Supreme Court Ruling on Basic Wages: How Does It Affect P.F. and Gratuity Contributions?

Dear Sir,

In an important recent Supreme Court ruling, it was established that allowances universally, necessarily, and ordinarily paid to all employees across the board are considered "Basic Wages," and therefore, these allowances attract P.F. contributions.

Queries Regarding Supreme Court Ruling on Basic Wages

In this context, I have the following queries:

1. When the employer pays contributions based on the actual Minimum Wages (below the ceiling of Rs. 15,000/-) for the scheduled employment set by the respective Government, does the employer need to make contributions over and above the Minimum Wages amount shown in the other allowance columns to attract P.F. contributions as per this judgment?

2. The Apex Court has clarified what allowances are construed as Basic Wages. Since there are guidelines for determining Basic Wages, would these guidelines be applicable to the Payment of Gratuity Act? Unlike the EPF & Misc Act, the Payment of Gratuity Act does not have a fixed ceiling of Rs. 15,000/- per month. In this scenario, would an employer have to pay Gratuity based on the Basic Pay determined by this Supreme Court Judgment for calculating Gratuity for outgoing employees?

I would appreciate the views of experts on these matters.

Understanding PF Qualifying Salary and Minimum Wages

There is no relevance to notified minimum wages in calculating PF qualifying salary. Even before this verdict came, the Act (Employees' Provident Fund & Miscellaneous Provisions Act) was very clear with respect to basic wages. The only confusion was around whether the contribution is payable on allowances other than Dearness Allowance. This is because, in section 6, it says that the contribution is payable on basic wages and dearness allowances. Therefore, we started paying PF only on basic wages (and DA if your establishment has the practice of paying it!) and, in order to reduce our burden, we started fixing this component of salary to the minimum. But we did not see the definition of basic wages, which says that it is the sum total of the salary agreed by an employee to give his labor. It is the wages that he gets if he had worked for a day or if he has taken a CL or any other eligible leave. It is not just the basic pay that we pay when an employee takes CL or PL, but it is the total emolument. Obviously, any attendance pay or a pay which is paid only based on attendance will be out of the scope of the definition.

When the employers start paying PF on reduced amounts, the EPFO people started insisting on payment of PF at least on minimum wages. At that time, the mandatory PF qualifying salary was just Rs 6,500, whereas the minimum wages for an unskilled worker were more than that. Moreover, the EPFO cannot direct the employers to pay minimum wages. If the employer is in a position to hire a worker at wages less than the minimum wages, he can hire him, and the EPFO cannot question it. Therefore, if you are able to hire a worker paying, say, Rs 5,000, you can do so, but you should pay PF on the entire amount of Rs 5,000.

House Rent Allowance and PF Qualifying Wages

House Rent Allowance is an allowance in the salary which is excluded from the PF qualifying basic wages. There is no mention of the percentage of HRA to the basic. Now the next attempt will be to increase the percentage of HRA so that our burden can be reduced. In order to curb the practice of paying higher amounts as HRA, the EPFO has worked out a percentage at par with the Income Tax exemption slab of HRA. The decision will come soon.

Gratuity Calculation and Salary Definition

The Payment of Gratuity Act also defines Salary as the entire amount payable as per the contract of agreement. As such, it will be the gross salary which will form the base for gratuity calculation. Please follow the link: https://madhu-t-k.blogspot.com/2019/...ary-and_6.html

I am an employee of M/s. Palsons Derma Private Limited and am confused about my PF deduction. As per my below-mentioned salary structure, what amount is deductible by the company?

Basic > Rs. 7908.00
HRA > Rs. 1977.00
Conveyance > Rs. 1600.00
LTA > Rs. 833.00
Medical > Rs. 1250.00
Special Allowance > Rs. 5551.00

My Gross Salary is Rs. 19119.00. The company is deducting my PF Rs. 949.00 (on basic @12%), but I learned from a source that, as per the Hon'ble Supreme Court's recent order, it is not correct. Can you please confirm the actual calculation of the deductible amount?

Regards,
Tarak Shaw

From the pay structure, it appears that your PF qualifying salary is Rs. 15,059 as follows: Basic - Rs. 7,908, Special Allowance - Rs. 5,551, Conveyance - Rs. 1,600. Since this sum is more than Rs. 15,000, the employer can restrict their contribution to 12% of Rs. 15,000. LTA, being an amount payable annually, will not form part of the salary. Similarly, medical allowance is paid subject to the production of bills or a declaration to its effect, and hence, not part of the salary.

Thank you for your response.

Question about Salary Structure Change for Existing Employee

I have another question about an existing employee (working for the last 5 years or more) who is currently receiving a monthly salary based on the following format:

Basic 21354.000
HRA 6406.000
Conveyance 1600.000
LTA 1000.000
Medical Reimbursement 833.000
Special Allowance 19650.000
Gross Earning 50843.000

Additionally, his Provident Fund is currently deducting Rs. 2562.00 (12% of Basic). The company has now decided to reduce his Provident Fund Basic to Rs. 15000.00 and deduct Rs. 1800.00 from his salary.

My question is, as an employer, is it permissible to make this change for an existing employee?

Regards,
Tarak Shaw

Employer's Ability to Reduce PF Contribution

Yes, the employer can reduce the PF contribution to the mandatory level. This was decided by the Apex Court in the case of Marathwada Gramin Bank Karmachari Sanghatana Vs Management of Marathwada Gramin Bank. The verdict states that an employer who has been contributing PF on wages above the mandatory ceiling of Rs 6,500 (now Rs 15,000 since the verdict came before the wage ceiling was increased to Rs 15,000) can reduce it to Rs 6,500 (Rs 15,000 now). By doing so, section 12 of the EPF and MP Act, which says that the employer cannot reduce the salary of an employee to lower his contribution towards the Fund, will not apply.

However, in practice, when you offer employment stating that your "CTC" is a specific amount, such as Rs 53,405 in this case, this approach will not suffice. To adjust it fairly, you will need to pay the difference of Rs 2,562 and Rs 1,800, which is Rs 762, in some other manner. Let the employee invest this amount on his own.