Madras High Court Ruling: How Will Changes to PF Contributions on Allowances Affect Your Organization?

Hi All, I have this new ruling by the Madras High Court on the applicability of Provident Fund contributions on certain allowances. Looking forward to views on the impact on organizations regarding the same.

Madras High Court Ruling on Provident Fund Contributions

The Madras High Court, in the case of Reynolds Pens India Pvt Ltd and other petitioners ('Petitioners') vs. Regional Provident Fund Commissioner ('RPFC'), has held that certain allowances such as Conveyance, Educational Allowances, Food Concession, Medical, Special Holidays, Night Shift Incentive, City Compensatory Allowances, etc., should be treated as part of Basic Wages under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 ('EPF Act'). Accordingly, Provident Fund ('PF') contributions should be remitted on such allowances.

EPFO's Directive on the Judgment

The Employees' Provident Fund Organisation ('EPFO') has, in a recent internal communication, forwarded the aforesaid judgment to its officers and directed them to utilize this judgment as per the merits of each case.

Regards,
Deepa

Madras High Court Landmark Judgment

Here is the landmark judgment by the Madras High Court. I have highlighted some portions for easy reading. I request our members to go through this and post their valuable comments.

Regards,
S. Sethupathy, Excellent HR Services, Erode

Thanks for the posting. Please refer to the CPFC's letter dated 23rd May 2011, asking the RPFCs to ensure PF contributions are paid at least on minimum wages. Now, this Madras High Court order has come, providing two different guidances. Which is correct?

To my knowledge, there should be a suitable amendment in the act itself. The Act was enacted a long time ago, according to that period. Now, things have changed significantly. New salary components have been introduced as the nature of work demands.

PF authorities are simply reacting to the judgments given by the court every now and then. Tomorrow, another judgment will come, and then they will refer to that. There should be concrete guidance that will enable both employers and employees to understand their commitment towards PF contributions.

Could you please tell me where I could find the letter from the CPFC to the RPFC that you mentioned, or could you tell me what the letter stated?

Thanks
Regards

Dear all, As we all know, the endless argument goes on and on. I think we have to keep our cool until the EPF organization wakes up because they themselves do not know what the act implies and are waiting for the Court orders to come one by one to tell us what all the components covered for PF contribution are. Please note that:

1) A review petition has been filed before the Madhya Pradesh High Court (Gwalior Bench), which will come up for hearing on 29th July 2011.
2) A Writ Appeal has also been filed in the High Court of Madras, which is likely to come up for hearing on or around 8th August 2011.

Let's wait for the judgments to come from the above petition and appeal.

As per the offer document of Hinduja Foundries: "We challenged this decision of the PF Commissioner via W.P. 22480 of 2010 before the Madras High Court, which was dismissed by order dated June 7, 2011. We filed a writ appeal numbered 1096 of 2011 on July 6, 2011, before the Division Bench of the Madras High Court, against the said order. The High Court, by order dated October 10, 2011, granted an interim stay of the operation of the impugned order."

Definition of Wages and PF Contributions

There are similar judgments from other courts as well. All the judgments focus on one issue, and that is the definition of wages. It is very clear that PF should be contributed on basic wages and dearness allowance, and the former shall include all allowances earned by an employee while on duty or on leave. That means if you have a conveyance allowance paid to you even while on paid leave, then that will be part of wages qualifying for PF deduction. Similarly, if that allowance is proportionately deducted if you take unpaid leave, that allowance is part of wages only.

In many private establishments, the total salary is first decided, let's say Rs 15,000. It will then be bifurcated as Basic pay Rs 5,000, HRA Rs 4,000, Conveyance Rs 3,000, and Special allowance (without any special skill to perform the work!) Rs 3,000. If the employee takes, say, three days' leave without pay, he will get only Rs 13,500 that month. That means his HRA, Conveyance, and Special Allowances are also reduced proportionately. It is not that LOP is made only from basic pay.

Public Sector Companies and Allowances

Public sector companies, like Banks, pay HRA to officers. That is either reimbursement or paid by the bank directly to the landlord. This is called House Rent Allowance or HRA, even if the employee is on leave for a few days.

Clarification on Allowances and PF

Therefore, there is no need for any confusion. Basic wage/salary means the total salary. Any allowance given based on the category of employment, skill set required, etc., are only allowances. You will require that a particular employee be available near your factory, and for that, you give him an allowance so that he can take a house for rent, and that is HRA. This is not paid uniformly to all employees. Similarly, you may pay some additional amount to some employees who work in risky operations. That can be termed as Special allowance. A section of employees may work during the night shift, and for that, you pay a night shift allowance. A person carrying cash to the bank may be given a cash handling allowance. These are allowances not paid to all employees of the establishment and as such not forming part of wages/salary and obviously will be outside the scope of PF.

Therefore, whatever interpretation you make, the essence is that the salary as per the contract of employment is the PF qualifying salary.