International Worker – Specifics in PF Act
(Volume – 43 of Coffee Break Compliance Guide from Anandan Subramaniam)
Last week, my colleague was asking me why Nepalese are considered as Domestic worker. As per the proviso inserted in the EPF Act, a Nepalese national on account of Treaty of Peace and Friendship of 1950 and the Bhutanese national on account of India-Bhutan Friendship Treaty of 2007, shall be deemed to be an Indian Worker.
He again shot a question whether such Nepalese working for an Indian Company in Nepal and his salary is processed in India, whether he will be covered as a domestic worker. I told him that as per Section (2) the Act extends to whole of India except the State of Jammu and Kashmir and in sub-clause (a) a factory in which 20 or more is employed and (b) any other establishment employer 20 or more employees.
As the establishment where the Nepali national is working is not covered under the EPF Act, as the coverage is limited to territories of India only. Further if the Nepali national was engaged in India, where he will be considered as Domestic worker and then transferred to employers’ branch in Nepal, then the employee shall be considered as International Worker, if it is applicable.
Not convinced, my colleague stated a scenario, where an US Citizen, who heads an Indian establishment in India, as Director, performs duty in US only. His business priorities are required only in US, hence he will stay there and never comes to India on an Employment Visa. My colleague queried, how this Director would be considered in EPF Act. I replied, by virtue of being the Director in a company in India, he is employed here and holding a US passport, which is a non-SSA country, he will be treated as International Worker.
My colleague drew a parallel, how a Nepali working in branch establishment of Indian company in Nepal cannot considered as domestic worker, but an US citizen not performing in India is treated as IW?
If the Nepali national was in the Rolls of Indian company and then transferred to Nepal branch of the establishment, then he shall be covered under EPF Act. When he is not in the Rolls of Indian establishment in Indian territories, he may not be considered for PF at all.
Whereas, the US citizen who is the Director of Indian establishment covered under the EPF Act is covered under the Act. And as it is he is already an International worker, for holding US passport.
Definition of International Worker
In late 2008, the coverage of the EPF Act was extended to ‘International Workers’ (IWs), essentially comprising of foreign expats working in India. As per the provisions of the EPF Act and the Employees’ Provident Fund and Miscellaneous Provisions Scheme, 1952 (EPF Scheme), ‘International Workers’ are defined to include:
- an Indian employee having worked or going to work in a foreign country with which India has entered into a social security agreement (SSA) or certain bilateral comprehensive economic agreements;
- an employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the EPF Act applies – (1) A person who is a foreign passport holder, (2) A person who is having other than Indian Nationality/Citizenship, (3) an OCI card holder (Overseas Citizen of India)
Hence, in relation to individuals working in India in establishments to which the EPF Act applies, an employee other than an Indian employee, holding other than an Indian passport, can be treated as an International Worker. One would also need to examine whether such an individual comes from a country with which India has signed a SSA, and if so, whether contributions need to be made in India or in the home country of this individual, based on the terms of the SSA. If an employee is classified as an International Worker and provident fund contributions are payable in India (either because India does not have an SSA with the country from which such individual comes, or because the SSA benefits are not triggered based on various factors), the Indian employer will be required to make contributions under the EPF Act on the entire global income of such individuals (without any upper limit).
The major difference between regular Indian workers, and IWs, is that for Indian employees, companies are entitled to limit their provident fund contribution to 12% of INR 15,000 (i.e. INR 1,800 per month)(the upper limit), even if the ‘monthly pay’ (defined to mean basic wages, dearness allowance and retaining allowance) of the employee exceeds INR 15,000. In case of IW’s there is no upper limit.
Therefore, in the event of any alleged non-compliance with the obligation to make PF contributions for IWs, organizations can face significantly greater liability to make hefty payment on pending contributions (along with interest and penalties).
In February 2015, the Employees Provident Fund Organization (EPFO) issued a clarification in response to a Right to Information query (attachment 1), whereby it stated that any employee holding a foreign passport and working in an establishment in India to which the EPF Act applies, would be considered as an International Worker. The circular went on to state that PIOs and OCIs would be considered as International Workers under the EPF Act. Accordingly, as per the EPFO, organizations would have to make PF contributions on the entire monthly pay of OCIs and PIOs, without any wage or upper limit. EPFO has taken a stand to distinguish between Citizen of India with Overseas Citizen of India to treat them as IW.
EPFO has taken the stance that PIOs and OCIs should be considered as ‘International Workers’, companies should take care to ensure that they comply with the provisions of the EPF Act and Scheme in relation to these workers. We have seen a number of companies receiving notices from the PF department, on the grounds that they have failed to pay the accurate amount of provident contributions for PIOs and OCIs on the basis that they are IWs. Since there is no upper limit on PF contributions for IWs, the PF department makes every attempt to argue that the employer is making PF contributions on a “lesser than normal” portion of the salary being paid to these individuals.
From a more practical perspective, in order to limit the future exposure from such assessments, organizations must take immediate steps to identify OCIs/PIOs and re-assess their compensation practices for such individuals to avoid unnecessary incremental and disproportionate exposure to PF liability.
Notwithstanding, of late, the Ministry of Home Affairs, Government of India, through Foreigners Regional Registration Office (FRRO), collects information on those persons who are employed in India and disseminate it to EPFO through Ministry of Labour and Employment for active coverage under EPF Act as International Worker. Hence the employers are required to consider due compliance from the day the Foreigner joins in an EPFO covered establishment.