Is Our Salary Structure Violating the PF Act? Seeking Guidance on Compliance and Ideal Ratios

Compliance with PF Act and Salary Structure Guidance

We are a multi-location industry with a presence in almost all states of India. For operative category employees, our gross salary is slightly higher than the prevailing minimum wages of the respective state. One of our clients informed us that we are violating P.F. as our sum total of Basic + DA is less than the minimum wage as per one of the sections of the PF Act.

I request you to please guide (along with a remedy) on the same if it is a violation of the Act. Also, please guide on what should be the ideal ratio of Basic (or Basic + DA) while fixing various components of CTC.

Please reply.

Regards,
HR Professional

HR Professional - since you are acknowledging the violation of the labor law, it is ideal to connect with a labor/P.F. consultant and have it rectified. I remember there's a penalty associated with this and would recommend that you pay rather than argue it out with the Commissioner.

Hope this helps.

Solution to Your Issue

The solution to your issue is as simple as you think it is difficult. Get hold of the minimum wage details prevailing in your area for the kind of industry you belong to. Prepare the remuneration/salary break-up such that the basic rate & DA is slightly more than the one announced in the circular by the Office of the Labour Commissioner/relevant authority in your region. Adjust the remaining components like HRA, Medical Allowance, LTA, PF (mandatory 12% employer contribution), ESIC (mandatory 4.75% employer contribution), bonus (mandatory 8.33% of Basic or a maximum of 20% of Basic), etc., so that it totals up to your decided CTC.

Generally, this revision is announced with effect from 1st April and/or 1st October of every year. So, you would need to pay out the arrears too. Good luck.

Cheers,
A.B.

"Central Provident Fund Commissioner Circular on PF Compliance

The Additional Central Provident Fund Commissioner (Compliance), EPFO, New Delhi, has issued Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011, instructing the PF authorities to ensure that PF is deducted on applicable minimum wages. The aforesaid circular escalated controversies pertaining to the definition of Basic wages on which deduction of PF needs to be made.

Definition of Basic Wages

The definition of “basic wages” as per section 2(b) of the EPF Act makes it clear that allowances and incentives are not to be treated as part of the basic wages. This has been upheld by the Punjab and Haryana High Court in a writ petition No.15443/2009 between APFC vs. G4 Security, vide order dated 1 February 2011. The Punjab and Haryana High Court has opined that minimum wages can be bifurcated into allowances, and PF contribution is not required to be deducted on allowances even when the same are part of the minimum wages.

Current Status of the Circular

The Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011 regarding the splitting of wages for the purpose of PF contribution is kept in abeyance in view of the verdict given by the Punjab and Haryana High Court in a writ petition No.15443/2009 (LPA 1139 of 2011) between APFC vs. G4 Security, vide order dated 1 February 2011, until there is a Supreme Court ruling in the matter SLP(C) NO 20085/2011 filed by EPFO against the above decision of the High Court of Punjab & Haryana.

A simple search gives the above result. It seems that the matter is still pending before the Hon'ble Supreme Court.

Regards,
V K Gupta"

Dear HR professional,

Please find attached a copy of the Supreme Court judgment in Airfreight Ltd, wherein the Supreme Court has clearly mentioned that Minimum Wages shall be as per Section 2(h) of the Minimum Wages Act. Section 2(h) of the Act defines that "Wages" includes House Rent Allowance (HRA). Therefore, please ensure that Basic, Dearness Allowance (DA), and HRA - all added together - exceed the Minimum Wage. If you require further details or support, please do not hesitate to contact us.

Regards,

N. Nataraajhan
Sakthi Management Services
Phone: +91 94835 17402
Email: natraj@sakthimanagement.com

Dear Mr. N. Nataraajhan, kindly attach the SC judgment as referred to by you (or mail at [Email Removed For Privacy Reasons]).

Supreme Court Judgment on Minimum Wages

The Hon'ble Supreme Court upheld that Basic, DA, and HRA are part of Minimum Wages, i.e., combining all elements/bifurcations of salary/wages should not be less than Minimum Wages. For the applicability of the Minimum Wages Act, this is true.

Clarification on EPF Wage Definition

However, in the case of the wages/salary definition under EPF, it covers only Basic Plus DA. Then under which clarification/ruling, HRA/other allowances are to be added for deducting PF contribution.

Thanks,

V. K. Gupta.

Dear All,

Please find attached a copy of the Supreme Court judgment in the Airfreight Ltd case and the definition of MW as per the Minimum Wages Act.

PF contributions should only be deducted on Basic and DA as per the PF Act, and no contribution is payable on HRA.

Regards,
N. Nataraajhan
Sakthi Management Services
HP: +91 94835 17402
Email: natraj@sakthimanagement.com