Is It Fair for Companies to Shift Full PF Contribution to Employees? Seeking Advice on Policy Changes

Dear all,

I work as an HR professional in an SME. My query pertains to PF contributions based on Gross or CTC. The situation in which I am currently facing a challenge is as follows:

PF Contributions Before September 2014

Up until August 2014, we had approximately 15 employees on the company payroll. During this period, the employer (my company) contributed 12% to the employee's PF, and an additional 12% was contributed by the employee. Employees who chose not to enroll in PF were classified as "off-roll" and received cash payments for their salaries through vouchers.

Changes in PF Contributions from September 2014

Starting from September 1st, 2014, with the increase in the PF ceiling, we were required to deduct PF from the salaries of contract workers as well. We currently employ around 75 contract workers. This deduction also applies to those workers who were previously classified as off-roll. However, our Director has now instructed me to deduct 24% of PF from the employees' salaries directly. Unlike before, he has mandated that the company will no longer contribute to the PF of newly enrolled employees; the entire 24% will now be the responsibility of the employee.

Concerns About Policy Change

Is it permissible for a company that previously contributed 12% to PF to suddenly require employees to contribute the full 24%? I have reservations about this change as I do not believe a company can alter its policy from Gross to CTC.

Furthermore, this adjustment may lead to disparities between newly joined off-roll employees and contract workers.

I would greatly appreciate your assistance and guidance on this matter.

Thank you in advance!

Deducting the employer's share of contribution from the wages of employees is an offense punishable under the EPF & MP Act, 1952. As an officer of the employer, I hope you have informed your employer about the consequences of such actions.

At the outset, I would like to appreciate that your employer has paid PF contributions for all your employees, including contract employees. However, the following points need attention for compliance:

1. Minimum wages have to be paid to all your contract employees as notified by the state government.
2. The PF Act clearly states that the contributions towards PF should be equal, i.e., both employer and employee.
3. The PF authority has clarified that PF should be calculated based only on the gross salary and not on the CTC. However, HRA and OT will be exempted from PF contributions.
4. If the PF enforcement officer notices a 24% deduction from the employees, the employer will have to face legal consequences.
5. If you are unable to convince your management regarding the 24% deduction from employees, it is suggested to seek legal advice from a lawyer and present it to your top management.

Thanks with regards,

S Rajasekaran

First, I think your query was right, but not clearly written. There are two clear amounts here: gross salary and CTC. Labour law does not recognize CTC; it only refers to gross salary. In the case of PF, it's the basic + DA that is considered. You need to deduct 12% of the basic and DA from employees and contribute 12% from the company. You cannot deduct all 24% from the employee's salary (that is, from their gross salary). However, you can very well compute their CTC to include the employer's contribution to PF when negotiating the salary of any employee.

Important Note on Section 11 of the Act

One point to note is that Section 11 of the act clearly states that under no condition can the gross salary of any employee be reduced to partly or wholly pay for the employer's PF contributions. You can adjust it in CTC from the next increment; you cannot adjust it at this point in time at current salaries.

Thank you for your appreciation. To be more specific regarding the situation as mentioned by you, please refer to Para 76(a) of the EPF Scheme, 1952, as well as Section 14 of the EPF & MP Act, 1952.

First of all, you made a major mistake when you segregated people based on their preference for PF deductions. Employees do not have the option to decide on this matter; it is a statutory requirement that must be complied with. It is possible that the importance of PF is not fully understood by your employees or even yourself. Deductions must be made from all employees to make them eligible for benefits as per EPFO regulations. CTC includes all direct and indirect expenses on an employee, while gross salary refers to the amount shown on the payslip. PF deductions are applicable only on the "Basic" pay and "DA" (if paid). However, the Labour department or PF authority will verify if minimum wages are being paid.

In modern CTC structures, both employer and employee PF contributions are typically included in the final CTC, which may lead to objections from some employees after joining the organization. The CTC concept has gained prominence in recent times, offering more transparency compared to past practices where companies incurred expenses that were not disclosed to employees.

Secondly, the management cannot deny the revised policy. You must calculate the total expenses to the company based on the previous and revised practices. The management should acknowledge that the burden on the company will increase by a maximum of Rs.780 and Rs.1800. Previously, the PF ceiling was applicable up to Rs.6500, but it has now been increased to Rs.15000.

You should provide revised CTC statements to all employees and obtain acknowledgments from them for your records and future auditing purposes.

I hope this clarifies the situation.

Regards

Clarification on PF Deductions for Contract Workers

Under no circumstances should there be a deduction of the employer's share of 12% (actually it is 13.61% inclusive of other components) from the employee. CTC is not applicable to contract workers. For contract workers, as it stands currently, only the basic wage and living allowance are considered for PF deductions. We are confusing ourselves.

Regards