EPFO Seeks Your Input on Proposed PF Act Changes: How Will You Respond?

Friends, EPFO has invited suggestions on proposed amendments to the PF Act by 30th December 2014. You can find more information on the official website of the Ministry of Labour: http://labour.gov.in.

Thanks

Thank you very much for the timely information about the proposed amendment in the EPF. Most employers, already burdened with the increased ceiling in PF, will be further affected by the proposal to pay PF contributions for salaries up to Rs 15,000 per month. Moreover, the present exemption for apprentices will also be removed. Employers should appeal to the government to be reasonable and cautious, as employees whose take-home pay has already been reduced will also be affected.

Additionally, the responsibilities of the PF authorities will significantly increase compared to the new coverage of establishments, compliance in the covered establishments, and the settlement of more claims. We strongly urge the government to postpone the proposal for a few more years.

Regards,
N. Nataraajhan
Sakthi Management Services
HP: [Phone Number Removed For Privacy Reasons]
Email: [Email Removed For Privacy Reasons]

Interesting... The changes were expected. The question is whether they can get it passed by the Rajya Sabha. I think this will take at least a couple of years to come into effect. Modi does not control the Rajya Sabha, and the opposition parties will oppose this bill.

You have spent a lot of time analyzing whether wages should be basic or gross. I think there are no two options here.

The Misuse of Basic Wages in the Private Sector

The concept of Basic Wages has been thoroughly misused by the private sector. They manipulate the wage structures constantly to lower the PF burden, and the workers are the losers. People earning 30,000 to 35,000 a month are shown with a basic of 5,000 per month. The government has no option but to define all-inclusive gross wages.

The Importance of Gross Wages for Workers' Savings

In addition, I think since this is for the savings of the workers and their pension, it's better to have it based on the gross wages. That way, the worker has more money when he retires. This is important in the medium and long run, irrespective of how many crocodile tears the industry sheds in the short run.

Mr. Banerjee,

The private sector thrives on the productivity of its workforce. Every effort should, therefore, be made to make higher productivity attractive. You accuse employers of 'manipulating' their wage structure. Such manipulation would occur only in cases where the employer unilaterally and arbitrarily fixes wages for their employees.

Problem with the EPF Act Wage Definition

The issue with the EPF Act wage definition, as we see it, is that it leaves no room for even legitimate collective bargaining between employers and employees through their unions to arrive at an agreed and acceptable wage structure. This is due to the high fixed statutory liability on contributions. This would eventually dissuade even a generous employer from extending any further benefits to their workers.

Concerns Regarding Pensionable Salary

Insofar as the pension is concerned, the pensionable salary is to be taken only at Rs.15,000/- in any case, regardless of the employees' earnings. So, what exactly is the prejudice caused? Someone earning Rs.1,00,000/- a month should not be dependent on their employer for doling out social security benefits without any cap or ceiling!

The Government may score brownie points by including and treating every payment as wages, but is it a sustainable idea in the long run? This is the question to be answered.

Regards,
Pradeep Sukumar.

Suggestions on Proposed Amendments to the PF Act

Two suggestions are made, please.

Firstly, the definition of basic wages is proposed in the Bill to be substituted by wages. This term is very broad and, implicitly as per contract, will include HRA, DA, bonus, etc., as according to the proposed definition, wages mean all remuneration paid or payable. On the contrary, employers may even contract out to minimize the wages for purposes of PF. On one hand, it may largely raise the contributions limit, and in some cases, employers may contract with employees to limit the scope of wages to reduce their part of contributions. Under the Coal Mines Provident Fund Scheme, the term basic wages excludes HRA, DA, food concession, overtime, bonus, commission, presents, or donations. Thus, there is a need to specify the term wages for the purposes of the Act. Further, the term basic wages used in the Act, as under section 8A, should be substituted by wages as the term "basic wages" is proposed to be omitted.

Secondly, there are cases where employers issue only vouchers for salary to avoid their contribution to PF. In view of certain decisions of the High Court, as cited in Law Commission of India reports, an employer shall be deemed to be liable to pay arrears from the date when the employee is eligible under the Act, irrespective of whether he recovers the dues under the Act.

Regards

Mr. Banerjee, your comments about the private sector are totally wrong. There are strong and multiple trade unions in the private sector that have fought over several decades and entered into many tripartite agreements. The proposal will be a significant blow to many veteran trade union leaders who have negotiated and signed many long-term settlements providing for several allowances, which are not considered for PF. The same has also been specifically agreed upon in such agreements. Therefore, the proposed amendment suddenly proposing all allowances for PF contribution will be against collective bargaining and will create a lot of confusion and unnecessary litigation. The proposed amendment will not only be a huge burden on the employers, as many workers of late prefer to have more money on hand to meet the increased family expenditure than to save more for their future. The present enhanced limit may be retained for a few more years without any further amendment.

Focus on Compliance and Coverage

The PF authorities should concentrate more on compliance coverage of new establishments and more employees, ensuring timely payment of contributions by employers instead of allowing accumulation. The PF department should also propose to restrict administrative charges beyond Rs 6500.

Exemption for Apprentices

Moreover, the present exemption allowed to the apprentices (both Act apprentices and under the Company's Standing orders) need not be disturbed because the Government of India has also recently announced a subsidy to employers to encourage more training opportunities for trade apprentices.

Regards,
N. Nataraajhan
Sakthi Management Services
HP: [Phone Number Removed For Privacy Reasons]
Email: [Email Removed For Privacy Reasons]

The more worrisome point, apart from the inclusion of other components in the definition of wage, is the exclusion of exemption given to apprentices and trainees engaged by the employer as per the provisions of the certified standing order. On one side, the government is saying that there should be more focus on manufacturing and developing a more skilled workforce; however, this exclusion restricts the employer from providing apprenticeship opportunities to freshers as now the stipend will also come under EPF purview.

I strongly feel that the benefits to the apprentices/trainees should be continued.

Regards

Yes, even in the private sector with large unions, employers try to structure salaries to avoid PF. Unions whose claim to fame is negotiating non-PF allowances are doing more long-term harm to employees. The so-called burden on employers is short-term and short-sighted. What difference does it actually make? Most industries' material accounts for 80-85% of costs. Overheads account for 15%, and consumables also take a lot. What is left for salaries is not more than 5%. The impact of increased PF costs will be a fraction of a percentage. It actually makes no difference beyond the pettiness of lower-level officers who feel the company will reward them for it.

The need of the hour is to be specific regarding components of wages instead of keeping it vague due to variable factors such as bonuses, productivity-linked incentives, etc., which may fall within the purview of wages. If it is vague, then the chances of litigation in settling what constitutes the wages of an employee will complicate the issue.

Secondly, one should not ignore the queries raised time and again on this site that the employer pays only on a voucher and does not contribute to PF. I have suggested earlier the requirement of an explicit provision to tackle these evasions. The bill should also focus on tightening the loopholes of such sorts and empowering the machinery of EPF at lower rungs to enforce the implementation of the EPF scheme promptly upon receiving complaints, even anonymously but with adequate prima facie proofs.

A number of queries on this site showed fears of victimization if a new employee tries to seek PF contributions. Let us not halt the introduction of the bill only because of disputes on the scope of wages, but these important issues need to be highlighted, and suitable provisions should be incorporated into the bill.

Understanding Productivity and Statutory Dues

Productivity is how much a worker can produce in a shift, not how much of statutory dues is given. As I explained in my previous post, this is a fraction of a percentage of the total cost. In terms of competitiveness, this hardly counts. PF on total wages does not stop collective bargaining. Nothing stops an employer from giving benefits. It stops them from pretending additional wage is a benefit. Actual benefits such as canteen, bus services, etc., are not counted as wages for PF. It’s only when, instead of giving a benefit, the employer breaks up wages into segments that pretend to be benefits (travel allowance, food allowance, attendance allowance) that this runs into trouble.

Clarifying the Cap on Contributions

The other argument you make is about the cap. The cap is 12% of ₹15,000. That has not changed. If a person earns ₹100,000, that does not mean the employer pays ₹12,000 per month as additional PF.

Considering total wages is an idealistic situation, but think of those categories of employers who do not have an inclination to contribute to PF, as discussed earlier. They virtually do not want to pay minimum wage standards when they are not willing to contribute as per existing law. Can workmen expect from them that they will be ready to bear an additional burden? So, before looking for higher targets, or while looking for higher targets, the stringent measures of implementing the scheme should be considered, discussed, and debated upon. The focus should be on transparency and the crystallization of rights under the Act, which an ordinary workman can identify, instead of leaving everything to be determined through litigation.

Regards

I think the move to PF on total wages is intended to ring-fence those who have been avoiding PF contributions by manipulating wage structures, similar to the approach with minimum wages. Now, with the new regulations, PF will be monitoring total wages and can identify those paying less than minimum wages. Of course, it is up to local labor officials to use the data collected. To my mind, whether the employer "wants to bear the burden" is immaterial. They will be forced to.

Crystallizing Rights and Minimizing Litigation

About the rest, I would also prefer if all rights were crystallized and litigation minimized. However, lawyers have a tendency to find loopholes in even the clearest meanings, so I think that is most idealistic.

I would request all of you to post suggestions on the site on what parts of the act can be further modified to ensure better compliance and to make the act clearer. They are not budging on wage definition, so don't bother with that. The industry has been trying for over 18 months to prevent that change, including paying a huge amount to the ministry since the Allahabad HC decision and the subsequent PF circular was put on hold.

Please focus your suggestions on the other parts that need to be strengthened, modified, or clarified. Our suggestions will definitely be considered by the current ministry as they are actually dynamic.

Proposed Amendment to PF Contribution Ceiling

The government could propose an amendment fixing a salary ceiling of Rs 6,500 for PF contribution for both employers and employees. In other words, any employee whose salary is up to Rs 15,000 will be covered under the Act, but the employer's contribution could be restricted to Rs 6,500 per month. This change will not only reduce a significant burden for many employers but will also provide relief to many employees whose take-home pay will suddenly decrease due to the substantial revision in the salary ceiling.

The current option of voluntary contribution can be maintained for willing employees who wish to contribute more. This system could continue for a few more years. This suggestion is somewhat akin to a bonus (eligibility at Rs 10,000 but bonus payment restricted to Rs 3,500).

I welcome comments and suggestions from seniors regarding this proposal.

Regards,
N. Natraajhan
Sakthi Management Services
HP: [Phone Number Removed For Privacy Reasons]
Email: [Email Removed For Privacy Reasons]

1. I fully agree with the views of Sh. Saswata Banerjee in this thread, indicating that the terms "basic wages" are being grossly misused by vested interests. The Government should plug this loophole in the EPF & MP Act, 1952 by redefining the term "wages" so that the total wages are considered while paying the contribution under the EPF & MP Act, 1952. I recollect some years back, ESIC had issued a circular indicating that the "conveyance allowance" would not be considered as "wages." The net result of this circular was that it was grossly misused, and employers used to book the salary/wages by indicating a huge amount as "conveyance allowance." Consequently, the said circular was later reversed and withdrawn by ESIC. The provisions of the EPF & MP Act, 1952, as they were until the year 1989 (I am not sure about the exact date), when there was a provision of qualifying service of 90 days for an employee, were also grossly misused. Employees were kept out of membership of EPF by changing their names well before they completed the qualifying service of 90 days. As a result, Parliament abolished the so-called provision of the qualifying period by amendment in the said Act, and the result is that as soon as the employee is engaged in a unit where the said Act is applicable, they become entitled to EPF membership. However, if the amount of contribution becomes higher by deducting from total "wages" as per the proposed revised definition of "wages," then the Government should definitely, in my opinion, reduce the rates of employers' and employees' contributions in the said Act.

2. Further, in my opinion, for the legislature, it is important that the laws so framed should not be such that they may be either misused or misinterpreted. The 2nd National Commission on Labour in its report in the year 2002 had also recommended the unification of labour laws in the words: "6.21 Existing set of labour laws should be broadly grouped into four or five groups of laws pertaining to (i) industrial relations, (ii) wages, (iii) social security, (iv) safety, and (v) welfare and working conditions, and so on. The Commission is of the view that the coverage as well as the definition of the term 'worker' should be the same in all groups of laws, subject to the stipulation that social security benefits must be available to all employees, including administrative, managerial, supervisory, and others excluded from the category of workmen and others not treated as workmen or excluded from the category of workmen."

3. The term "wages" is different in many labour laws, and for a common man, it becomes difficult to understand what constitutes "wages." If the Government is trying to bring the definition of wages at par with other enactments as mentioned by seniors and experts in remarks in this thread, then, in my opinion, the same should be welcomed.

4. It is further submitted for the kind consideration of seniors that the present Government has also prepared a Bill titled: The Small Factories (Regulation of Employment & Conditions of Service) Bill, 2014, and had called for comments from the public. In the said proposed bill, the factories employing less than 40 persons are reported to be defined as small factories and will be out of the purview of the EPF & MP Act, 1952. Therefore, the proposed amendments in the said EPF & MP Act, 1952, reducing the coverage to 10 or more persons will, in my opinion, be contradictory to the above proposed bill of the Small Factories (RE&CS) Bill, 2014. Only time will tell which of the proposed amendments will be finalized and passed by Parliament.

Employer's Obligation on PF Contributions

Is it your case that an employer need not remit PF contributions on a wage exceeding Rs. 15,000/- under any circumstances, despite the change in the definition of ‘wages’ inclusive of all payments, as proposed in the amendment? If so, do you claim that the EPFO will accept this proposition? In that case, the definition of wages should be something totally different from what is in force now and what has been proposed.

Specious Argument on Wage Costs

Secondly, your reasoning that wage cost is just a fraction of the cost of production, so as to justify a higher PF contribution by the employer, is a highly specious argument. Perhaps that might be true in the case of a few highly automated sectors of the industry where the number of workers employed is few, whereby the ratio of capital deployed to that of labor is very low. But in labor-intensive industries, for instance, agro-industrial enterprises like plantations, the wage and wage-related costs go up to more than 50% of the cost of production. These are among the sectors which contribute to the bulk of the PF subscribers. For such employers, every rupee in additional liability would count, especially if such liability could be avoided through negotiated settlements with the employees. It is where additional productivity on the part of the employees is taken as the yardstick for extending proportionately additional monetary benefits to workers who produce more. By agreement, it is legitimate to prescribe that such payments will not attract social security benefits. Please refer to the decision of the Madras High Court on this subject (RPFC Tamil Nadu Vs. WIPRO Ltd, 2009-II-LLN, 198).

Let's start with the last point. I have not seen that particular decision of the court, but it is a given doctrine that you cannot contract away statutory dues or liabilities. So no, you cannot make an agreement with employees that you will not pay PF on a certain amount. You can (under the existing law) have a certain part of your payroll in terms of allowance that is not covered in PF. That is the loophole now proposed to be removed.

I specifically mentioned in my post that I am talking about the cost structure of manufacturing. Plantation and service industries have a different cost structure. But at present, manufacturing is the largest contributor to PF, by far. Not plantations. The arguments made are spacious, either because they lack an understanding of the cost and impact on profitability/pricing, or because someone is deliberately ignoring reality to make a point.

Employers are not required by current law or the proposed law to pay PF for more than that on a salary of ₹15,000 per month. So for higher-paid employees, the impact as a percentage of CTC is even lower. Further, employees change jobs and join at higher and higher salaries (except in some traditional factories and those in low industrial areas) and reach a cutoff point after which they are outside the PF limits. This will be stopped once the universal account number is properly implemented. But till then, it also lowers the impact of PF on total cost, sales, and margins.

There is no scope for individual replies to the objections or suggestions received by the Government from the public in these matters. While framing the law, the Government may or may not take into consideration our suggestions. Ideally, they should, especially where technical issues are brought to their attention.

Regards,
Pradeep Sukumar.

It is highly appreciated that the systems of EPFO have been changed and developed, making it easier for members to access information about their PF account. Several computerized systems have also been developed and introduced. I would like to suggest the following points if possible:

1. In the monthly return, it is necessary to stop charging administrative fees for Account Numbers 2 and 22.
2. With the increase in FPS contribution from Rs. 542 to Rs. 1250 for salaries ranging from Rs. 6500 to Rs. 15000, there is a need to also enhance the pension for eligible members. Currently, the pension amount received by members is very low.

Regards,
Shailesh G. Parmar