Can Employers Legally Lower EPF Deductions for Long-term Employees?

In an organization, PF contribution is deducted from the actual basic salary since the beginning, i.e., 12% on Rs. 40,000, which equals Rs. 4,800 per month. To reduce costs, the organization now intends to deduct PF contribution based on Rs. 15,000, i.e., Rs. 1,800. Is it possible to decrease the deduction amount for continuous employment?

Certainly, yes. Section 12 of the EPF and MP Act

Section 12 of the EPF and MP Act states that the employer should not reduce the salary on which PF is being contributed. This provision aims to prevent employers from decreasing the salary solely to lessen their contribution burden. However, this requirement does not apply in cases where the contribution is based on Rs 15,000. If the employer cannot contribute on a salary lower than Rs 15,000, this provision does not come into play.

The Maratwada Gramin Bank case

In the Maratwada Gramin Bank case, the Supreme Court ruled that the EPF Organisation cannot demand contributions on a salary exceeding the threshold limit. Hence, the employer can reduce the contribution from the actual salary to Rs 15,000. It is essential to note that if the employer's contribution is a condition of service, such as being part of the Cost to Company (CTC), changing it would necessitate the consent of the employees, as stipulated by section 9A of the Industrial Disputes Act.

Madhu Sir,

If the contribution is reduced from the actual (Basic + DA) to Rs. 15,000/-, will he become eligible for EPS contribution at 8.33% on Rs. 15,000/- (i.e., Rs. 1,250/-) now or not? Earlier, he was not under EPS due to higher wages.

If not eligible for EPS, will there be any possibility of rejection of his online claim in the future due to resignation or otherwise, stating that "Employee's salary is Rs. 15,000/- and eligible for EPS contribution but no EPS contribution is made" from the EPFO Portal.

Regards,
erv

Eligibility for EPS and EPF Coverage Based on Salary Changes

An employee not covered by EPS due to the reason that his PF qualifying salary was above Rs 15,000, but on a change of employment, if his salary becomes less than Rs 15,000, he shall be given EPS. In such a scenario, in his future employments also he would become an employee covered under the Pension Schemes.

But it is again a question of law, and I don't know if the EPFO, which is currently working like a private financial company, will come out with some argument. It is not necessary that an employee who started his career with a salary of more than Rs 15,000 should always work with the same salary. The opportunities are getting lesser, and in such a scenario, we can't say that we will continue to get the same salary always. Suppose an employee was not covered even under the EPF because his salary was above Rs 15,000, and the employer was not interested in contributing to EPF for employees whose wages exceeded Rs 15,000.

Now, if he changes his employment and accepts a job that offers him a salary less than Rs 15,000, will the employer be able to say that he will not contribute to his PF because when he started his career he was not given PF by his previous employer? No. Will the EPFO say that he cannot be enrolled under EPF because in his previous company his salary was more than Rs 15,000, and hence was excluded? No. If we apply the same theory in Pension Fund contribution, the employee should be given Pension scheme coverage if he subsequently chooses to join an establishment with a salary less than Rs 15,000.

Madhu Sir,

Can there be two sets of employees, one contributing at the actual higher Basic and DA, and another set of employees contributing at Rs. 15,000/- in the same organization, or should there be uniformity, i.e., either actuals or a ceiling for all employees?

Can we show the PF qualifying salary a little above Rs. 15,000/-, say 15,500 or 16,000, and exclude him from EPS contribution as before? Will there be any query from EPFO for this? The employee wants his take-home to be increased due to financial commitments every month. The impact of employer contribution will not be there since the employer contribution is restricted to Rs. 15,000/- even for higher wages before also.

erv

There is legally no issue if you have two sets of employees: one set contributing based on their actual salary and another contributing Rs 15,000. This decision depends solely on the employer.

You can set the salary of new employees at a level higher than Rs 15,000. However, the question is what happens if the PF qualifying salary is increased to Rs 25,000 or Rs 30,000 by the EPFO? Discussions are ongoing to revise the threshold limit from Rs 15,000 to Rs 30,000. It is expected that both under ESI and EPF, it will be increased to Rs 25,000, mainly because in almost all states, the statutory minimum wage exceeds Rs 15,000.

Even if you set the salary at Rs 15,500 or Rs 16,000 to exclude them from PF coverage, the main question is whether there would be any bifurcation of salary like basic wages, HRA, conveyance, etc. If you are contributing based on basic pay alone, then to exclude the new employees from the ambit of PF, you should make the basic pay more than Rs 15,000, right? Then, will it be higher than the basic pay of existing employees? In compensation restructuring, I have encountered such issues as well. Therefore, setting the salary with the intention of avoiding statutory coverage is not a wise decision.

Thank you, Madhu Sir. The employee is still in continuous employment with the same company. If we restrict the PF contribution to Rs. 15,000/- from now onwards and enroll in the Pension Fund by contributing Rs. 1250/- from the Employer's Share, will the EPFO ask us to pay the Pension Fund Contributions of Rs. 1250/- per month for the earlier months as well, wherein this amount was diverted to his EPF account and was nil in the Pension Fund due to higher wages, i.e., actual basic + DA? Or, will they transfer the funds from EPF to the Pension Fund for the earlier months internally, considering that he is still employed with the company?

Regards

While being employed in the same establishment, you can restrict the contribution to Rs 15,000 but not less than Rs 15,000. If you reduce the PF contribution salary (i.e., Basic pay) to Rs 15,000, then from that day onwards, the employee shall become eligible for the Pension Scheme but not with a retrospective date.

Legal implications of reducing PF contributions

Again, it is a question of law, and I am not sure if the system will accept such a contribution. This is an issue with online/software-driven payment systems where we cannot provide any remarks or explanations while contributing to a fund. The EPFO cannot mandate that an employee should not accept any proposal to reduce the salary. According to section 12 of the EPF & MP Act, any reduction in the PF qualifying salary will be considered an attempt to lessen the employer's liability towards contributions to the fund.

EPFO's authority on contribution limits

However, the EPFO does not have the authority to demand the payment of contributions on an amount exceeding Rs 15,000 if the salary is not reduced below this threshold. Legally, they cannot question why the salary has been reduced. If the salary falls below Rs 15,000, the employee should receive Pension Fund contributions. Interestingly, once enrolled under EPS, the employee will remain a member of the Pension Scheme even if their salary exceeds Rs 15,000 later on.

Sir,
Can we restrict the PF contributions of employee after paying on actual basic+Da for several months to wage ceiling ie 15000/- during the course of financial year or it has to be done at the beginning of financial year.
erv

In India, as per the EPF Act, the employer and employee contribution towards EPF is fixed at 12% of the basic salary. This contribution is mandatory and cannot be altered unilaterally by the employer. Therefore, reducing the EPF deduction for long-term employees below the statutory requirement of 12% is not legally permissible. The EPF contribution should be based on the actual basic salary and not on a reduced amount to cut costs. Any deviation from this standard contribution rate can lead to legal implications and penalties.

Regarding the query about restricting PF contributions of employees after paying on actual basic+DA for several months to the wage ceiling of Rs. 15,000 during the financial year, it is essential to follow the EPF guidelines strictly. The EPF contribution should be calculated based on the actual basic salary and DA without any ceiling limit during the entire financial year. Any attempt to restrict the contributions to the wage ceiling mid-year could violate EPF regulations.

For further clarification or specific guidance tailored to your organization's situation, it is advisable to consult with a legal expert or the EPF authorities directly for accurate advice and compliance with the EPF regulations.