Minimum Wage and PF Contributions: Are They Covered Together?

Dear Seniors,

Is the minimum wage covered for PF contributions?

Regards,
askforsatya

Hi,

By Minimum Wage, I suppose you mean the Statutory Minimum Wage (SMW) for a given schedule of industry for a given region, as provided under The Minimum Wages Act 1936. It is the Basic Wage PLUS the Dearness Allowance component that forms the basis for computing Provident Fund Contribution.

Now, SMW has essentially two components viz: Minimum Rate of Wage and a Special Allowance. The concerned law does NOT stipulate payment of any other allowances. It is a popular misconception that these two are indeed the Basic Wage and Dearness Allowance. There is no law that defines these terms or requires payment of structured wages.

It is true that the Dearness Allowance (where paid) is a variable component of the total wage and being linked to the cost of living index for the region it fluctuates in tune with the movement of the Cost of Living Index. The same is applicable to the Special Allowance also, but it fluctuates every six months.

The Minimum Wages Act merely requires that whatever the structure of wages paid by an employer, the total of elements (permissible in the definition of wage-Sec. 2-h) of the act may never be less than the total of Minimum Rate of Wage and Special Allowance.

Kindly study the act and practices in the industry before you make decisions as developing your structure has an advantage of keeping the (Basic + DA) component reasonably low to save on the burden of PF contributions.

Whatever the structure the (Basic Wage + DA) component of the wage up to Rs. 6500/- p.m. (presently) has to be the basis for Provident Fund contributions. There are additional provisions regarding PF that you must know, but I'll explain when you desire or when appropriate.

Clear?

Regards,

Samvedan

June 20, 2006

Dear Satya,

Minimum wages, as per the Act which is released twice every year, are encompassed by PF. In West Bengal, the entire amount is considered in the PF calculation.

Regards,
SC

Dear Samavedan,

The Minimum Wages Act is applicable for EPF to the extent of Basic wages. In the Supreme Court judgment in the matter of Air Freight Ltd vs. State of Karnataka, it was held that the package of salary payable to the employee is the minimum wages irrespective of basic and D.A. etc.

Kindly provide us with your comments.

Thank you.

Hi,

The Minimum Wages Act is a normative legislation, whereas the Employees Provident Fund and (Misc Provisions) Act is an establishment legislation.

I'll explain.

Under the Minimum Wages Act, the appropriate government decides the minimum wages payable to various skills in different industries in different parts of the state. It has, as I mentioned earlier, two components. These are "Minimum Rate of Wage or MRW" and "Special Allowance or SA." The MRW is NOT Basic Wage UNLESS the employer says so, and the SA is NOT Dearness Allowance UNLESS the employer says so. The law enforcement agencies somehow force and coax the employers to treat the MRW as Basic Wage and the SA as the Dearness Allowance. This is wholly wrong. And this is what was put to the test in the said matter you have rightly cited.

In that case, the issue was whether, despite the wage paid by the employer being higher than the Statutory Minimum Wage, any variable payment by way of SA or DA was mandatory to be paid. While answering the proposition in the negative, the Supreme Court clarified that if the wage structure adopted by the employer comprised components permitted by the definition of "wage" under the Minimum Wages Act and its total was greater than the Statutory Minimum Wage, it was perfectly in order.

Now, let us understand the EPF. This act is applicable to any establishment stipulated under it (whether such an establishment paid the Minimum Wage or NOT). This act further states that only the employees drawing Basic Wage PLUS DA less than Rs. 6500/- p.m. were to be covered under the act. Kindly do NOT confuse yourself with the terms used in the Minimum Wages Act and this act.

The EPF act does NOT require an employer to adopt any mandatory structure of wages or components. Some employers may NOT use components like Basic Wage and/or DA. They may only have a salary and a few other allowances. In such a case, it is the "salary" that will attract PF. In another case, some employers may not have any breakup of the salary paid to employees at all. In such a case, the total salary will attract PF. Therefore, it is advisable to have a breakup of the salary structure. If you keep the Basic Wage PLUS DA component to about 40% to 50% of the total wage, it will be considered reasonable. This way you may rationalize the wage structure and also save by paying PF contributions on just about 40% or 50% of the total wage.

Are you clear now? Coverage under PF has more facets that one must understand. I have not touched upon these as it isn't necessary here!

Regards,

Samvedan

June 21, 2006

Hi Samvedan,

Wow, that was in-depth :) I have asked this question before but received no answers: How is a single-linked DA calculated, and how is a double-linked DA calculated? What are the benefits of a single-linked DA? Could you please explain with an example? Thank you in advance :)

Hi,

DA, as everyone knows, came into existence when inflation and the cost of living rose sharply (due to greater resources being spent on defense production, adversely affecting the production and availability of goods and services for human consumption). The rulers had to evolve a "novel" concept of installing a system of payment "related to the prevailing cost of living."

This is why DA is known to "neutralize the rising cost of living" for employees (salary/wage earners).

This means that some part of your total wage/salary will be linked to the cost of living index published by the government.

What started with the best of intentions has now reached alarming proportions. The method is simple and generally goes like this:

1) The parties select a particular series of the cost of living index and agree that the present wage is adequate at a particular index level, say 200.

2) Then the parties further agree that for every rise of "x" points in the index, the employees would get a certain amount in addition to the wage. So, over time, as the index keeps rising, the employees keep getting more money in their pay packets.

3) This is a single linked system of DA, as it is only linked to one factor—the index.

4) Clever Unions, through superlative bargaining with their employers, created an additional linkage to the basic wage of each employee.

5) This system states that the compensation linked to the index will change as per the slabs of the basic wage of the employees.

Let me explain. Consider two employees, A and B, drawing basic wages of Rs. 100/- pm and Rs. 200/- pm. Assume that the compensation per slab of ten points is Rs. 10/- pd above the base slab of 200. Assume further that the current index level is 300.

Now, in the same month, the monthly DA payment to A and B in a single link system will be Rs. 100/- each.

But if there was a double link system—linking DA payment to both the index and the basic wage—then the scenario would be, "Up to a basic wage of Rs. 100/-, the compensation for rising costs will be @ Rs. 10/- per slab of ten points as before, and for a higher basic wage, in excess of Rs. 100/- pm, it would be Rs. 15/-pd.

In such a situation, A will get DA of Rs. 100/- as above, but now B will get DA of Rs. 100/- plus Rs. 150/- (Total of Rs. 250/-). The Rs. 150 coming from the compensation rate of Rs. 15/- per slab rise of ten points above the index level of 200.

See how one would benefit in a double link DA system (and how the employer will continue to suffer)?

Kindly do not focus on the figures. They are used only to highlight the difference between the two systems. In reality, things could be WORSE!

I hope your query is answered.

Regards,

Samvedan

November 24, 2006

Whether consequent to Supreme Court judgments on contract employees, is it right to say that as long as there is a contract of employment and the employee is aware of his eligibility, such as PF, can the department stipulate that the basic components should be at a minimum and equal to the Minimum Wage Act? Some officials hold the view that PF is a social security legislation and the employee should receive maximum benefits. In my view, the act does not specify any minimum basic amount in PF; only a maximum of Rs 6,500 is fixed. I believe that any basic amount from 0 to 6,500 covered under the contract of employment is still within the purview of the act, unless the act is amended, similar to ESIC. What is the minimum basic component?

GK

If an employee is receiving a salary or wages higher than the notified Minimum Wages, but the employer is deducting EPF contributions lower than the notified Minimum Wages, is the employer obligated to deduct EPF based on the Minimum Wages or more?

M.G. Rabbani

Can we bifurcate the stipulated minimum wage rate for an unskilled worker to pay his EPF contribution? Please provide your legal opinion as per the provisions of the Minimum Wages and EPF Act.

Regards,
Aditya

Is it reasonable to deduct PF only on basic 60%, HRA 30%, and conveyance allowance, i.e., 2360, 1180, and 394 = 3934 (minimum wages Feb 2009)? PLEASE CLARIFY.

Dear Samvedan,

I am very impressed with your logical statement, but a few things need to be clarified.

It is very clear in the Minimum Wages Act that minimum wages include House Rent. However, in the PF act, house rent is not considered for the computation of PF.

Having said that, it is true and surprising that the PF department is still enforcing the deduction and contribution of PF on Minimum wages + DA without a clear verdict on this issue. Please review the below websites, which are the official websites of the concerned departments, and provide us with your focused opinion on the legal stance.

[EPFO](http://epfindia.com)
[EPFO](http://epfindia.com)
[Wage Cell Ministry of Labour & Employment](http://labour.nic.in) ([Search On Cite](https://www.citehr.com/results.php?q=Wage Cell Ministry of Labour Employment) | [Search On Google](https://www.google.com/search?q=Wage Cell Ministry of Labour Employment))
[labour.nic.in](http://labour.nic.in)

Also, check the link mentioned below:

[EPFO Chennai](http://www.epfochennai.tn.nic.in/pdf/wages.pdf)

Waiting for your reply.

Vijay

Hi,

By Minimum Wage, I suppose you mean the Statutory Minimum Wage (SMW) for a given schedule of industry in a specific region, as provided under The Minimum Wages Act 1936. It is the Basic Wage PLUS the Dearness Allowance component that forms the basis for computing Provident Fund Contribution.

Now, SMW has essentially two components: Minimum Rate of Wage and a Special Allowance. The concerned law does NOT stipulate the payment of any other allowances. It is a popular misconception that these two are indeed the Basic Wage and Dearness Allowance. There is no law that defines these terms or requires payment of structured wages.

It is true that the Dearness Allowance (when paid) is a variable component of the total wage and is linked to the cost of living index for the region, fluctuating in tune with the movement of the Cost of Living Index. The same applies to the Special Allowance, but it fluctuates every six months.

The Minimum Wages Act merely requires that whatever the structure of wages paid by an employer, the total of elements (permissible in the definition of wage - Sec. 2-h) of the act may never be less than the total of Minimum Rate of Wage and Special Allowance.

Kindly study the act and practices in the industry before making decisions, as developing your own structure has the advantage of keeping the (Basic + DA) component reasonably low to save on the burden of PF contributions.

Whatever the structure, the (Basic Wage + DA) component of the wage up to Rs. 6500/- p.m. (presently) has to be the basis for Provident Fund contributions. There are additional provisions regarding PF that you must know, but I'll explain when you desire or when appropriate.

Clear?

Regards,
Samvedan
June 20, 2006

Dear Seniors,

My current company salary structure components are:
- Basic
- HRA
- Washing Allowance
- Medical Allowance/Medical Reimbursement.

I have got 2 questions:
1. In this format, can the Gross Salary be treated as Minimum Wages, which is much higher than the statutory minimum wages?
2. Does the introduction of Special Allowance/DA in the structure legalize our point that SMA = Gross Salary?

Looking forward to your reply.

Regards,
Amitava

Hi,

As per PF authorities, PF coverage includes the BASIC+DA+Allowance. (Ensure that Provident Fund is deducted at the statutory rate from the total wages i.e. basic, D.A., and retaining allowance if any). So please check and do as per the instructions.

Regards,

A. Satheesh

I want to hire a peon (unskilled labor) and pay less than 15k without giving PF. Is it possible under the Minimum Wage Act to pay less than 15k but still not provide PF?