Exploring PF Minimum Wage Deductions: Are There Any Legal Loopholes?

Exploring Loopholes in PF Deductions

As we all know, PF has to be deducted up to the minimum wage scale. Is there any loophole to this? Here are some of the ways I thought might be useful:

- Yearly bonus instead of allowances.
- An agreement between the employer and the employee to reduce the PF liability.

Thanks. If there are any suggestions, please post.

Any such agreement will be null and void. You will have to pay PF and penalties with interest.

Why Will It Be Null and Void?

Actually, it is stated in the section itself. Section 2(b) of the EPF Act states that "basic wages" means all emoluments earned by an employee while on duty, on leave, or on holidays with wages, in accordance with the terms of the contract of employment, and which are paid or payable in cash to him.

It specifies accordance with the terms of the contract of employment. There is also a judgment regarding it. (If I find it, I will post it as soon as possible).

Understanding Statutory Requirements and Employment Agreements

Any agreement that is made to defeat statutory requirements is null and void. Any court will strike down such arrangements. That is the general doctrine.

According to the terms of employment, it does not mean you can include a term stating, for example, that you will pay zero basic and pay everything as a travel allowance. It means that all payments due to the employee under their terms of employment, whether paid or not (but due to them), will be subject to PF.

Regards.

You are right on the first part that any contract which defeats statutory requirements is null and void. That is the law.

Clarification on Employment Terms and PF Liability

Now, for the second part, I am not saying that. What I mean is if the terms of employment do not cover any expenses or other cash benefits, then it cannot be considered as part of the salary, and thus no PF is liable to be paid on it.

Understanding Basic Wages and EPF Contributions

The concept of Basic Wages for a particular post or job is based on the sound reasoning that Basic Wages are the remuneration that an employee is worth for that particular post or job assigned. To maintain its worth intact due to the rise in the cost index, the concept of D.A. (Dearness Allowance) is introduced. The EPF Act provides for compulsory contribution on the Basic Pay plus D.A. of the employee, subject to falling within the wage limit of Rs. 6500/- per month.

Hence, when the prescribed Minimum Wages are less than or equal to Rs. 6500/-, the P.F. Department insists on payment of EPF contribution on Minimum Wages. This is because, firstly, the logic of fixation of Minimum Wages and Basic Wages is governed by the same principles, especially that an employee's worth for a particular job cannot be less than the Minimum Wages prescribed for that category by the State Government. Secondly, the EPF savings at the prescribed percentage of Basic Wages plus D.A. would maintain the real value of savings as and when D.A. increases, which is part of Minimum Wages.

Though the Honorable High Court has kept in abeyance the notification of the EPF Department to this effect, any mutual agreement contrary to the spirit of the EPF Act is bound to be termed as not enforceable under the law.

Regards,
S.C. Verma, Labour Law Consultant

Verma Ji, you are right and logical, but you also know that a large number of industries do not pay minimum wages to the employees, and there is no provision of minimum wage defined in the EPF Act. Though there have been some judgments regarding this issue.

Regarding your statement about mutual agreement contrary to any Act being "ultra vires," I must clarify that it is not what I am saying. As mentioned earlier, "if the term of employment does not cover any expenses or other cash benefits, then it cannot be considered as part of the salary, and thus no PF is liable to be paid on it."

Consideration of Allowances as Bonus

Now, what if all the allowances are given as a bonus (yearly, half-yearly, quarterly).

Regards, Atom.

As per the Hon'ble Supreme Court ruling, what is not paid to all the employees in an establishment and what is generally not paid in all the industries cannot be termed as Basic Wages to attract P.F. contribution. Therefore, your quotation in red is correct to the extent that the employee should not have earned the amount in his hand out of his service condition, like providing free/subsidized transportation, meals, etc., which an establishment incurs on its own.

If the employer is bound to pay the allowances as a part of the service condition of an employee at the prescribed rates/amount, though they are worked out yearly, half-yearly, or quarterly, and by including those allowances, an employee cannot be excluded from the coverage under the EPF scheme, the employer can be made liable to contribute to EPF.

Regards,
S.C. Verma

You are right once again, but if an allowance is given as a bonus to the employees, then no PF liability could be made. For example, if a person is earning $3500 per month, then PF will be deducted from the total salary because it is less than the minimum wage. The salary is divided into basic (60%), HRA, DA, etc. (40%).

Consideration of PF Deduction Strategy

Now, if I suggest deducting PF on 75% of the salary and showing the rest as a bonus or other cash benefits at the end of the financial year or half-yearly, it is an important consideration. If the balance sheet (as well as the company's accounts) supports the deduction, then EPFO cannot challenge it. (Of course, they can challenge it, but they cannot prove it.)

I hope you are aware that by breaking up the salary as above, you are in violation of the Minimum Wages Act. You can be asked by the authorities to pay the difference as back wages along with interest. The minimum wages are on a basic + DA + HRA basis. You will end up with a higher risk.

I know what I wrote, but do you know how many employers are giving the minimum wages? Both the offices are independent of each other. EPFO can never force the employer to make them pay the minimum wage. How many cases have you seen for the violation of the minimum wage in court? The Labour office does not care about the minimum wage. (I am not saying you are wrong, but I have seen more than half do not pay the minimum wage to the employees.)

Please provide a response to the attachment.

Regards.

In the context of the above, please find attached the decision of the High Court of Punjab and Haryana at Chandigarh.

Regards.

Current Legal Status of Minimum Wage Splitting

For the time being, the splitting of the minimum wage is legal. If any order is passed reversing the judgment, then the EPFO cannot apply the judgment retrospectively. So, for now, it is good.

Regards.

Now, I think Mr. Saswata has been satisfied with the verdict/decision by the higher court. Now, employers are not forced to make a contribution of PF on minimum wages.