Confused About EPF Basic Wage Rules? Need Clarity Before Implementing Changes

Salary Structure and EPF Compliance

I had faced a 7A Enquiry in my earlier organization. The main focus was on the salary structure. The Enforcement Officer reported that our Basic was very low, and allowances were more. Hence, he added all allowances excluding the current Basic and HRA and restricted it to Rs. 6500, resulting in dues for 25.61%. He suggested we change the salary structure. We revised our salary structure to have 60% Basic, 30% HRA, and 10% other allowances. Even then, the PF Commissioner and Enforcement Officer suggested increasing the Basic from 60% to 80%, with the remaining 20% as other allowances.

Query on EPF Act Provisions

My question is: Is there any rule mentioned in the EPF Act that Basic Wages should be 50%, 60%, or 80%? Please confirm this for me immediately, as I am going to implement the new structure in my new company.

My email IDs are [Email Removed For Privacy Reasons] and [Email Removed For Privacy Reasons].

Thanks in advance.

With Regards,

M. Karthik

There is no such rule. From your posting, I cannot determine the type of organization you are in. You simply need to ensure that the basics are not less than the minimum wages. If the inspector asks for something, ask them to show where it is written.

Understanding the Payment of Wages Act

The Payment of Wages Act does not prescribe any minimum limit for basic and allowances; it is entirely at the employer's discretion how to structure the salary of its employees.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Ensuring Compliance with Minimum Wages

We need to ensure that the Basic and the DA (Dearness Allowance) are as per the minimum wages notified by the respective state governments every year for each industry. The rest is left to the employer to structure the salaries.

Regards

In Punjab, the minimum basic has been fixed by the government with effect from 17.02.2012. The government has issued a notification stating that "the minimum rates of wages shall be the basic rates of wages." This means that there is no rule requiring the basic to be 60% or 50% of the salary. It is your own decision, but it should be at or above the minimum wage.

Regards,
Satish

If you are paying a salary above the minimum wages, then it is not illegal if you are not paying the Basic Salary and D.A./special allowance as per the minimum wages. This was held in the judgment of the Honourable Supreme Court in the case of Airfreight Ltd. v/s. State of Karnataka. Kindly refer to the link below. [Link to the case: Airfreight Ltd. vs State Of Karnataka & Ors. on 4 August, 1999](http://www.indiankanoon.org/doc/1146344/)

Regards,
Kuldeep Singh

Clarification on PF Calculation

There are no rules stating that you should calculate PF on basic or allowances. PF should be calculated on the gross amount, excluding HRA and washing allowance, to my knowledge. If I am wrong, please update me on the same.

Regards,
Ajay Krishnan
Junior Executive
[Phone Number Removed For Privacy Reasons]

Basic Salary and Minimum Wages

The basic salary should not be less than the minimum wages notified by the government. If the basic salary is more than the minimum wages, then management is free to fix the basic salary and allowances. However, it should be applied equally for all employees.

Regards

As I am a fresher, can you please explain from what amount the PF has to be calculated? Could you provide a detailed explanation of the salary structure and the percentage of ESI, PF, DA, etc.?

Thank you.

Understanding Minimum Wages and Basic Wages

Please be informed that the Minimum Wages (MW) and Basic Wages are two different concepts and are relevant for different purposes. The MW or Minimum Basic Wages, as per some of the State Governments, are different from the Basic Wages as defined under the EPF & MP Act 1952. The Enforcement Officer (EO) for Provident Fund (PF) has exceeded his authority by suggesting any changes in the wage structure. The EPF Act has not prescribed any wage structure as such.

Basic Wages are a term used to calculate other allowances like House Rent Allowance (HRA), Dearness Allowance (DA), Transport Allowance, PF, Employee State Insurance (ESI), etc., whereas MW is inclusive of all except DA. There is a specific exclusion of DA and HRA from Basic Wages, whereas the MW takes care of them.

Regards

EPF Contributions and Minimum Wages

It is a general phenomenon that EPF contributions should be paid based on the minimum wages declared by the Labour Department from time to time. The EPF Appellate Tribunal has categorically held that the allowances forming part of minimum wages can be split for the purpose of EPF contributions. Therefore, the EPF authorities do not have the power to determine whether minimum wages should be considered when making EPF contributions. Consequently, minimum wages can be divided for EPF contribution purposes.

For instance, the minimum wage for an Attender is Rs. 6000/-. Currently, the EPF authorities are insisting that we pay EPF contributions on Rs. 6000/- as it is the minimum wage. However, according to the EPF Appellate Tribunal's judgment, Rs. 6000/- can be divided into different components, such as 60% basic and 40% remaining allowances. In this scenario, EPF contributions can be paid only on 60% of Rs. 6000/-, which is Rs. 3600/-.

Regards,
N. Lokanadha Babu, Manager-HR NRI Academy of Sciences

Supreme Court Decision on PF Contribution and Salary Structure

On 23.05.2011, the RPFC issued a circular stating that minimum wages cannot be split for the purpose of PF contribution. This was challenged by various companies in the concerned High Courts. The Hon'ble High Courts of the states had differing opinions on the matter, leading to a challenge in the Supreme Court. Meanwhile, the PF office put the circular in abeyance until the decision of the Hon'ble Supreme Court.

Now, the Hon'ble Supreme Court needs to decide on this matter.

Please also refer to the following order:

It may be recollected that in a Review Petition by Surya Roshni Limited vs. Employees' Provident Fund and Another, 2012 LLR 42, the Division Bench of the Madhya Pradesh High Court held that Section 2(b) and 6 of the Employees' Provident Funds & Miscellaneous Provisions Act define basic wages. HRA, overtime allowance, bonus, commission, or any other similar allowance are not covered in the definition of basic wages. However, when special allowance, dearness allowance, conveyance allowance, and other allowances are paid universally to all employees, they would be treated as part and parcel of basic wages.

A special leave petition to appeal was filed and came up for hearing on 13.7.2012, during which the following order was passed:

ITEM NO.MM-128 COURT NO.12 SECTION XV

SUPREME COURT OF INDIA

RECORD OF PROCEEDINGS

I.A. NOS.4-5 in

Petition(s) for Special Leave to Appeal (Civil) No(s).8781-8782/2012

(From the judgment and order dated 24-3-2011 in WPC No.1891/2011 and dated 22-11-2011 in RP No.117/2011 of the High Court of M.P. at Gwalior)

SURYA ROSHNI LTD. Petitioner(s)

versus

EMP. PROVIDENT FUND & ANR. Respondent(s)

(FOR DIRECTIONS)

Date: 13-7-2012 These I.As were mentioned today

CORAM:

HON'BLE MR. JUSTICE K.S. RADHAKRISHNAN

HON'BLE MR. JUSTICE DIPAK MISRA

For Petitioner(s): Mr. Rohit Arya, Sr. Adv., Mr. Gagan Gupta, Adv., Mr. Harvinder Singh, Adv., Mr. Sunil Singh Parihar, Adv., Mr. Nitin Gaur, Adv.

For Respondent(s): Ms. Liz Mathew

Upon being mentioned, the Court made the following order:

"Considering the facts and circumstances of the case, we are inclined to direct the petitioner to deposit 60% of the amount demanded, after getting credit for the amount already paid, within a period of two weeks. On the above facts, we are inclined to grant a stay of the High Court judgment. The I.A. are, accordingly, disposed of."

If the court decides issues in favor of PF authorities, it will have long repercussions on the definition of salary/wages as stated in Bonus, Gratuity, and workmen compensation, probably because these regulations are also social security benefits.

Regards

Regarding your query on PF, there is no specific structure for salary under the EPF Act-1952 Rules. According to Sec 2 (a) and Sec 6 (b), PF Contribution is payable on Basic, D.A, or any other retaining allowance paid to employees. As for the meaning of Wages specified in various labor enactments and the verdict of the Supreme Court, if the components of the Salary/Wages paid to all employees are in an equal manner, then only we will consider other allowances as part of the salary.

The breakdown of salary is purely at the discretion of the Company. The contributions are payable on Minimum Wages, which are basic wages and DA according to the category of employment as per the schedule in the Notification under the Minimum Wages Act applicable to your organization according to your state's regulations. You can modify the structure of wages, remit the contributions, and ensure compliance for the 7A enquiry.

Regards,
P.V. Rama Rao
[Phone Number Removed For Privacy Reasons].

Understanding Basic Wage Compliance

Your question is valid. Some Enforcement Officers have asked companies to set the basic wage at 70% and HRA at 30% without proper amendments or rules. Some companies are paying the balance contribution as subterfuge wages. We have provided many judgments to prove that there are no proper rules to comply with, and eventually, they have backed down. Now, they are not pressing to fix it as I mentioned earlier. However, it is necessary to set the basic component according to the Minimum Wages Act. If you fail to do so, you are liable to pay. There is no question of whether you fix the limit at 6500/- for PF or not; you have to comply with the minimum wages.

Regards,
Ganesh
[Phone Number Removed For Privacy Reasons]

Thank you so much for all your feedback, friends. I prepared a new salary structure based on all your suggestions and presented it to our management for approval.

Options for Salary Structure

I provided 2 options:

Option 1: 40% Basic + DA (Rs. 2238) (for a Steel Fabrication company in T.N) + 30% HRA + 10% Conveyance Allowance

Option 2: 60% Basic (Clubbed DA with Basic) + 30% HRA + 10% Conveyance. I recommended the second option.

Any opinions on this are welcome.

With Regards,
M. Karthik

The EPF Officer is correct. I heard from a PF Commissioner that the Basic has to be 70% of the gross. Though this may not be practically feasible for all salary ranges, you may restrict this system for salaries up to ₹15,000 per month. There is no scrolling or flash notification on the EPFO site regarding this. Design your CTC accordingly.

It is advisable to apply this rule up to the ESI coverage salary limit. For the remaining salary range, continue with what you have been implementing in your company.

Regards,
Chandru

The EPF Officer is correct. I heard from a PF Commissioner that the Basic has to be 70% of the gross. Though this is not practically possible for all salary ranges, you may restrict this system for a salary up to ₹15,000 per month. There is no scrolling or flash notification on the EPFO site about this. You should design CTC accordingly.

It is always better to apply this rule up to the ESI coverage salary limit. For the remaining salary range, you should apply what you have been following in your company. If the basic is too low, then there is no need to contribute a small amount to PF. When he retires, his PF savings will be too little. Instead, the employee can opt for a Recurring Deposit. Am I right...?

Regards,
Chandru

The MW Act and EPF Act are not at all interconnected or interdependent on each other. For the calculation of PF Contribution, only Basic Wages are relevant. The employer alone is competent to decide the Basic Wages, and none else. Certifying standing orders also play an important role. The RPFC or the EO has no competence to direct the employer to change the Salary Structure. Bridge and Roof, DCM (Vs RPFC) cases are relevant in this context. However, the P and H High Court cases are also relevant to distinguish MW and Basic Wages. Wipro has perhaps the lengthiest list of Salary and Allowances constituents in the country.

Regards,

There is no provision in PF to define a salary structure. It is suggested that your basic salary should be equal to or more than the minimum wages, and the allowances should be in proportion to the Basic. Having a proper salary structure would also ensure that Income Tax benefits, if any, will be easy to claim.

Regards,
Preetam Deshpande