Understanding PF Deductions and Gratuity in Small Organizations with Contract Workers

Hi Team,

A small organization with about 18 permanent employees and around 20 contract employees. One person's pay is approximately 10 LPA, but there are no PF and gratuity components included as part of the pay. There is a variable component and only two deductions - PT and TDS. The company states that PF is not applicable to them.

Is it possible for there to be no PF and gratuity component in the above scenario? Please help resolve my query.

Thanks

Yes, PF is not applicable to him, but if he has worked continuously for 5 years in a job, then gratuity is compulsory.

Goutam

How PF is not applicable when the company is employing 38 persons? Provided your establishment is one covered under Schedule I or covered by government notification.

B. Saikumar
HR & Labour Law Advisor
Mumbai

How to know whether an establishment is covered under Schedule I or by government notification? The company says that they have not employed more than 20 employees on its permanent payroll and therefore PF is not applicable. Also, it is not a Pvt Ltd company.

Regards.

Is your establishment a factory manufacturing some product, and if so, what is the product? Or is it a commercial establishment? If so, what business is it carrying on?

B. Saikumar
HR & Labour Law Advisor
Mumbai

It is a small IT services company that serves other major IT companies through consulting, software development, and staffing.

Dear Katz,

As you have mentioned that your company is a small organization and the total number of permanent employees is only 18, hence your organization may not be included in the PF scheme. Kindly confirm with the HR team/Admin Department whether the company is indeed included in the PF scheme.

Thanks and regards,

Pranab Chakraborty
Email: pranabchak10@gmail.com

Dear Khatz,

Can management bluff about anything? Can you accept this? May I know your designation? Are there direct employees or contract laborers? If there are 20 employees, you must cover them under the act. There are 18 permanent and 20 contract workers, making the total 38. Therefore, you must cover them.

Regards,
V. Subbarao

Mr. Katz,

The Central Government, through a notification in 2006, has extended the application of the P.F Act to IT companies. As your company has employed 38 persons, including contract labour, it needs to be covered under the P.F Act. I trust you are sufficiently clarified now.

B. Saikumar
Mumbai

Hi,

As you have only 18 employees on your payroll, your organization can't be registered under the PF as the members must be 20. To be exempt from this requirement, your organization has not recruited any permanent employees. Instead, you have hired some contract workers through a contractor who will pay them using his own code if he is registered under the PF.

Regards,
Kumar

Hi,

I agree with Viju Kumar. However, as a Principal employer, the Katz's company is responsible for PF deduction of contract employees as well. Though they would not deduct it directly, it needs to be checked and audited periodically, and proofs of deposit (challans) need to be asked from the contract vendor for the PF, ESI, etc.

Mr. Sasikumar, please correct me if I am wrong. I would be grateful to you.

Best Regards,
Devendra Jawaji

Thank you all for clarifying my query.

I do not have any issues regarding whether PF is deducted or not as I am receiving a lump sum salary. I was simply curious about the absence of PF deductions. I received the same response from the management as mentioned by Viju Kumar. Later, through my other contacts, I learned that there are numerous small companies where PF deductions are not made, and the employees are paid well. Therefore, even if there is no PF deduction, it is considered normal.

I also realized that they do not verify all the details with the contract vendors, as it is the vendor's responsibility to ensure everything is correct. This is not a concern for the small company, as they lack the enthusiasm and resources for it. With a limited number of employees, there is more work and full utilization of their skills for which they were hired. Most of the admin/finance/facilities work is outsourced.

Once again, thank you all for sharing your valuable insights.

Regards.

P.F Act is a social welfare legislation and therefore do not relax under the false notion that you are not concerned about P.F deductions of contract labor since you are getting a wholesome salary. No one can have an arbitrary view opposed to law, more so to an Act like P.F Act which was enacted to secure social welfare of employees, to deprive an employee of his legitimate right to a particular benefit guaranteed by law. You need to understand the scope of the definition of 'employee' under Section 2(f) of the P.F Act to have a proper understanding about the coverage of employees. Do not be also under the false impression that it is contractor's responsibility to pay the contribution. Though it is contractor's responsibility to pay contribution, Para (30) of the P.F Scheme 1952 makes it abundantly clear that it is the responsibility of the Principal employer in the first instance to pay the contributions of the employees including contract labor to P.F. Further, it is the responsibility of the Principal Employer under Sec.21 of the Contract Labor Act 1970 to ensure that the contractor pays wages to the contract labor properly and if the contractor fails to pay the wages, it is the responsibility of the Principal employer to pay the wages to contract labor.

Further, the P.F authorities have the right to determine disputes of coverage and quantum of P.F dues and have enforcement powers to recover the dues even by way of attachment of employer's properties. Not only this, the defaulting employer renders himself liable for penalties - both pecuniary and penal under the P.F. Act. The Act knows no distinction between a small organization or a big organization when it deals with violations. Therefore, be serious, go through the P.F Act thoroughly and take a prudent decision.

B. Saikumar

HR & Labour Law advisor

Mumbai.