Salary Adjustments After Closing and Reopening a Company with Fewer Employees: How Does PF Impact Pay?

As a startup company, we had more than 20 employees; hence, we registered for PF and paid PF to all employees. Now we have lost clients, and we have very little workflow, so we reduced our staff to 8 employees. Additionally, we are closing the company and opening a new one with a new name but retaining the existing employees. Since we now have fewer than 10 employees, we are not required to pay PF to anyone.

Salary Adjustment After PF Changes

So, my question is, since we are not paying PF anymore, what will be the employees' salary? For instance, earlier, if an employee was receiving 18k as take-home pay + 1k as employee PF and 1k as employer PF, totaling a gross of 20k per month, how much salary will that employee receive now? Will it be 18k or 19k?

Hi Smitha, you cannot withdraw Employer PF contributions from the existing company even though your company is running at a loss. Moreover, even if the employer becomes insolvent or is in the process of winding up, the PF contributions need to be paid in priority over other debts.

Please refer to the abstract of THE EMPLOYEES' PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952 for your understanding:

Act Abstract for Priority of Payment of Contributions Over Other Debts:

5 [(1)] 6[Where any employer is adjudicated insolvent or, being a company, an order for winding up is made, the amount due— (a) From the employer in relation to 7 [an establishment] to which any 8 [Scheme or the Insurance Scheme] applies in respect of any contribution payable to the Fund 9 [or, as the case may be, the Insurance Fund], damages recoverable under section 14B, accumulations required to be transferred under subsection (2) of section 15, or any charges payable by him under any other provision of this Act or of any provision of the 8 [Scheme or the insurance Scheme]; or (b) From the employer in relation to an exempted 1 [establishment] in respect of any contribution to 2 [the provident fund or any insurance fund] (in so far as it relates to exempted employees), under the rules of 2 [the provident fund or any insurance fund], 3 [any contribution payable by him towards the 4 [Pension] Fund under subsection (6) of section 17], damages recoverable under section 14B, or any charges payable by him to the appropriate Government under any provision of this Act or under any of the conditions specified under section 17, shall, where the liability thereof has accrued before the order of adjudication or winding up is made, be deemed to be included among the debts which under section 49 of the Presidency Towns Insolvency Act, 1909 (3 of 1909) or under section 61 of the Provincial Insolvency Act, 1920 (5 of 1920) or under 5 [section 530 of the Companies Act, 1956 (1 of 1956)], are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be.

[Explanation: In this sub-section, and in section 17, "insurance fund" means any fund established by an employer under any scheme for providing benefits in the nature of life insurance to employees, whether linked to their deposits in provident fund or not, without payment by the employees of any separate contribution or premium in that behalf.]

Act Section Briefing Count of Employees:

"3[(5) An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below twenty.]"

Now, coming to your query regarding the new company... In case your employee strength is not more than eight (and not ten), you can avoid PF contributions. In that case, only applicable taxes may be deducted from the salary. For example, for Karnataka Professional Tax. In the example quoted by you, if your company is in Bangalore, only a professional tax of Rs 200 may be deducted from Rs. 18,000/- (Consolidated salary), and Rs. 17,800/- may stand payable to the employee.

Hope this helps.