The dust has yet not settled on the latest pronounce of Supreme Court in the matter relating to provident fund in the case of Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir and Ors’ (2019 LLR 339 (SC)) (“Vivekananda Case”). On February 28, 2018 the Supreme Court once again laid down the law on how to compute the PF liability by explaining the manner of ascertaining the salary components that would constitute “basic wages” within the meaning of the EPF Act.
The ‘Vivekananda case’ is no twist in the tail. The Supreme Court has simply recapitulated its previous judgements on the same subject matter. In this case, the Supreme Court has opined on five different appeals arising from the High Courts of Calcutta, Madhya Pradesh, and Madras which raised a common question of law on whether the special allowances paid by an establishment to its employees would form part of the ‘basic wages’ and accordingly attract PF contributions. One of the appeals concerned an unaided school giving special allowance by way of incentive to teaching and non-teaching staff which was reviewed from time to time upon enhancement of tuition fee. In other appeals, the appellants had excluded all allowances such as house rent allowance, special allowance, management allowance, conveyance allowance, education allowance, food concession, medical allowance, not specifically included as basic wages from the perspective of determining PF liability. It was argued in these appeals that only those emoluments that are earned by an employee in accordance with the terms of employment, would qualify as basic wage and discretionary allowances not earned in accordance with the terms of employment would not be deemed basic wage. One of the parties to the case has filed a review petition against the judgment. However the review petition will not impact the decision of the Supreme court in the Vivekananda Case vis-à-vis others as the petition is specific to its facts and the Vivekananda Case simply reiterates the existing position of law.
The principle on what constitutes “basic wages” for the purpose of PF calculation is and has always been the test of “universality”. The EPF Act defines the term “basic wages” in the widest form and has consciously prescribed certain specific exclusions. The rule of thumb therefore is that all emoluments payable in relation to a contract of employment fall under the term basic wages unless it is one of the specific exclusions.
Applying the above principle, the Supreme Court has opined in the Vivekananda Case that where an emolument is universally, necessarily and ordinarily paid to all employees will be ‘basic wages’ for PF calculation. However, where the payment is specifically for those who avail a special opportunity or for special work or in the nature of a special incentive – it does not constitute basic wages. Thus, as per the Supreme Court, only those allowances that are variable in nature, linked to incentive for extra work and not paid to all can be excluded from the definition of basic wages.
The Supreme Court’s decision has created a furore in the labour market, given that, historically the trend seems to have been to calculate PF only on the ‘basic pay’ which is just one of the components of ‘basic wages’. However, the Vivekananda Case has not delved into the fine prints of the EPF Act and EPF Scheme which needs to be applied together with the Supreme Court decision. As per the EPF Scheme, an employer can limit the PF calculation to the wage ceiling of INR 15,000/-. Consequently, the impact of the Supreme Court judgment would primarily affect those employees whose basic pay is less than INR 15000/- and PF contribution was being calculated only on the basic pay.
Nevertheless, the ramification is widespread and financial impact huge. The Supreme Court Judgment is the ammunition EPFO has been waiting for. However, it goes to be seen how will the EPFO use this weapon. Market news indicates that the appeals made by industry associations to the EPFO for a prospective enforcement and not retrospective enforcement has been rejected and the PF authorities have commenced with their inspections.
The time has come for taking expeditious steps by the employers. This perhaps is also an opportune time for the EPFO to consider introducing an amnesty to encourage all defaulters to remedy the default prospectively and condone penalty for past non-compliance to bring about a win-win for all stakeholders.