How to Handle PF Exemption Issues with Contractors: Seeking Advice on Compliance and Protection

Dear Team,

We have engaged a major civil contractor. It is a private Ltd Company. He is engaging around 200 workmen daily. He is paying ESIC to everyone. However, concerning PF, he states that he pays a salary beyond 15,000 per month. I have requested the contractor to pay the wages through the bank, but he insists he cannot comply.

Form 11 and Appointment Letters

My view is: Can I ask the contractor to fill out Form 11? Can I also ask the contractor to issue an appointment letter to his workers, indicating their monthly wage as 15,000?

Protecting the Company from Future Complications

If we implement the above two measures as the principal employer, can we protect the company from potential future complications?

Please provide your inputs.

Contract Agreement and Statutory Clauses

The contract agreement and the EPF or statutory clause in the agreement must be clear.

Inclusion of Statutory Costs

If the rate quotation includes EPF, ESIC, and other statutory costs, and as a principal employer, if you are paying, then you are supposed to have proof of remittance of all such statutory dues.

EPF Contribution for Wages Beyond 15k

If the basic wage is set beyond 15k, then if the labor is not registered, the EPF contribution against such labor should not be paid by the principal employer.

However, if the employee has wages more than 15k and is a member of the EPF, then their EPF contribution must be made by the contractor. Hence, the principal employer is supposed to pay for such contribution.

@Rahainakoti, you can easily cross-check the salary of employees with the ESIC contribution record submitted by the contractor, annexed with the invoice submitted to you.

Hi Bijay Ji, he was given a trustworthy contractor and mentioned in the contract that the principal employee must communicate to the contractor that he needs to comply with all statutory compliances like ESIC, PF, BONUS, etc. However, the contractor is reluctant to pay PF, stating that he is already paying a salary of more than 5k.

In the future, if any PF authorities come for inspection and the contractor is not in compliance, the principal employer may be questioned because it could be argued that they did not enforce the contractor to pay PF. How can we justify this to the statutory authorities at that time? Will Form 11 and the worker's offer letter help us? If so, to what extent?

Thank you.

Hi Bijay Ji, he was given a tricky contract. The company mentioned in the contract that the contractor needs to comply with all statutory compliance like ESIC, PF, BONUS, etc. However, the contractor is reluctant to pay PF, stating that he is paying a salary of more than 15k to his workers. In the future, if any PF authorities come for inspection, then the contractor will not be in the picture; hence the principal employer may be questioned. They may ask why we did not force the contractor to pay PF.

How to justify to statutory authorities

How can we justify to the statutory authorities at that time? Will keeping a copy of Form 11 and the offer letter of the worker help us? If so, to what extent?

Thank you.

I hope this will not suffice the purpose.

How to verify if a worker is an earlier PF member

1. How can we cross-check whether the worker is an earlier PF member or not? We can access his details only if his Aadhaar is linked to PF; otherwise, we won't get them.

Challenges with unlinked Aadhaar and PF numbers

2. If the worker is registered in PF earlier and Aadhaar is not linked, we cannot trace the worker's EPF number. Taking advantage of this, the contractor is claiming that none of his workers had a PF number earlier. How should we deal with this situation?

Statutory Compliance Responsibility

Statutory compliance is mandatory for the contractor if the Principal Employer (PE) is paying for the same. Ultimately, it is the PE who will be summoned for this compliance. Your contract agreement also contains clauses towards the fulfillment of compliances.

Social Security Laws and Principal Employer Responsibilities

Social security laws do not operate at the discretion of the employee, contractor, or through any declaration they might make. It is the responsibility of the principal employer to ensure compliance, even if the contractor is tasked with fulfilling statutory obligations. If the contractor is being compensated for these statutory compliances, it is crucial to verify the agreement clauses with the contractor first and then proceed accordingly. Employees are ultimately working for you at your premises, and legally, the principal employer must ensure all statutory obligations are met.

Principal employer's liability for statutory compliance

The principal employer is liable for all statutory compliance under the employee welfare laws and schemes. If the department finds that the contractor has not complied, they will hold the principal employer liable for the outstanding compliance.

Mere verbal assurances from the contractor do not garner any appreciation in the administrator's office.

Following compliance forms

Follow the Form 5 (CLRA) and the Form 7 (CLRA) submitted by the contractor, and the periodical Forms XXII to XXV (CLRA). All details and breakdowns are specifically provided in each employee's form.

There are some judgments stating that if there is a PF code assigned to a contractor, the liability lies with the contractor. Then how can the PF authority summon the Principal Employer (PE)? Can you please provide me insights on this?

Please check the CLRA (Contract Labor Regulation Act) related documents, and ensure that the employees deputed to your establishment under CLRA belong to the payroll of the immediate contractor, i.e., the contractor to whom the Principal Employer (PE) has issued Form 5 (CLRA), and they are submitting their CLRA related documents every month with an invoice.

Now, if employees are on the regular payroll of the immediate contractor, and the contractor is registered under the EPF Act, then the PE can make the point.

However, if the contractor has also outsourced the employees to a non-registered entity, then it is the responsibility of the PE to ensure compliance. Verbal commitments and arguments between the PE and the contractor do not protect us in terms of applicability; rather, documentary evidence is required.

EPFO Form 11 and Contractor Compliance

Form 11 is a stationary form of EPFO, and according to your statement, the contractor is already registered in EPF. Therefore, they have to collect it and submit an attested copy to the PE. The employment card is homemade stationary and does not confirm compliance with any rule or act.

1) I have asked for a check on the ESIC contribution record of the contractor employees working for the PE. This is where the PE can determine if the salary component is higher than 15,000 or not. However, this request was ignored by the query posting person.

2) The CLRA Act is applicable to contract employees, and within the documents, every compliance factor can be easily traced.

3) Neither the PE nor the contractor can prevent employees from joining EPF unless the employee submits Form 11 to their immediate employer, stating that they do not have an active EPF account and do not wish to participate in EPF. By default, every employee is eligible to join EPF, and according to company policy, this may be based on gross basics or a ceiling of 15,000.

Merely stating that those earning above 15,000 are exempted from EPF is a misinterpretation. Unless an employee earning above 15,000/- basic provides written consent stating that they do not wish to join EPF, the employer cannot exclude them.

Thank you for your inputs, sir.

Lastly, I have one question. The contractor has a fixed monthly wage for workmen at 16,000/-. If the workman does not attend all 26 days, then the salary will default to less than 16,000/-.

For example, if the calculation is as follows: 16,000/26 = 615 per day. If the workman worked for 10 days, then he will receive 16,000/26 * 10 = 6,150. His contribution for the month on ESIC will be Rs. 6,150/-, which is less than the 15,000 PF exemption.

The average monthly income of 16k, where does this amount recur from? Try to establish the same with ESIC contribution records. Make a reconciliation of the number of days worked by the employees in your establishment. For example, if the employee works for 25 days and the contractor pays for 10-15 days, then who is liable to ensure compliance?

The person who posted the query seems to be overlooking the ESIC record factor, not discussing the CLRA or ESIC records, but attempting to find loopholes in the law to avoid providing employee benefits. Such practices are not to be appreciated in any case.