Navigating Salary Restructuring: How Can We Legally Minimize PF and ESIC Contributions?

I want to THANK ALL OF YOU for being a teacher to me and many others who are entering the field of HR. Sir, today for the first time, I am daring to write something. Please forgive any mistakes that may occur and provide your valuable guidance.

To your obedient follower,

Current Situation and Challenges

Sir, I am working with an automobile parts manufacturing company that was taken over by new management just one month ago. All staff remain in the same positions as before. Now, our first salary under the new management is due in 15 days. Within this short time frame, the management wants me to restructure the salary system in compliance with rules and laws, limiting PF/ESIC contributions to the lowest to minimize their liability according to government regulations.

Salary Structure and PF Contributions

Currently, employees have gross salaries ranging from ₹5000 to ₹75000 per month, with Basic + DA set at 50% of the gross. This results in a significant statutory PF contributory burden on the employer due to the absence of a ceiling of ₹6500. The new management aims to reduce this burden to the legal limit of ₹780 + 1.61% of admin charges, with the deduction of employees' PF amounts maintained to increase their savings in PF accounts. However, the employer's share is to be capped at ₹885 (13.61% of ₹6500).

Is this legally possible? We aim to respect the law and comply with it.

Guidance on ESIC Contributions and Leave Policy

Additionally, please provide guidance on minimizing ESIC contributions and how to formulate a leave policy.

Thank you, and I eagerly await your guidance.

Regards,

Considerations for PF and ESI Contributions Under New Management

If the new management continues with the old employer's name and PF & ESI account, it is not possible to reduce the PF and ESI contributions. If they change the company name and decide to start new PF and ESI accounts, it may be possible. However, some problems may arise in this scenario. Employees will lose the continuity of their savings in PF. Therefore, it is advisable to inform the new management about these considerations. They should make a decision on this matter. Best of luck.

Recent Judgment on PF Contribution Limit

Kindly refer to the recent judgment of the Bombay High Court regarding the restriction on the management's PF share to be paid only up to ₹6,500, even if the employee's salary exceeds ₹6,500 (Basic + DA).

Regards,
G.K. Manjunath

As regards your query on PF, you can reduce the PF contribution amount and restrict it to 12% on ₹6,500, i.e., ₹780. There is a judgment of the Supreme Court in the case of Marathwada Gramin Bank Karmachari Sanghatana Vs Management of Marathwada Gramin Bank (SC 2011 LLR 1130), according to which you can reduce the PF contribution amount and restrict it to 12% on ₹6,500, i.e., ₹780. However, you are advised to obtain consent from all affected employees. Furthermore, according to Section 9A of the ID Act, no employer who intends to make any changes in the conditions of service applicable to any worker in regard to any matter specified in the Fourth Schedule shall do so without providing notice. Therefore, you need to give notice of the change under Section 9A.

As for your ESI query, you have no scope to reduce your liability unless you restructure your entire salary package and convert certain emoluments into annual terms (i.e., LTA, Medical, etc.).

Thank you.

Supreme Court Ruling on PF Contributions

The Supreme Court has upheld that even if management has been paying contributions over and above ₹6,500, it can be brought back and paid only on ₹6,500. The decision is in respect of the case by the workmen of Marathwada Gramin Bank Karmachari Sangatana vs. Management of Marathwada Gramin Bank - 2011 LLR 1130 (SC).

Citing the above judgment, you can also implement the same in your organization. This could save a lot of money for the management. The present system will have a cascading effect as the VDA and wages would go on increasing due to inflation and wage settlements.

In view of all these, it is advisable to have a detailed discussion with your advocate.

With kind regards.

PF Contribution and Salary Restructuring

As far as PF contribution is concerned, PF authorities are not at all bothered whether you are increasing or decreasing the salary. They care about whether the company covers PF & ESIC for all its employees, including the contract laborers. More importantly, the current yearly CTC offered to its employees should not decrease. To maintain this, you may introduce other yearly benefits such as LTA, incentives, etc., to match the previous yearly CTC.

Regards,
Vijayan

Can anyone help me in knowing if we can split minimum wages to avoid contributing more PF amount? If anyone has an answer, please revert with some notification.

Thanks,
Deepa Gusain

You can find prevailing minimum wages in Delhi through Google (please find attached a screenshot saved in a Word file). As it is known, the PF authority is not concerned about contributions based on basic salary. Please remember that the minimum wages to be paid are mandatory, and the gross wages should not be less than the amount specified in the notification.

The basic salary can be reduced to lower the PF contribution. However, ESI is calculated based on the total wages paid, excluding the washing allowance. Therefore, as suggested by another member, consider restructuring the CTC by creating components for Medical and LTA.

From your post, I understand that you are looking for ways to reduce the burden of PF and ESI contributions imposed by your employer.

Thank you.

Dear Subbarao ji, with due respect to you, I differ with your following statements:

Employer Not to Reduce Wages

I am reproducing paragraph 12 of the EPF & MP Act 1952 verbatim for your reference:

12. Employer not to reduce wages, etc.

No employer in relation to an establishment to which any Scheme or the Insurance Scheme applies shall, by reason only of his liability for the payment of any contribution to the Fund or the Insurance Fund or any charges under this Act or the Scheme or the Insurance Scheme, reduce whether directly or indirectly, the wages of any employee to whom the Scheme or the Insurance Scheme applies, or the total quantum of benefits in the nature of old age pension, gratuity, provident fund, or life insurance to which the employee is entitled under the terms of his employment, express or implied.

Regards