. 576/-

PF deduction on Rs. 1600/- (Rs. 160/- X 10 days) will be Rs. 192/-

As per assumption: Basic: Rs. 2000

HRA: Rs. 1500

Perf Allowance: Rs. 500

Conveyance: Rs. 500

and deducts Rs. 240/- towards PF. Is it OK by doing so?

If the worker belongs to the same Rs. 160/- category and works only for 12.5 days in a month, then the deduction of Rs. 240/- is okay. But if the worker works for 26 days, then this splitting is not permissible.

I hope I am correct.

Regards,
Jawed Alam

Mr. Jawed, the assumption here is that he works for the entire 26 days. Secondly, the salary/wages are paid based on one's attendance. I do not think a different yardstick shall be maintained for someone who worked for 10 days in a month and for someone who worked for the whole month without any loss of pay.

My question here is, when an employer pays the minimum wages more than the prescribed limit (by the respective Government), whether splitting of wages in the way that I quoted in the example is permissible or not.

If not permissible, what is the sanctity of the judgment of the Punjab and Haryana High Court that I attached in my previous post?

Other members of the HR forum can also put in their views, please.

Regards,
Balaji

I agree with PBS as it's the exploitation of the industry by government departments without disclosing all the facts.

Mr. Balaji,

When an employer pays monthly wages more than the minimum wages, it is always permissible as far as the Minimum Wages Act is concerned because the Act defines the minimum limit of wages for a particular job. If an employer pays more than the prescribed minimum limit, then there is no harm.

The splitting of wages into different components has been permissible by different labor judgments (as you posted), but the portion of basic wages in splitting of Basic Wages + DA + HRA and other allowances may not be less than the minimum wages rate for the purpose of the deduction of PF contribution, which has been clarified by EPFO. Therefore, splitting of minimum wages solely to avoid PF liabilities is not permissible.

Other members' views on this matter are expected.

Regards,
Jawed Alam.

Dear Friends, thanks for all the discussions and information shared. However, I would like to know if any reply has been issued or published for Advocate Mr. H.L. Kumar's letter to the PF commissioner regarding the permissibility of splitting the minimum wages. Thanks for letting me know the current status. Regards

Delhi PF Tribunal Decision on Circular

The Delhi PF Tribunal has quashed the circular issued by the PF Commissioner, and the judgment is expected within 2 days. Hence, the circular issued by the PF Commissioner stands annulled with the quashing of the circular by the tribunal, and bifurcation has been allowed under the PF Act. Once I receive the judgment, I will post it on the net.

Thanks
Regards

Minimum Wages and Their Components

Is any appropriate government forming minimum wages that comprise elements other than basic, DA, and VDA? If so, please let me know.

Kindly go through the updated information on the splitting of minimum wages for the purpose of PF contribution.

Regards,
Ratikanta Rath

Good inputs. Thanks to all members. I want one clarification related to this discussion—whether PF should be deducted on monthly incentive payments (which are not fixed, calculated based on a particular department's and overall company's performance in the particular month, vary month on month, with conditions of deduction of full incentive if leave exceeds a certain number of days, etc.).

Compliance with Minimum Wages and Allowances

When the following are complied with:

1. Minimum wages/DA applicable complied.
2. The balance portion of the salary is divided into other allowances such as HRA, TA, WA, CCA, etc., with PF deducted from the basic.

Regards,
Siva/Chennai/[Phone Number Removed For Privacy Reasons]

Dear Sirs,

Was there any response from the PF Commissioner (Compliance) to Mr. H.L. Kumar's letter? It seems that the controversy still continues. Furthermore, some states split the minimum wages themselves into two parts, namely Basic and Dearness Allowance. In such cases, is it correct to account only the basic wages for the calculation of PF deductions?

Thank you all in advance for clearing my doubts above.

Regards,
S.S. Kumar

The letter from Mr. Kumar itself serves as proof that the matter is sub judice, and the views of various high courts also vary from time to time. In my opinion, we should adhere to the circular or directive from EPFO as provided by Mr. Alam initially, rather than initiating proceedings under section 7A ourselves.

Thanks and regards,

Sumit Kumar Saxena

Update on EPF Circular

It was informed earlier that the EPF Circular of 30th November 2012 has been kept in abeyance. The abeyance circular is attached in the thread "Legal Compliances Required for the Staffing Industry" for reference.

Regards,
Rajanassociates

I would like to know when it became mandatory by the government that the basic salary cannot be less than the minimum wages of the state. Please specify the date if possible.

Dear all,

Earlier, Jawed Saab posted a clarification not to split the minimum wages for the EPF purpose. Many of us, including myself, personally agreed on the same. However, in the same matter, a scanned copy of the judgment by Sh. Balaji was posted, which is also true. Subsequently, a clarification from the EPF department was also received, which is enclosed for reference. In this regard, I spoke to an EPF department official who mentioned that the matter is sub judice in the Honorable Supreme Court of India, and that we should let them decide.

Question to Seniors and Colleagues

My question is to all my seniors and fellow colleagues: should we split the same (minimum wage) or not?

Dear Jawed Saab, Kahan hain AAP? Bhool gaye kya.

Thanks and Regards,

Sumit Kumar Saxena

Dear Sumit Kumar Saxena ji,

It is advisable not to split the Minimum Wages. At any moment, definitely the court will say not to split the M.W.

Regards,
PBS KUMAR

From all the discussions above, I have found that minimum wages fixed by the state governments may be split into allowances to reduce the P.F. liability of the employer in the light of the order of the Honorable Punjab & Haryana High Court.

So far, concerning the views of Mr. PBSKUMAR, it would be in litigation until the decision of the Honorable Supreme Court or amendment in the Act by the parliament.

I. M. ANAND

Important Information from CAPSI Chairman

This is important information from Mr. Kunwar Vikram Singh, Chairman of the Central Association of Private Security Industry-India. He clarifies:

"Dear Friends, I would like to inform you that the Delhi High Court has given its orders regarding a petition filed by CAPSI against the notification issued by the EPF department, directing all PSAs to deduct EPF on Minimum Wages. Now, the EPF department has given an undertaking via an affidavit to the Delhi High Court that Circular No. Coord/4/(6) 2003/Clarification/VolII/7394 dated 23.05.2011 on minimum wages has been withdrawn and has been kept in abeyance until the outcome of the SLP (C) No.20085/2011, which is pending before the Hon’ble Supreme Court. The submission of the PF department has been recorded in the order dated 01.05.15. The orders of the Delhi High Court are attached herewith for your information."

The order is enclosed for reference.

Thanks & Regards,

Sumit Kumar Saxena

Union Labour Ministry's Amendment to EPF & MP Act 1952

Please find attached a copy of the news item regarding the Union Labour Ministry's finalization of the proposed amendment to the EPF & MP Act 1952. This amendment will exempt HRA, Con all, etc., from the payment of PF contributions, with an option to join the National Pension Fund. If anyone has details of the final recommendations from the Labour Ministry, please upload them for the benefit of the members.

Regards,
N. Nataraajhan
Sakthi Management Services
HP: [Phone Number Removed For Privacy Reasons]
Email: [Email Removed For Privacy Reasons]

Legal Interpretation of EPF Contribution on Minimum Wages

Refer to your query on "Splitting of Minimum Wages for EPF Contribution is Legal by EPF Appellate Tribunal against the order passed by EPF Authorities dated 26.04.2011 under Sec. 7A of EPF Act assessing PF Dues on allowances is also illegal.

The Tribunal has observed that the employer has bifurcated the Minimum Wages into Basic Wages, DA, HRA, Conveyance Allowance, etc. The employer has been paying employees' contribution only on the Basic Wages as provided under the EPF Act 1952. The EPF Authority pleaded that PF dues can never be calculated on wages lower than the Minimum Wages. Accordingly, the authority has initiated proceedings under Sec. 7A of the Act, taking into consideration the Minimum Wages under the Minimum Wages Act and directed the employer to pay the contribution so determined.

The Appellate Tribunal has opined that Minimum Wages have not been defined under the EPF Act, only Basic Wages is defined under the said Act. EPF Authority has no power to hold whether Minimum Wages amount to Basic Wages or not. While interpreting a provision of any Act, the court only has to interpret the law and cannot legislate it. If a provision of Law is misused and subjected to abuse of the process of Law, it is for the legislature to amend, modify, or repeal it if deemed necessary. There is no compulsion to hold that the definition of Basic Wages should be equated to the definition of Minimum Wages under the Minimum Wages Act as per law settled by the courts.

The employer is liable to deduct PF Contribution on Basic Wages and DA as defined under subsection 2(b) read along with section 6 of EPF & Misc. Provisions Act 1952 and not on Minimum Wages Act 1948. Hence, the impugned order is set aside, and the appeal is allowed in the case of M/s. Syncom Healthcare Ltd Vs RPFC Indore (ATA No. 448(08)2012, dated 08.09.2014).

Thanks & Regards,

V R Rao Pulipaka