Clarification Needed on PF Deductions for Contract Workmen
Our company is in Telangana State, and we have two sets of employees: Company Employees and Contract Workmen engaged through Licensed Contractors. While the Company Employees are paid a salary on a Cost to Company (C to C) pattern, the PF for Company Employees is paid on the Basic, as there is no DA component for them. This Basic is equivalent to 50% of the Gross Salary. The remaining 50% of the Gross Salary is treated as Allowances, bifurcated into HRA, Conveyance, Medical, LTA, Education Allowance, Washing Allowance, and Other Allowance.
On the other hand, the Contract Workmen are paid as per the Minimum Wages declared by the Telangana State Government for Unskilled, Semi-Skilled, and Skilled Categories based on the applicable Government Order (GO) for Scheduled Employments. A copy of the latest GO issued by the Telangana Government is attached for your kind perusal and reference.
In Telangana State, Minimum Wages comprise a Basic Wage (a fixed amount) and VDA. Accordingly, we are paying PF for Contract Workmen based on 50% of the total Minimum Wage, similar to Company Employees. When preparing the monthly wage bill, the Contractor shows 50% of the monthly earned total Minimum Wage as PF Wage, and the remaining 50% as other allowances, without any further breakdown.
For example, if the Minimum Wage for Contract Helpers (at Sl. No. 10 in the attachment) is Rs. 8244.10 per month (Basic Wage = Rs. 3496/- and VDA = Rs. 4748.10), we are paying 12% PF on Rs. 4122.05, which is 50% of the Total Minimum Wage. This is done instead of the actual Basic of Rs. 3496/-. In essence, we are paying PF on more than Rs. 626/- of Basic Wage (50% of Total Minimum Wage minus Basic Wage).
I would appreciate your expert opinion regarding whether PF for our Contract Workmen should be deducted based on the Basic Wage, 50% of the Total Minimum Wage (as currently practiced in our Company), or 100% of the Total Minimum Wage including Basic Wage + VDA. Additionally, considering Section 2(b) and Section 6 of the EPF Act 1952, clarity on this matter is sought.
In our Company, while there is no DA component for Company Employees in the Cost to Company breakdown, there is a VDA component in the Total Minimum Wages paid to Contract Workmen. The ambiguity arises as Section 2(b) of the EPF Act 1952 excludes any Dearness Allowance from Basic Wage, but Section 6 states that the employer's contribution to the Fund shall be 10% of the Basic Wages, Dearness Allowance, and retaining allowance (if any) for each employee. This raises questions on whether PF should be paid only on the Basic Wage (similar to regular company employees), 50% of the total Minimum Wage as for Contract Workmen currently, or on 100% of Basic Wage + VDA, i.e., the total Minimum Wage.
I kindly request the inclusion of any relevant settled citations for my professional guidance.
Thank you,
Regards, LV Sastry
[Phone Number Removed For Privacy Reasons]
[Email Removed For Privacy Reasons]
Date: 24.01.2017
From India, Hyderabad
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Our company is in Telangana State, and we have two sets of employees: Company Employees and Contract Workmen engaged through Licensed Contractors. While the Company Employees are paid a salary on a Cost to Company (C to C) pattern, the PF for Company Employees is paid on the Basic, as there is no DA component for them. This Basic is equivalent to 50% of the Gross Salary. The remaining 50% of the Gross Salary is treated as Allowances, bifurcated into HRA, Conveyance, Medical, LTA, Education Allowance, Washing Allowance, and Other Allowance.
On the other hand, the Contract Workmen are paid as per the Minimum Wages declared by the Telangana State Government for Unskilled, Semi-Skilled, and Skilled Categories based on the applicable Government Order (GO) for Scheduled Employments. A copy of the latest GO issued by the Telangana Government is attached for your kind perusal and reference.
In Telangana State, Minimum Wages comprise a Basic Wage (a fixed amount) and VDA. Accordingly, we are paying PF for Contract Workmen based on 50% of the total Minimum Wage, similar to Company Employees. When preparing the monthly wage bill, the Contractor shows 50% of the monthly earned total Minimum Wage as PF Wage, and the remaining 50% as other allowances, without any further breakdown.
For example, if the Minimum Wage for Contract Helpers (at Sl. No. 10 in the attachment) is Rs. 8244.10 per month (Basic Wage = Rs. 3496/- and VDA = Rs. 4748.10), we are paying 12% PF on Rs. 4122.05, which is 50% of the Total Minimum Wage. This is done instead of the actual Basic of Rs. 3496/-. In essence, we are paying PF on more than Rs. 626/- of Basic Wage (50% of Total Minimum Wage minus Basic Wage).
I would appreciate your expert opinion regarding whether PF for our Contract Workmen should be deducted based on the Basic Wage, 50% of the Total Minimum Wage (as currently practiced in our Company), or 100% of the Total Minimum Wage including Basic Wage + VDA. Additionally, considering Section 2(b) and Section 6 of the EPF Act 1952, clarity on this matter is sought.
In our Company, while there is no DA component for Company Employees in the Cost to Company breakdown, there is a VDA component in the Total Minimum Wages paid to Contract Workmen. The ambiguity arises as Section 2(b) of the EPF Act 1952 excludes any Dearness Allowance from Basic Wage, but Section 6 states that the employer's contribution to the Fund shall be 10% of the Basic Wages, Dearness Allowance, and retaining allowance (if any) for each employee. This raises questions on whether PF should be paid only on the Basic Wage (similar to regular company employees), 50% of the total Minimum Wage as for Contract Workmen currently, or on 100% of Basic Wage + VDA, i.e., the total Minimum Wage.
I kindly request the inclusion of any relevant settled citations for my professional guidance.
Thank you,
Regards, LV Sastry
[Phone Number Removed For Privacy Reasons]
[Email Removed For Privacy Reasons]
Date: 24.01.2017
From India, Hyderabad
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Dear Mr. LV Sastry, Please note that there is no discrimination in EPF for regular and contractual employees as the definitions of "wages" and "employees" are at par without any exception. Treating 50% of notified minimum wages for paying contribution of EPF is unjustifiable and illegal. You are liable to contribute on earned Basic and DA subject to a maximum of Rs. 15,000/- per month, which is the ceiling at present.
Understanding Basic Wages
Section 2(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:
(i) the cash value of any food concession;
(ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by the employer.
Rate of Contribution
As far as the rate of contribution at 10% is concerned, it is only for establishments employing less than 20 employees and for some schedules of employment; otherwise, it is 12%.
Regards, P K Sharma
From India, Delhi
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160Understanding Basic Wages
Section 2(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:
(i) the cash value of any food concession;
(ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by the employer.
Rate of Contribution
As far as the rate of contribution at 10% is concerned, it is only for establishments employing less than 20 employees and for some schedules of employment; otherwise, it is 12%.
Regards, P K Sharma
From India, Delhi
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Understanding EPF Contributions: Sections 2(b) and 6 of the EPF Act, 1952
Section 2(b) of the EPF Act, 1952 defines "basic wages," excluding other components of the wage structure like dearness allowance. In contrast, Section 6 of the Act specifically deals with contributions, including dearness allowance as one of the constituents of the contribution percentage. The confusion arises from the unnecessary conjunctive reading of both provisions. One section addresses basic wages, while the other focuses on the percentage and components of the contribution. Therefore, comparing these sections is not appropriate.
Minimum Wages and EPF Contribution
The Minimum Wage fixed under the Minimum Wages Act, 1948, includes all components of the wage structure except those excluded from the term "wages" as defined in Section 2(h) of the MW Act, 1948. When dearness allowance is included, it should be fully considered for computing the EPF contribution based on the fixed percentage under the EPF Act.
The practice of considering 50% of the gross salary of regular employees for EPF contribution, due to the absence of a dearness allowance component and the coincidence of basic wages being exactly 50% of the gross, should not be blindly applied to contract labor. Contract labor minimum wages consist of only two components: basic and VDA.
Regards,
LV Sastry
From India, Salem
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Section 2(b) of the EPF Act, 1952 defines "basic wages," excluding other components of the wage structure like dearness allowance. In contrast, Section 6 of the Act specifically deals with contributions, including dearness allowance as one of the constituents of the contribution percentage. The confusion arises from the unnecessary conjunctive reading of both provisions. One section addresses basic wages, while the other focuses on the percentage and components of the contribution. Therefore, comparing these sections is not appropriate.
Minimum Wages and EPF Contribution
The Minimum Wage fixed under the Minimum Wages Act, 1948, includes all components of the wage structure except those excluded from the term "wages" as defined in Section 2(h) of the MW Act, 1948. When dearness allowance is included, it should be fully considered for computing the EPF contribution based on the fixed percentage under the EPF Act.
The practice of considering 50% of the gross salary of regular employees for EPF contribution, due to the absence of a dearness allowance component and the coincidence of basic wages being exactly 50% of the gross, should not be blindly applied to contract labor. Contract labor minimum wages consist of only two components: basic and VDA.
Regards,
LV Sastry
From India, Salem
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Many establishments are bifurcating wages into various allowances, ignoring the dictum of the Gujarat, Madhya Pradesh, and Madras High Courts, which hold that all allowances other than house rent allowance will form part of 'basic wages' to attract provident fund contributions. Some of these allowances include:
Special Allowance, City Compensation Allowance, Tiffin Allowance, Night Shift Allowance, Hardship Allowance, Supplementary Allowance, Punctuality Allowance, Attendance Allowance, Children Education Allowance, Travelling Allowance, Uniform Allowance, Washing Allowance, Tea Allowance, Canteen Allowance, Leave Travel Allowance, Milk Allowance, Make Up Allowance, Newspaper Allowance, Regularity Allowance, Suspension Allowance, Medical Allowance, Production Allowance, Heat Gas and Dust Allowance, Meal/Food Allowance, Overtime Allowance, Wellness Allowance, Performance Allowance, Field Working Allowance, Location Allowance, Compensatory Allowance, Cash Handling Allowance, Supervisory Allowance, Steno Typist Allowance, Computer Allowance, Conveyance Allowance, Area Allowance, Driver Allowance, Cycle Allowance, Entertainment Allowance, Additional Allowance, Club Allowance, etc.
[The above list is only illustrative and not exhaustive. Some of these allowances are being paid universally, necessarily, and ordinarily to all employees.]
Savings
The industry previously lacked consistency in the inclusion of 'other' allowances for calculating PF. Over the years, the PF Authorities did not insist on the inclusion of different types of wage elements that did not fall under the Basic or DA category. With wages skyrocketing, the employer PF contribution of 13.45% (12% employer and 1.45% administrative charges & EDLI contribution) started to prove costly. Needless to say, employers shifted the weight of the pay packets from Basic and DA to other wage elements.
Now, the PF Authorities have woken up to this truth after being prompted by two independent rulings by the Madras High Court and the Madhya Pradesh High Court, holding allowances (except HRA) paid by the employer to the employee to be part of basic wages.
This decision raises a question of whether it is the PF Authority who will decide on what and how a salaried employee has to save for their future. While this may be a welcome change for some, most would feel the pinch as their spending capacities would be crippled. This could also affect the salaried class who have invested in long-term money-saving schemes that involve premiums that cannot be stopped now as a result of their reduced take-home pay.
Employers would again be burdened with higher employer PF contributions and contributing to higher employee costs. Even in the present scenario, the employer sees 25.45% of the wages being directed into the employees' PF account, and therefore, this inclusion of 'other' wage elements would send the employers' heads spiraling!
Present Legal Position
Special Leave Petitions, including Appeal (Civil) filed before the Hon'ble Supreme Court by the following establishments on the issue of whether Basic Wages include all allowances (excluding HRA) and also whether the employer has the liberty to split the minimum wages declared by the Government into various allowances, is pending before the Apex Court:
1. Surya Roshni & Others – Vs - EPFO Appeal (Civil) No.8781-8782/2012: Whether various allowances form part of basic wages and attract PF contribution.
2. Montage Enterprises Pvt Ltd. – Vs – EPFO SLP(C)11438/2012: Appeal against the Order/Judgement of the Gwalior Bench of Madhya Pradesh High Court. The Division Bench held that since the conveyance and special allowance is paid universally, necessarily, and ordinarily to all employees, it will form part of basic wages and attract PF Contribution.
3. U Flex Limited – Vs – EPFO SLP(C)11440-11441/2012: Whether various allowances form part of basic wages and attract PF contribution.
4. EPFO – Vs – G4 Security Services (India) Ltd. SLP(C)20085/2011: Against the Judgement of Punjab & Haryana High Court which went in favor of G4 Security – Whether the employer can split the minimum wages declared by the Government into various allowances.
As the issues involved are identical in all the above SLPs, the Apex Court has decided to hear all the SLPs together.
Present Status
In spite of the above Appeals pending before the Apex Court, the EPFO issued a Circular on 23rd May 2011, instructing its field officers to ensure that PF contributions are remitted at least on the minimum wages based on the Apex Court Order dated 23rd July 2004, wherein the Apex Court, while tentatively upholding the order of the Division Bench of Karnataka High Court in the Case of Group 4 Securities Guarding Ltd., - Vs – RPFC (which was challenged by Group 4), granted liberty to the authorities to decide the matter in accordance with law on its merits.
Subsequently, based on the decision of the Punjab & Haryana High Court in the case of G4 Security Services (India) Ltd., the EPFO withdrew the above circular via Circular dated 2nd December 2011, keeping the matter in abeyance till the outcome of the decision of the Apex Court.
Even though some of the parties approached the Apex Court in June 2016 for an early hearing, the Apex Court negated the request. The case is still pending with the Apex Court for disposal.
The EPFO had subsequently issued a Circular dated 30th November 2012 pertaining to Guidelines for Quasi-judicial proceedings under section 7A of the EPF&MP Act, 1952, issued by the EPFO on the inclusion of certain allowances, etc., for calculating Provident Fund contribution.
The above Circular has created a lot of confusion, and subsequently, the Union Labour and Employment Minister Mallikarjun Kharge on 13th December 2012 said that the Circular of November 30th, 2012, pertaining to Guidelines for Quasi-judicial proceedings under section 7A of the EPF&MP Act, 1952, issued by the EPFO on the inclusion of certain allowances, etc., for calculating Provident Fund contribution is to be kept in abeyance, and the Circular of 30th November 2012 stands withdrawn.
So the status quo will continue.
Under the scenario, either the authority has to wait for the final verdict of the Apex Court or they should go for an amendment of the definition of basic wages.
Be it known that the provident fund contributions can be demanded up to any past period since there is no limitation period fixed for it as of now, and the employers are held liable to pay not only employees' share of contributions, interest thereon, but penal damages also.
Regards, Lakkshmanan
S.G. Management Services
Kolkata
[Phone Number Removed For Privacy Reasons]
From India, Kolkata
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Special Allowance, City Compensation Allowance, Tiffin Allowance, Night Shift Allowance, Hardship Allowance, Supplementary Allowance, Punctuality Allowance, Attendance Allowance, Children Education Allowance, Travelling Allowance, Uniform Allowance, Washing Allowance, Tea Allowance, Canteen Allowance, Leave Travel Allowance, Milk Allowance, Make Up Allowance, Newspaper Allowance, Regularity Allowance, Suspension Allowance, Medical Allowance, Production Allowance, Heat Gas and Dust Allowance, Meal/Food Allowance, Overtime Allowance, Wellness Allowance, Performance Allowance, Field Working Allowance, Location Allowance, Compensatory Allowance, Cash Handling Allowance, Supervisory Allowance, Steno Typist Allowance, Computer Allowance, Conveyance Allowance, Area Allowance, Driver Allowance, Cycle Allowance, Entertainment Allowance, Additional Allowance, Club Allowance, etc.
[The above list is only illustrative and not exhaustive. Some of these allowances are being paid universally, necessarily, and ordinarily to all employees.]
Savings
The industry previously lacked consistency in the inclusion of 'other' allowances for calculating PF. Over the years, the PF Authorities did not insist on the inclusion of different types of wage elements that did not fall under the Basic or DA category. With wages skyrocketing, the employer PF contribution of 13.45% (12% employer and 1.45% administrative charges & EDLI contribution) started to prove costly. Needless to say, employers shifted the weight of the pay packets from Basic and DA to other wage elements.
Now, the PF Authorities have woken up to this truth after being prompted by two independent rulings by the Madras High Court and the Madhya Pradesh High Court, holding allowances (except HRA) paid by the employer to the employee to be part of basic wages.
This decision raises a question of whether it is the PF Authority who will decide on what and how a salaried employee has to save for their future. While this may be a welcome change for some, most would feel the pinch as their spending capacities would be crippled. This could also affect the salaried class who have invested in long-term money-saving schemes that involve premiums that cannot be stopped now as a result of their reduced take-home pay.
Employers would again be burdened with higher employer PF contributions and contributing to higher employee costs. Even in the present scenario, the employer sees 25.45% of the wages being directed into the employees' PF account, and therefore, this inclusion of 'other' wage elements would send the employers' heads spiraling!
Present Legal Position
Special Leave Petitions, including Appeal (Civil) filed before the Hon'ble Supreme Court by the following establishments on the issue of whether Basic Wages include all allowances (excluding HRA) and also whether the employer has the liberty to split the minimum wages declared by the Government into various allowances, is pending before the Apex Court:
1. Surya Roshni & Others – Vs - EPFO Appeal (Civil) No.8781-8782/2012: Whether various allowances form part of basic wages and attract PF contribution.
2. Montage Enterprises Pvt Ltd. – Vs – EPFO SLP(C)11438/2012: Appeal against the Order/Judgement of the Gwalior Bench of Madhya Pradesh High Court. The Division Bench held that since the conveyance and special allowance is paid universally, necessarily, and ordinarily to all employees, it will form part of basic wages and attract PF Contribution.
3. U Flex Limited – Vs – EPFO SLP(C)11440-11441/2012: Whether various allowances form part of basic wages and attract PF contribution.
4. EPFO – Vs – G4 Security Services (India) Ltd. SLP(C)20085/2011: Against the Judgement of Punjab & Haryana High Court which went in favor of G4 Security – Whether the employer can split the minimum wages declared by the Government into various allowances.
As the issues involved are identical in all the above SLPs, the Apex Court has decided to hear all the SLPs together.
Present Status
In spite of the above Appeals pending before the Apex Court, the EPFO issued a Circular on 23rd May 2011, instructing its field officers to ensure that PF contributions are remitted at least on the minimum wages based on the Apex Court Order dated 23rd July 2004, wherein the Apex Court, while tentatively upholding the order of the Division Bench of Karnataka High Court in the Case of Group 4 Securities Guarding Ltd., - Vs – RPFC (which was challenged by Group 4), granted liberty to the authorities to decide the matter in accordance with law on its merits.
Subsequently, based on the decision of the Punjab & Haryana High Court in the case of G4 Security Services (India) Ltd., the EPFO withdrew the above circular via Circular dated 2nd December 2011, keeping the matter in abeyance till the outcome of the decision of the Apex Court.
Even though some of the parties approached the Apex Court in June 2016 for an early hearing, the Apex Court negated the request. The case is still pending with the Apex Court for disposal.
The EPFO had subsequently issued a Circular dated 30th November 2012 pertaining to Guidelines for Quasi-judicial proceedings under section 7A of the EPF&MP Act, 1952, issued by the EPFO on the inclusion of certain allowances, etc., for calculating Provident Fund contribution.
The above Circular has created a lot of confusion, and subsequently, the Union Labour and Employment Minister Mallikarjun Kharge on 13th December 2012 said that the Circular of November 30th, 2012, pertaining to Guidelines for Quasi-judicial proceedings under section 7A of the EPF&MP Act, 1952, issued by the EPFO on the inclusion of certain allowances, etc., for calculating Provident Fund contribution is to be kept in abeyance, and the Circular of 30th November 2012 stands withdrawn.
So the status quo will continue.
Under the scenario, either the authority has to wait for the final verdict of the Apex Court or they should go for an amendment of the definition of basic wages.
Be it known that the provident fund contributions can be demanded up to any past period since there is no limitation period fixed for it as of now, and the employers are held liable to pay not only employees' share of contributions, interest thereon, but penal damages also.
Regards, Lakkshmanan
S.G. Management Services
Kolkata
[Phone Number Removed For Privacy Reasons]
From India, Kolkata
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