What the Judgment means

On 28th February 2019, The Supreme Court Of India was hearing a plea made by the Employees Provident Fund Organization (EPFO) about the numerous cases of artificially lowering basic wages by employers through providing special allowances which get exempt for computation of Employees Provident Fund (EPF) contributions. The bench was headed by Justice Arun Mishra and Justice Navin Sinha. Hence, The question in front of them was whether special allowances paid by these companies are included within the definition of basic wages. 

The Supreme Court Judgment

“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. There is no data available on record to show what were the norms of work prescribed for those workmen during the relevant period. 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. The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, who have arrived at a factual conclusion 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 accordingly to the provident fund account of the employees.”

Extract obtained from Live-Law

In their ruling they stated that there was no material put forth by the companies to show that the allowances that were being offered were linked to any incentive, 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”.

Therefore, the special allowances for conveyance, canteen, education, medical, management and city compensatory allowances, special holidays and night shift incentives will be included as part of the basic wages which will be subject to deduction.

In its ruling, the court concluded that to avoid deduction and contribution to the Employee Provident Fund (EPF), these allowances were being camouflaged by the employers and they are a part of the basic wages. The implementation of the plan is to be done by the Employees’ Provident Fund Organisation (EPFO) and the detailed plan will be out soon.

The top court said this while dealing with a question on whether special allowances paid by an establishment to its employees would fall within the expression “basic wages” under the provision of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 for computation of deduction towards provident fund.

Extract obtained from ET

Impacts of the Judgment

The impact of this decision is three-fold in nature.

  • The court in its ruling didn’t make it clear whether changes will be implemented on a retrospective or prospective basis.
  • The two parties which are directly linked to this decision are the employer and the employees. The EPF rule states that the employees have to contribute 12% of their basic wage to the Provident Fund along with the employer with a wage limit of Rs 15,000 but for any employee earning an amount higher than this, the contribution is voluntary. Hence, the employers who had been trying to minimize their contribution to the EPF will be the most affected. For employees with wages up to Rs 15,000, it means less money on hand as their EPF contribution will also increase but on the other hand, they’ll get higher pension amounts for their retirement.
  • On a closer look of our economy and businesses, it can be safely assumed that some sectors of the economy like manufacturing, production, etc. will be more affected by this order than other sectors like multinationals, technology, etc. because there are more employees falling under the income bracket of Rs 15,000 in the former in comparison to the latter, where most of the employees have their basic wages higher than Rs 15,000.

While 12 per cent of the basic salary and dearness allowance have to be contributed by all employees earning up to Rs 15,000 per month (not mandatory for others), the employer component (12%) has to be contributed mandatorily in case of all employees. The employer’s component is split into EPF (3.67%) and the Employees’ Pension Scheme (8.33%).

Extract obtained from Indian Express

The much broader and general effect of this ruling will be on the further polarization between the organized and unorganized sector within the country as the EPF rule doesn’t apply to employees working in the unorganized sector.

Sources: Live-law, Business Today, Indian Express, Financial Express, Zee-biz, Business Standard, ET, CMIE, CNBC

Image Credits: Livemint

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