EPF & MP Act – A brief of recent 3 landmark Judgments from Hon’ble Supreme Court of India
(Coffee Break Compliance Guide – Volume 52 by Subramaniam Anandan)
- A Judgment on definition of “Excluded Employee”
Who is an excluded employee?
Section 2(f) of EPF Scheme defines, “excluded employee” means—
(i) an employee who, having been a member of the Fund, withdrew the full amount of his accumulations in the Fund under clause (a) or (c) of sub-paragraph (1) of paragraph 69;
(ii) an employee whose pay at the time he is otherwise entitled to become a member of the Fund, exceeds [fifteen thousand rupees] per month;
What an excluded employee means?
An excluded employee, shall NOT be entitled and required to become a member of the Fund
What is the case about?
When a person who was a member of any other Fund (other than EPF Scheme, 1952) withdraws full amount of his accumulations (in this case Railways) and joins an organization which is covered under EPF Scheme, 1952 can he/she be considered as ‘Excluded Employee”?
- If a person is member of the Fund created thereunder i.e., under the Scheme of 1952 (EPF scheme covered in an establishment) and withdraws all his accumulations therein, he may not be obliged to be a member of the same Fund under the Scheme of 1952 over again and could be treated as an “excluded employees”
- However, such is not the relaxation granted in relation to an employee who was earlier a member of any other Fund (Not PF scheme, 1952) but later on joins such an establishment where he would be entitled to membership of the Fund created under the Scheme of 1952.
- Principle of the Provident Fund Act is to provide social security for those employees who otherwise would not be in a position to save any money from their wages.
- Paragraph 2(f)(iv) again provides that an apprentice shall be an excluded employee till he becomes a full fledged employee.
- There was no age bar for an employee to become a member of the Scheme of 1952
- A Common Order on definition of Special Allowance
The appeals raise a common question of law, if the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund.
- no material has been placed by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees
- 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
- 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 accordingly to the provident fund account of the employees
- It is therefore not possible to ascertain whether extra amounts paid to the workmen were in fact paid for the extra work which had exceeded the normal output prescribed for the workmen
Understanding Key Rulings of the Hon’ble Supreme court
- Universally, necessarily and ordinarily paid wages are Basic wages (para 6 of the Judgment)
- If an employer could not able to explain that why the specific allowance is paid for such
- employee, it is construed as basic wages as per the definition under section 2(b) of the EPF Act
- When a worker produces beyond the base or standard, what he earns was not basic wage
- (para 7 of the Judgment)
- A written HR Policy and documentation having nexus and linkage with the sum of extra output
Essential of the Judgment
Paragraph 14 of the Judgment – can be considered as CORE of the Judgment
Applying the aforesaid tests to the facts of the present appeals, no material has been placed by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity. 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.
3. A Judgment on Set-Aside of Gazette notification amending Employee Pension Scheme, dated 22-08-2014
Is on a Gazette Notification dated 22nd August 2014 Effective date 1st September 2014, which states
- PF ceiling increased to INR 15000/month
- First timers earning exceeding 15000/month are excluded from EPS
- Existing employees who were members of the EPS have an option to contribute on higher salary – such option was to be exercised through a joint request by the employee and the employer, by 28 February 2015 (extended time limit – 31 August 2015).
- If no such option is made, the contribution already made in excess of the wage ceiling limit would be diverted to the Provident Fund Account, along with interest.
- In case the above said option to contribute on higher salary was exercised, additional contributions at the rate of 1.16% of salary exceeding INR 15,000 per month was required to be allocated to the EPS out of employee’s share of contributions to the Employees’ Provident Fund Scheme
- Pensionable salary was required to be calculated on average salary of 60 months (instead of 12 months as per earlier proviso) prior to the date of exit from the EPS.
The Hon’ble Kerala High Court’s Judgment on the Amended Gazette Notification
- The Employee’s Pension (Amendment) Scheme, 2014 brought into force by Notification No. GSR. 609(E) dated 22.8.2014 evidenced by Ext.P8 in W.P.(C) No. 13120 of 2015 is set aside;
- All consequential orders and proceedings issued by the Provident Fund authorities/respondents on the basis of the impugned amendments shall also stand set aside.
- The various proceedings issued by the Employees Provident Fund Organization declining to grant opportunities to the petitioners to exercise a joint option along with other employees to remit contributions to the Employee Pension Scheme on the basis of the actual salaries drawn by them are set aside.
- The employees shall be entitled to exercise the option stipulated by paragraph 26 of the EPF Scheme without being restricted in doing so by the insistence on a date.
Hon’ble Supreme Court ordered, upholding the Hon’ble Kerala High Court Judgment
Consequences of the Order:
Existing contributors to EPS
(1) Considering actual basic wages for Pension contribution, exceeding Rs.15,000
(2) Re-diversion of contribution from EPF to EPS (this will have high complication for members
of PF Exempted establishments)
Existing member but not contributing to EPS (where the PF pay is more than 15,000): Those who joined on or after 1st September 2014, the impact is from their date of joining – Both for Domestic and International Workers.