Can My Company Legally Transfer Employees to Avoid PF Deductions? Seeking Advice on Legal Implications

Hi, The management team of my company has decided to withdraw PF deduction and wants to transfer its existing employees (14-15) from a 'PF Deduction Registered Company' to a new company to be exempted from PF deduction on meeting the following criteria:

1. Employee strength less than 20
2. Employees earning more than INR 15,000/- per month.
3. We have taken 'PF Exemption Acceptance Letter' from the employees.

Request you to please advise and share your inputs on the following:

Can the company transfer employees?

Do we need to issue Transfer or Fresh Appointment Letters?

Will there be any legal issues on account of this transfer of employees from a PF registered company to another?

Will there be any impact on employees to claim gratuity?

Will the transfer from one company to the other be considered as a break of employment after completion of 5 years of service?

Regards,
Abhishek Jain.

Transfer of Employees and PF Liabilities

You cannot just transfer your employees to another company with a view to eliminating PF liabilities. What you have to do is to close down the present establishment and clear the dues with ESI, PF, Sales Tax, etc., and then clear the dues of the employees as per the Industrial Disputes Act (Sec 25F and 25FFA). Pay the gratuity payable based on their service, and then appoint these employees in the new company by giving new appointment orders.

Employees will definitely lose their continuity of employment but will be compensated by paying gratuity till date. Yes, if you have only 15 employees, you need not follow the complicated procedures associated with closure and retrenchment as prescribed under the ID Act, but you cannot simply close it just to avoid any statutory liability. You can have a consent letter from the employees stating they are ready to work in the new establishment without PF and other benefits, but that will bounce back to you as solid proof that you have closed down the unit with a clear intention of avoiding PF. That will not be permitted.

Now, when you approach the District Industries Centre or such other offices for sanction of opening a venture, they will certainly raise this issue and may refuse to grant permission, saying that a unit under the same management doing the same business was closed and the new unit is sought to be registered for availing benefits like tax, bonus payment, etc.

In addition to the comments by Mr. Madhu, please note: We have taken 'PF Exemption Acceptance Letter' letters from the employees. This will have no impact, since an EPF covered employee should continue to contribute on ceiling EPF wages, i.e., Rs. 15,000/-. You can think of restricting EPF contribution up to the ceiling, i.e., Rs. 15,000/- per month.

Dear Shri Abhishek Jain, you are transferring the employees to a new company, which establishment has no PF code as the strength is less than 20. Please obtain the resignation of the employees from the old company and issue a joining letter to the new establishment.

Since the establishment is not covered under the EPF Act, there is no need to deduct PF until the strength is below 20 employees. When the strength reaches 20, the members who have had previous membership may be entitled to PF deduction, even if their PF wages are above 15K, and a new PF code must be obtained.

You cannot escape from PF liability once the strength exceeds 20 employees.

Thanks,
Vidyadhar Bhat

Sorry, but this does not sound ethical. Also, if an employee switches from one company to another, there should be a proper exit and entry process, as the second company is a different entity. Transfer is not possible.

Dear Aniket, even though the second company is a different entity, until the staff count reaches 20, PF is not applicable, and no transfer will be initiated. When an employee shifts from one company to another, they have to resign from the first establishment and join the new company. According to the act, when the establishment's staff count reaches 20, they are required to enroll for PF. Additionally, existing members with a UAN must be considered for PF contributions, even if their PF wages exceed 15K. New members with PF wages above 15K are classified as Excluded Employees and are exempt from EPF deductions.

Thanks,
Vidyadhar Bhat

You can't transfer any employee to a different organization. You have to issue them a new appointment letter and do all other formalities. I think a transfer is only possible within the same organization, even if it is for different locations.