The Employee’s Provident Fund Organisation (EPFO) in November last year issued a Circular wherein it stated that all such allowances which are ordinary, necessarily and uniformly paid to the employees are to be treated “as part” of Basic wages. The circular stated that “basic wage” encompasses within its fold all the payments except the specified exclusions expressly provided in the definition of “basic wages” in section 2 (b) of the Employee and Provident fund and Miscellaneous Provisions Act 1952 (EPF Act).
The circular also stated that the words "commission or any other similar allowance payable to the employee" is a continuous term and refers to commission or any other "commission" like allowance by whatever nomenclature it is referred. The Circular also stated that ‘basic wages” is subject to the exclusions expressly referred in the definition provided in section 2 (b) and no other.
This circular as for the time being has been put on hold. This circular was a result of the recent conflicting judgments of Madras and Madhya Pradesh High Court respectively in Montage Enterprises Pvt. Ltd. v. Employee Provident Fund, Indore and another [2011 LLR867] and Management of Reynolds Pens India Pvt. Ltd. Kancheepuram and others V. Regional Provident Fund Commissioner Chennai [2011 LLR 876] wherein the hon'ble courts have held that certain allowances like conveyance, educational allowances, Food Concessions, Medical, Special holiday, Night shift incentive, City Compensatory allowance etc. should be treated as part of "basic wage" under Employee's Provident Funds and Miscellaneous Provisions Act, 1952 and the accordingly provident fund (PF) contributions should be remitted on such allowances.
The Madhya Pradesh High Court held that the "Conveyance allowance" is included in the definition of "basic wage" because it is universally, necessarily and ordinarily paid to all across the board. The Madhya Pradesh High Court also held that "special allowance" is also included in basic wage since it is paid to all workers and there is a specified criterion to determine the amount. The Madras High Court had observed in the above noted case that the word "wage" should be liberally construed as the EPF Act is welfare legislation. Meanwhile, Review petitions against the said judgments are pending before Madras and Madhya Pradesh High courts and Supreme Court of India respectively that shall conclusively assist in clearing the confusion over what shall be included within the definition of "basic wage".
Section 2 (b) provides that: Basic wage" 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 to the terms of the contract of employment and which are paid or payable in cash to him, but does not include-
Section 6 of EPF Act and Paragraph 29 of the EPF Scheme 1952 provides that contribution towards the provident fund shall be on basic wage, dearness allowance (DA) and retaining allowance.
The question as to what constitutes "basic wage" and what allowances shall encompass within the definition of "basic wage" have often been debated in the Indian Courts. These issues arise on account of mandatory contribution by the Employer and the employee on the basis of salary towards Provident fund or PF under social welfare legislation of EPF Act. PF as noted above is contributed on Basic wage, dearness allowance and retaining allowance. This contribution towards PF is also part of salary and is part of cost to company.
The Companies in practice provide salary by dividing it into many heads and these include basic wage or basic salary, House rent allowance (HRA), Leave travel allowance (LTA) etc. The Provident Fund Authorities are of the view that PF is contribution on basic wage, DA and retaining allowance and all those allowances that are ordinarily and universally paid to the employee come within the fold of definition of Basic Wage and thus are liable to be included in basic wage while contribution is being made towards PF.
The Provident Fund Authorities are of the view that Company often divide the salary of employees into many components so as to avoid these being clubbed under basic wage and reduce the incidence of PF contribution.
Supreme Court of India in Bridge and Roof Co. Pvt. Ltd. v. Union of India [AIR 1963 SC 1474], Manipal Academy of Higher Education v. Regional Provident fund Commissioner [AIR 2008 SC 1951 have held that :
Where the emolument is universally, necessarily and ordinarily paid to all across the board, such emoluments shall be ‘basic wage’ and where such payment is available to be specially paid to those who avail of the opportunity is not 'basic wage'."
"Any payment by way of special incentive is not ‘basic wage’."
Under the PF fund scheme, the employer has to contribute 12 per cent of the basic wage, DA, retaining allowance towards the fund and the employee also has to correspondingly contribute an equal amount towards the PF with an option to contribute more than the contribution made by the employer.
Here, it is also important to note that as per the EPF Act, the said scheme provides a wage cap of 6500 rupees for the purpose of contribution towards PF fund wherein the employee who draw a salary exceeding 6500 has an option to join and become the member of the scheme. The Employer under the Scheme is also liable to pay contribution towards PF only on 6500 rupees irrespective of the basic salary drawn by the employee. In case the employee salary exceeds the said wage cap then the employee and the employer submit voluntary contribution and Joint declaration form wherein both give declaration as to rate at which the PF shall be deducted.
Generally in practice, employers limit their share contribution towards PF on the basic salary of 6500 in cases where the basic salary exceeds this wage cap limit and sometimes the company also calculate both employer and employee share on wage cap limit of 6500 rupees. Thus, in such situation, the proposed changes in the definition of the 'basic wage' shall not have an adverse impact on all those employers who limit their contribution towards the fund at wage cap of 6500 rupees and thus the inclusion of the other allowances within the basic wage shall be irrelevant. Butat the same time it shall have considerable impact on those employers who do not subscribe to the wage cap and contribute 12 per cent of basic salary, DA and retaining allowance irrespective of the wage cap.
The employer thus shall be liable to include all allowances within the 'basic wage' as are proposed to be included within the said definition for the purpose of calculation of PF and thereby shall be contributing more towards PF. It is also important to note here further that the employee take home salary shall also be affected whereby employee shall be contributing equal contribution as that of employer towards PF and thereby witnessing reduction in the take home salary by increase in contribution towards PF. This shall however have positive impact on funds available to the employee at the time of retirement.
The above circular dated 30 Nov 2012 has been put on hold by the Ministry and petitions challenging the above noted judgments of Madhya Pradesh and Madras High Courts are pending for disposal before the courts thereby resulting in ambiguity over the definition of 'basic wage'.
Only further orders from the Labour Ministry and Court judgments on the issue shall be able to conclusively decide the matter and clear confusion over the question as to what allowances paid by a Company shall be included in 'basic wages'. Though, one can safely presume for the time being that only those allowances that are paid ordinarily to the employees come within the scope of 'basic wage' for the purpose of contribution towards PF.
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