Definition of ‘Wages’ under EPF and Misc Provisions Act

To realize the context and purport of the topic here, a small briefing on the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 is called for:
It was in the context of declining nature of joint family system, there arose a crying need to provide pension products to the employed groups. The Employee Provident Fund Scheme is the most important mandatory retirement scheme applicable to large number of working people in India. As per Preamble to the Act, the EPF Act is enacted to provide for the institution of provident funds, pension fund and deposit lined insurance fund for employees in factories and other establishments. The mandatory schemes cover provident fund, family pension fund and deposit linked insurance in factories and other establishments for the benefit of the employees.
The Employees’ Provident Funds and Miscellaneous Provisions Act is a social security legislation to provide for provident fund, family pension and insurance to employees. Apart from factories, the Employees Provident Funds and Miscellaneous Provisions Act, 1952 applies to establishments wherein 20 or more persons are employed and also for units for which the Centre has issued notification for coverage under Section 1(3) of the Act.
Under the scheme of the Act, Employee has to pay contribution towards the fund. Employer also pays equal contribution. The employee gets a lump sum amount when he retires, which may be useful to him or his family after retirement/death. The Act covers three schemes i.e. PF (Provident Fund scheme), FPF (Family Pension Fund scheme) and EDLI (Employees Deposit Linked Insurance scheme).
Nowadays, PF contribution by the employer is also presented as a part of CTC( Cost to the Company) when MNCs and other Private companies offer positions in their concerns. However, it is true that the Act prohibits the employer from deducting any amount from the pay of the employee towards the employer’s PF contribution.
The EPF Act contains basic provisions in respect of applicability, eligibility, damages, appeals, recovery etc. The three schemes formed by Central Government under the Act make provisions in respect of those schemes.
Applicability of the Act - The Act applies to (a) Every establishment which is a factory engaged in industry specified in Schedule I to the Act and in which 20 or more persons are employed and (b) any other establishment or class of establishment employing 20 or more persons which may be specified by Central government by notification in official gazette. -Central Government can also apply provisions of the Act to any establishment even if it employs less than 20 persons. [Section 1(3)].
In RPFC v. TS Hariharan 1971 Lab IC 951 (SC), it was held that temporary workers should not be counted to decide whether the Act would apply.
Even if the provisions of PF Act are not applicable in a particular establishment, if employer and majority of employees agree, the Central Provident Fund Commissioner can apply the provisions to that establishment by issuing a notification in Official Gazette. [Section 1(4)]. Once the provisions of Act become applicable, it continues to be applicable even if number of employees fall below 20. [Section 1(5)].
Coverage of Act - The Act cover extensively to almost all establishments. The provisions of the Act have been extended to all Factories and Mines other than coal mines.
Other non-factory establishments covered - Besides factories, other establishments employing 20 or more persons can be covered under the Act u/s 1(3)(b). Various notifications have been issued extending the provisions of PF Act to non-factory establishments. Some major among them are -plantation of tea, coffee, rubber [Tea factories in Assam have been excluded under EPF Scheme], mines, coffee, hotels and restaurants, cinema and theatres, trading and commercial establishments engaged in purchase/sale or storage of goods, laundry, canteens, establishments of exporters/importers/advertisers/stock exchanges, establishments of attorneys/ CA / ICWA/engineers/contractors/ architects/medical practitioners, hospitals, Banks doing business only in one State, General Insurance, other financial establishments (other than IFCI, UTI, IDBI, SFC and banks), travel agencies, expert services, clubs and societies rendering services to their members, agricultural farms, building and construction industry, poultry, university, college, schools, scientific institutions etc. ,
The Act has been extended w.e.f. 1.4.2001 vide notification dated 22.3.2001, to courier services, Aircraft or airlines other than aircraft or airline owned or controlled by Government, Establishment engaged in rendering cleaning and sweeping services.
Transitory provisions when Act is extended - It is possible that when PF Act is extended to certain establishment, some PF scheme may be already in existence. Such scheme will continue and the balance amount in such scheme to credit of the employee will be transferred to the Provident Fund under statutory scheme of PF Act. [Section 15].
Establishment to include all departments and branches - Where an establishment consists of different departments or has branch¬es, whether situate in the same place or in different places, all such departments or branches shall be treated as parts of the same establishment. [Section 2A]. - Thus, if factory is covered, the head office and branches will also be covered under the Act.
Where PF Act is not applicable? - Section 16(1) of the Act excludes certain establishments from the applicability of its provisions. Accordingly the Act is not applicable to the following establishments—
(a) Factories or establishments employing less than 20 employees. However, once Act becomes applicable, it continues to apply even if subsequently, the number is lower than 20.
(b) Banks doing business in more than one State,
(c) Coal mines,
(d) Units established under Cooperative Societies Act employing less than 50 workers and working without aid of power,
(e) Other establishments belonging to Central Government or State Governments or under control of them by virtue of a statute and whose employees are entitled to benefits of contributory provident fund or pension;
(f) Tea factories in Assam Exemption granted by Central Government by a special notification.
Administration of the Fund – The Act clearly spells out how the Fund is created and how it is administered. Both employer and employee have to pay contribution at prescribed rates. These amounts are credited to a fund. The fund vests in and is administered by Central Board. [Section 5(1A)].
Employees covered under the scheme – Important highlight of the Act is the definition it has given to the term Employee. As per section 2(f), “employee” means any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment, and who gets his wages directly or indirectly from the employer. It includes any person - (i) employed by or through a contractor in or in connection with the work of the establishment (ii) engaged as an apprentice, not being an apprentice engaged under the Apprentices Act, 1961 or under the standing orders of the establishment.
Thus, (a) Persons employed through contractor in connection with work of establishment are covered (b) Apprentices employed under Apprentices Act or under standing orders of establishment are excluded, i.e. they are not employees. [The model standing orders merely state that an ‘apprentice’ is a learner who is paid an allowance during the period of his training].
ELIGIBILTY:
The Employees drawing salary/wages at the time of joining upto Rs. 6500/- (w.e.f 01.06.2001) are presently governed under the provisions of the Act. However, an employee at the time of joining if happens to be a member of PF with earlier establishment, then in such case he shall be made member of the PF subject to maximum Salary of Rs. 6500/-. The employees drawing salary above Rs. 6500/- can also be brought under the purview of the Act at the discretion of the management and by furnishing a joint undertaking to the Provident Fund authority.
Non-Eligible employees under PF –
i. Employee whose ‘pay’ is more than Rs. 6,500 per month are not eligible. (It may be noted that limit of pay was Rs 5,000 upto 31.5.2001 and Rs. 3,500 upto 30th Sept., 94)
ii. Apprentices as per certified standing orders or under Apprentices Act
iii. Casual employees. However, employees employed through contractors are also to be covered under PF.
When an employee shall join PF: Every employee employed in or in connection with work of a factory or establishment to which the Act applies is entitled and required to become member of Provident Fund, unless he is an excluded employee. An employee who is drawing ‘pay’ above prescribed limit (presently Rs 6,500) can become member with permission of Assistant PF Commissioner, if he and his employer agree.
A person who is already a member continues to be a ‘member’ even if his ‘pay’ exceeds Rs 6,500. However, the contribution is limited to Rs 6,500 only.
Contribution by employer and employee - As per section 2(c) “contribution” means a contribution payable in respect of a member under a Scheme or the contribution payable in respect of an employee to whom the Insurance Scheme applies.
As per section 6, contribution shall be paid by employer @ 10% of his pay ‘Pay’ here means basic wages plus dearness allowance plus retaining allowance.
Equal contribution is payable by employee also. This contribution can be increased to 12% by Central Government and in fact, has been increased to 12% in most of the cases.
Exception to general rule
Lower contribution is permitted in certain exceptional cases although as general rule the employer's and employee’s contribution is 12% each. This excemptions are applicable any establishment registered with Board for Industrial and Financial Reconstruction (BIFR) as a sick company. In such case the lower rate of contribution continues till its net worth is positive. Any other establishment which has accumulated loss equal to or more than its assets and has also suffered cash loss in last two years can also claim such exemption. In the cases of Jute industry, Beedi industry, Brick industry, Coir industry other than the spinning sector, Guar gum factories the contribution is only 10%.

Employees Provident Fund Scheme
This is the main scheme under the Act. Both employer and employee have to pay contribution to Provident Fund. The employer has to deduct contribution of employee from the salary of employee towards employee’s contribution and has to pay both employees’ contribution along with employer’s mandatory contribution by a challan in prescribed form. The amount has to be paid in approved bank.
Employer has the liberty to deduct employee’s share from his salary and pay the same in EPF scheme. However he has to actually make payment of his contribution to EPF. That means to say he cannot deduct his contribution from wages of the employee. Further while deducting employees contribution also, deduction can be only from the wages pertaining to period for which contribution is paid. However, if there is accidental omission, the amount can be recovered later. Amount deducted from salary of employees is held in trust by the employer or contractor.
Option for Employees to pay higher contribution
Employee has to contribute 12/10% of his 'pay' as contribution in consonance with the employer’s contribution. However, the employee is free to voluntarily make higher contribution above the stipulated statutory rate. Neverthless in such cases, employer need not have to match the voluntary contribution, over and above the statutory rate.
Contribution with regard to contract employees
The Principal Employer is liable to pay contribution of his own employees as well as employees employed through contractor. However, Principal Employer is entitled to recover from contractor the amount paid by him on behalf of contractor. The contribution in such cases from both sides also would be the same 12% of ‘pay’ i.e. basic wages, plus dearness allowance, cash value of food concession and retaining allowance. By specific agreements nd covenants in contract, the burden of contribution can be shifted from the employer to contractor. However in case of a claim, the principal employer would not be fully absolved from his liability to ensure PF contributions as per the statute.
Schemes- how employer keeps PF in trust for the benefit of employees
Out of employer’s contribution of 12/10%, the Employer’s contribution of 8.33% will be diverted to Employees’ Pension Scheme. The balance will be retained in the EPF scheme. Thus, on retirement, the employee will get his full share plus the balance of Employer’s share retained to his credit in EPF account. [This diversion is only w.e.f. 16th November, 95. Earlier Employer’s contribution to their credit will continue to remain to their credit].
The Employee Provident Fund Scheme is broadly divided into two parts
a) exempted Provident Fund Scheme and
b) unexempted Provident Fund Scheme.
EXEMPTED PROVIDENT FUND SCHEME.
Under section 16A of the Act central Government upon application by an establishment can authorise to maintain provident fund accounts by itself. By virtue of the powers under section 17 the government can exempt such establishments from the provisions of the Act and scheme framed by the Government there under. In such Exempted Provident Fund Scheme, the employer forms his own Provident Fund Trust for benefits of his employees. The employer executes the Trust Deed, prepares the Provident Fund Rules and nominates the trustees amongst its employees for administering and managing the trust. On formation of Provident Fund Trust the employer has to obtain recognition to the Provident Fund Trust from the Commissioner of the Income Tax and thereafter apply to the office of the Regional Provident Fund Commissioner for granting exemption from the Provisions of the Employees' Provident Fund and Miscellaneous Provisions Act 1952 and the Schemes framed there under. Such recognised and exempted Trust is a separate legal arrangement. The employer pays its monthly contributions to the Trustees who are in charge and responsible for day to day management and administration of the trust including that of doing necessary investments as per the pattern laid down in Rule 67 of the Income Tax Rules 1962.
Notwithstanding such exemption granted, as per Sec. 17 provisions of Sec. 6, 7A, 8 and 14 (b) of the Act would be applicable with respect to the Employer in such exempted scheme also. Section 7A deals with adjudication, Section 8 is mode of recovery of money from Employers and Sec. 14(b) is the power to recover damages by Central Government from the Employer.
The important issue concerned with the Act is with regard to the definition and purport of the term Basic wages used in it. It is perhaps controversial to see this aspect in detail

BASIC WAGES

Basic wages is defined under Sec. 2(b) of the Act, as follows.
Sec.2 (b): “basic wages” 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 with the terms of the contract of employment and which are paid or payable in cash to him, but does not include—
(i) the cash value of any food concession;
(ii) any dearness allowance (that is to say, all cash payments by whatever named called paid to an employee on account of a rise in the cost of living) house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) any presents made by employer;
Production bonus is outside the definition of basic wages since the word “bonus” in clause (ii) of sec.2 (b) has been used without any qualification. Bright & Roof Co. (1) Ltd. V. Union of India 1962 II LLJ 490.
Overtime is something does not on time but thereafter. If extra work is done on time, it would not come within the definition of overtime. In other words extra payment for work done beyond the fixed norm and done during normal hours is wages.

While the definition excludes Dearness allowance, interestingly under Sec. 6, Dearness allowance is included for the purpose of computing the contribution to be made by the Employer.

As per the definition given in the Employees Provident Funds & Miscellaneous Provisions Act, 1952, as amended through EPF Amendment (Scheme 2001) excluded employee means, an employee whose pay at the time he is otherwise entitled to member of the fund exceed Rs.6,500/- per month. In the explanation, it is said “pay includes basic wage with DA, retaining allowance if any and cash value of food concessions admissible thereon”. Wherever exempted scheme is available and is operated by the Employer as authorised under Sec. 16 and 17 of the Act, it is open to the Employer to fix the aforesaid sum. However, it would be mandatory that such sum shall not be less than Rs.6,500/- as Rs.6,500/- is the stipulated amount as per the scheme framed by the Central Government. Hence, keeping the ceiling amount, the sum more than Rs.6500/- will not have any effect on the validity of the scheme. Even under the Central Government Scheme, it says that the Member of the fund shall continue to be a Member until he is exempted under Sec. 17 or he withdraws the entire amount.

This would mean that it is optional for the Employee and Employer to make a scheme applicable to such an employee receiving more than Rs.6,500/-. However, it says under the Central Government Scheme that the contribution from the Employer in such a case of Member would be limited to the amount payable on a monthly pay of Rs.6,500/- including DA, Retaining allowance if any and cash value of food concession. BEML has adopted the contents of the Central Government Scheme under its PF Trust Deed and has made applicable almost all the provisions under the Central Government scheme to its PF scheme. Accordingly, the excluded employee as per BEML PF Trust also remains to be those who receive a pay below Rs.6,500/- and while there is no bar for other employees whose pay exceeds Rs.6,500/- remaining to be a Member of the scheme, the contribution by BEML has to be restricted as per the provisions of the Trust Deed on contribution payable of Rs.6,500/-.

The definition of wages, under Sec. 2(b) of the Act, and Sec. 6 of the Act, has been subject to examination by various Courts of the Country, including Supreme Court.

The same has been settled through the order of the Supreme Court in Manipal Academy of Higher Education –Vs- PF Commissioner in Appeal No. 1832/2004 decided on 12.3.2008 which was against an order of Karnataka High Court. The said case while overruling the decisions of the Karnataka High Court and Bombay High Court in Hindustan Lever Employees' Union v. Regional Provident Fund Commissioner and Anr. (1995 (2) LLJ. 279) has relied on Bridge & Roof Co., (India) Ltd., -Vs- Union of India 1963 (2) SCR 978 and Jay Engineering Works Ltd., & Others –Vs- Union of India & Others 1963 (3) SCR 995 and has clarified that even though the statute is for the benefit of the Employees, concept of beneficial interpretation can only be applied when there are two views possible and as the statute and its intend is clear from the provisions, the same has to be strictly applied to. The ourt reiterated that the concept of beneficial legislation is misplaced philanthropy where the statutes and principles underlying it are clear and the question is no longer res integra (Jay Engineering Works Ltd. and Ors. v. Union of India and Ors. (1963 (3) SCR 995).

The dispute in the MAHE case is whether the amount received by encashing the earned leave is a part of "basic wage" under Section 2(b) of the 'Act' requiring pro rata employer's contribution. In the case the Regional Provident Fund Commissioner (RPFC) held that the amount received on encashment of earned leave has to be reckoned for the purpose of Section 2(b) of the Act. Accordingly, demands were raised. Appeal was preferred before the Employees Provident Fund Appellate Tribunal ('Tribunal') which held that it is not part of basic wages. However, it was observed that a different view was taken by the Bombay High Court and, therefore, the respondent in the appeals i.e. the Commissioner should take up the matter before the Karnataka High Court. Accordingly, Writ Petitions were filed before the Karnataka High Court. A learned Single Judge allowed the Writ Petitions and set aside the impugned orders. The Writ Appeals before the Karnataka High Court were also dismissed which was challenged before Supreme Court.

After analysing various judgements from High Courts finally the Supreme Court came to the conclusion that “the term 'basic wage' which includes all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in accordance with the terms of the contract of employment can only mean weekly holidays, national holidays and festival holidays etc. In many cases the employees do not take leave and encash it at the time of retirement or same is encashed after his death which can be said to be uncertainties and contingencies. Though provisions have been made for the employer for such contingencies unless the contingency of encashing the leave is there, the question of actual payment to the workman does not take place. In view of the decision of this Court in Bridge Roof's case and TI Cycles's case -TI Cycles of India, Ambattur v. M.K. Gurumani and Ors. (2001 (7) SCC 204), the inevitable conclusion is that basic wage was never intended to include amounts received for leave encashment”.

Supreme Court highlighted its decision in TI Cycles of India, Ambattur v. M.K. Gurumani and Ors. (2001 (7) SCC 204) were it was held that “incentive wages paid in respect of extra work done is to be excluded from the basic wage as they have a direct nexus and linkage with the amount of extra output. It is to be noted that any amount of contribution cannot be based on different contingencies and uncertainties. The test is one of universality. In the case of encashment of leave the option may be available to all the employees but some may avail and some may not avail. That does not satisfy the test of universality”. The court also referred to its observation in Daily Partap v. Regional Provident Fund Commissioner (1998 (8) SCC 90) where the test was arrived as uniform treatment or nexus under- dependent on individual work.

The Apex Court therefore held that no contribution is to be made on encashed leave amounts either from employees or employer as leave encashment amount does not fall within the purview of the wages as per the Act.

In conclusion, it could be said that the Employer is at liberty to join his Employees as Members to the PF scheme if it has exempted PF scheme which provides so. However, if the Employer is covered under the Central Government PF scheme, there is nothing necessitating joining such Employees to the scheme.

The Supreme Court in MAHE case relies on the Bridge Roof's case in which the basic principles as laid down on a combined reading of Sections 2(b) and 6 as follows:

(a) Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.
(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.
(c) Conversely, any payment by way of a special incentive or work is not basic wages.

In the wake of the judgement of the supreme court in MAHE case, it is still not clear why the ‘basic wages’ is defined so under section 2(b) of the Act as the Section 6 even though clearly manifest the purport does not conform to such definition. Hence it can be concluded that this is an anomaly crept in the Act and has to be corrected by way of amendment and it does not matter whether courts recognize it so or not.