Impact of SC judgment On PF applicability on “allowances” paid beyond “Basic wage”

By putting all controversies at rest about inclusion of various components of wages for applicability of PF contribution of such special allowances apart from basic wages, SC has held on 28th Feb. 2019 that allowances camouflaged to avoid PF contribution will be part of basic wages for the purpose of PF contribution unless employee earned it.

While deciding the appeal of RPFC (ii) west Bengal against Vivekanand Vidyamandir and bunch of other appeals filed by Surya Roshni, Uflex Ltd, Saint Gobain and Montage Enterprises against respective High court orders and EPFO show cause notice for demanding PF Contributions on allowances beyond Basic Wages, SC has relied on the principles laid down by the by its own court earlier way back in 1963 in Bridge & Roof company case along with Muir Mills Co. case in 1960.

The test laid down to ascertain as to what would become the part of basic wages is:

“(a) Where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages.

(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example, it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.

(c) Conversely, any payment by way of a special incentive or work is not basic wages.”

SC has not interfered with the fact findings of PF authority and appellate authority in the matters of companies who preferred appeals against their orders in high courts and dismissed by them holding that analysis of the wage structure and the components of salary showed that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

The Hon’ble Supreme Court opined that there was no occasion for the Court to interfere with the concurrent conclusions of facts.

Impact

1- All allowances which are paid to all employees universally, necessarily and ordinarily will be treated as part of basic wages for PF contribution except those specifically excluded in the definition of Basic wage of EPF Act.

2- To come out of Basic wages for the purpose of PF contribution, allowances paid to employees, should be variable and not paid to all.

3- Variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term “Basic Wages” under the EPF Act. However, in order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.

4- For example- The allowances like attendance allowance , night shift allowance, washing allowance and relocation allowance because of transfer from one place to another which are earned by employees because of extra efforts and are variable and paid to those only who get qualified for that and not all generally, should not be treated as part of basic wages.

5- Any amount either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity will be excluded from definition of Basic Wages.

6- The SC judgment will not impact all salaried class employees. Two categories of employees would be affected: One-Employees drawing up to 15,000/ a month and other-International workers. It means that PF contribution is to be paid now on an amount on total wages less HRA (which is specifically exempted in the definition of basic wage under the EPF Act.) and any other allowance which is not universally, ordinarily and generally paid to all.

7- The employees drawing up to 15,000/ salary with breakup of basic and allowances not specifically excluded as discussed above will have to pay more contribution and equally the employer also have to pay matching amount of contribution, consequently, the employee in hand salary will be now less but his accumulations in PF will be increased. 

8- Since the judgment interprets the provision of basic wage within the four corners of EPF Act and the Act applies to employee drawing up to 15,000/pm salary (Basic & DA and allowances now covered), the employees drawing more than the above ceiling but paying contribution over and above by own will not be impacted because PF Authority cannot demand the contribution more than 1,800/ (12% of 15,000).( Till this wage limit is not increased)

9- In case of International workers (Expats), the liability of the employer will be significantly increased, because for international workers there is no threshold limit of Rs. 15,000/. The Employer has to pay PF contribution @ 12% on basic wages. Now other allowances with different nomenclature expect specifically exempted under the definition will attract PF contribution.

10- The EPF authorities are now armed with the SC decision. Since EPF Act does not provide the limitation period for determination of PF amount on wages, the authorities may give it the retrospective effect and raise the demand to pay PF contributions, interests and damages on all allowances paid in past, which have now been declared as part of basic wage.

What employers should do now?

Keeping in mind the judgment of SC on the point, employers need to restructure their compensation package in consonance with the judgment.

The compensation structure can be redesigned to be divided into Basic, HRA and such allowances that are not paid to all and are variable also depending on the extra efforts of the employee to earn.