Can We Deduct ESI and PF for Employees Under Suspension? Seeking Your Guidance

Dear Seniors, I need your guidance and suggestions on the query below. Can we deduct the ESI and PF when an employee is under suspension?

With Regards,
Prasanna Kumar

I think suspension and termination are not the same. Since the employee is under suspension, the statutory dues like ESI, PF, and PT will be deducted, but the calculation will be based on half of his basic salary.

Regards.

Subsistence Allowance and Statutory Payments

If a subsistence allowance is paid to a suspended employee, then statutory payments like ESI and PF must be contributed without fail. Suspension of an employee does not end the employer-employee relationship.

The Supreme Court has held that subsistence allowance forms the 'wages' of a suspended employee under the Employees State Insurance Act. Hence, employer and employee contributions to the ESI fund must be made on the subsistence allowance. (ESIC v. Popular Automobiles, Civil Appeal No. 3850 of 1993, decided on 29.09.1997).

The Supreme Court has also compared Section 7A of the Provident Fund Act in India and Section 45A of the ESI Act in Bharat Heavy Electricals Ltd v. Employee's State Insurance Corporation (Civil Appeal No. 1271 of 2008, decided on 14.02.2008), which gives power to inspectors under the respective statutes to initiate proceedings against employers for failure to pay contributions under the respective statutes.

Understanding Suspension and Its Impact on ESI and PF Contributions

Regarding the question of suspension, it means the employee is punished for some reason. If it is proven that his suspension is unjustified, then the company will provide full payment, and the PF and ESI deductions will be made as usual. However, if his suspension is deemed valid, he will receive 50% of his basic pay for the suspension period. Even in this case, the PF and ESI contributions will be paid.

The ESI and PF contributions will cease when the employee is on Leave Without Pay (LWP) or due to other reasons.

Regards,
Srihari

Deduction of PF & ESI on the wages received by the employee during the suspension period is the statutory responsibility of the employer.

Regards,
Eswararao Ivaturi.

Subsistence Allowance and Its Impact on ESI and EPF

It is correct that subsistence allowance is considered wages for ESI. However, for EPF, it is not. Referring to the definition of basic wages in the EPF Act, it states that basic means the emoluments earned by an employee while on duty, on leave, or on holidays. When a person is under suspension, they are not on duty, leave, or holiday. Therefore, the payment received as a subsistence allowance is not considered wages for PF. The case mentioned does not fall under the EPF Act but under the ESI Act.

Regards,
Varghese Mathew
HR/Labour Law Professional
[Phone Number Removed For Privacy Reasons]

Subsistence Allowance and PF Deduction

Subsistence allowance is paid to the employee during the course of employment, calculated at 50% of their wage. In my view, deduction of PF on this amount cannot be avoided.

Regards,
Eswararao Ivaturi.

I totally agree with Mr. Varghese Mathew. Subsistence Allowance attracts ESI, not EPF. Mr. Saji has shared a judgment of the Hon'ble Supreme Court in this regard. However, I would also like to share that it is clearly mentioned that "An inquiry under sub-section (1) of Section 7-A can be initiated to decide the dispute regarding the applicability of the Act." But, thereafter, no further update in this regard was issued by the EPFO.

So, until any notification from EPFO in this regard, it cannot be assumed that Subsistence Allowance also attracts EPF; this is my view. The learned members can correct me if there is any discrepancy.

It's simple, don't get confused. PF, ESIC, and PT will be paid on earnings, right? If they have not earned, then what will you pay?

In case the salary is on hold and the employee is terminated/suspended, in that case, you have to pay the contributions to the respective departments.

Best Wishes,
Karthik

I was heading HR for more than 30 years in the private sector, including MNCs. But I left my job in 2001 and am not in touch very much with these things. Let me give you my opinion based on my experience. If an employee is suspended with "suspension pending enquiry" as per model standing order, he is to be paid a subsistence allowance on which no statutory deduction is made. I suggest you may refer to the standing order and make a decision.

Best wishes,
Dr. K K Anirudhan
Regards

The Employee Provident Fund Scheme, framed under the Employee Provident Fund Act, provides in Para 26A that a member of the Fund continues to remain a member until they withdraw the money in their name from the Fund or until they are excluded from the Scheme under a scheme for exemption.

Thus, in light of the above, though it does not appear to have been expressly held as such by a court, it can be stated that a subsistence allowance ought to constitute wages under the Employee Provident Fund Act. Provident Fund contributions ought to be made on the subsistence allowance since the suspended employee continues to remain a member of the Provident Fund, and the employer-employee relationship is not extinguished on suspension.

Regards

I agree that if an employee is a member of the Fund, then he/she should continue to remain a member until he/she withdraws the money in his/her name from the Fund or is excluded from the Scheme. As you have mentioned that the employer-employee relationship is not extinguished on suspension, I do not agree with you on this point. There is an order of APFC-EPFO in which it is clearly mentioned that "during the suspension period, the concerned workers are not on duty, and the employer-employee relationship is suspended."

Subsistence Allowance and Provident Fund

Subsistence allowance is paid for the survival of the suspended workers, and during the suspension period, the concerned workers are not on duty, and the employer-employee relationship is suspended, since the decision does not arise from the inquiry. Hence, subsistence allowances paid to the suspended employees do not constitute wages and are not liable for deduction of Provident Fund.

For your ready reference, here I am attaching The Order dated 17-11-2009 passed by APFC, RO-Mumbai.

Regards

In continuation of the above, I would like to add that if the employee who was under suspension is exonerated from the charges and reinstated, then he/she should be paid their full salary after deducting the subsistence allowance already paid. At that time, PF can be deducted and submitted to the department as per procedure.

Thank you.

I have gone through the order of the PF Authority. There are a few more orders from the Honorable Court of Chandigarh and Madras on the same topic. It is indeed a debatable topic. Here, I am of the opinion that as per the Order of the PF Authority, the employer-employee relationship is suspended but not extinguished or exhausted, which is a very thin line in the court of law. I am not against any orders but am of the opinion that the same can be heard or taken for litigation.

Also, if the employee is reinstated, the difference in salary and subsistence allowance is paid, so how would you bifurcate the PF contribution? Also, what about interest on late payment, return filing, etc.? There are numerous queries related to this issue.

Last but not least, I am not against your comment. I may be wrong somewhere but need clarity in depth to satisfy my conscience.

Regards.

As I said, from the definition of basic itself, it is clear that subsistence allowance is not wages as it is not earned while on duty, leave, or holidays. It is based on this logic that courts have held that EL surrender, layoff, and retrenchment compensations are not wages for EPF. When a suspended employee is taken back, his contribution for the suspended period can be paid in the same way the contribution on arrears of wage revision is paid.

Regards,
Varghese Mathew
[Phone Number Removed For Privacy Reasons]

If the employee is reinstated, there should be no question raised regarding the bifurcation of PF contributions. The management can decide the salary structure for the suspension period as per company policy for all, or the EPF contribution can be simply calculated based on the Minimum Wages of the State or Rs. 6,500/-, whichever is less.

Regarding the question of late payment, if I am not mistaken, there should be no interest charged on clearing the dues upon reinstatement, as it cannot be considered late payment.

As of now, EPFO has already introduced an online portal for filing monthly contributions. It is not a hectic job and can be done very easily.

I hope I have satisfied your conscience.

Your statement contradicts, "The management can decide the Salary Structure for the suspension period, as per company policy for all OR the EPF Contribution can be simply calculated based on the Minimum Wages of the State / on Rs. 6,500/-; whichever is less."

If the management can decide the salary structure for the suspension period, why can the company decide on the subsistence allowance and contribute to EPF based on Minimum Wage/Rs. 6500/-, whichever is applicable?

I hope the PF authority will not prevent you from contributing on subsistence allowance if you consider the Minimum Wage/Rs. 6500/- as the basic pay. Please clarify if I am mistaken.

Suspension and Statutory Deductions

Suspension is not a punishment. Therefore, in the case of suspension, statutory deductions will continue from the subsistence allowance.

During the course of suspension, employees provide an undertaking to the employer regarding the payment of subsistence allowance. They state that they will not engage in a different job and will be wholly dependent on the current job. Consequently, payments will continue as per the rules, and all statutory deductions will be made from the payment.

Regards,
Badal Moharana Bharatiya Mazdoor Sangh [Phone Number Removed For Privacy Reasons]