Splitting of Minimum Wages for PF Contribution purposes

Splitting of Minimum Wages into basic wages and other allowances for PF Contribution purposes

As per section 2(b) of the EPF Act, Provident Fund (PF) is to be contributed on “basic wages” which means, all emoluments which are earned by an employee while on duty or in accordance with the terms of the contract of employment and which are paid or payable in cash to him. EPF Act does not specify or define any amount as basic wages and hence, it dependents on contractual agreement between the employer and employee.

On the above subject, Additional Central Provident Fund Commissioner (Compliance), EPFO, New Delhi has issued Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011 instructing the PF authorities to ensure that PF is deducted on applicable minimum wages. The aforesaid circular escalated controversies pertaining to the definition of Basic wages on which deduction of PF needs to be made.

The definition of “basic wages” as per section 2(b) of the EPF Act makes it clear that allowances and incentives are not to be treated as part of the basic wages. This has been upheld by Punjab and Haryana High Court in a writ petition No.15443/2009 between APFC vs.G4 Security vide order dated 1 February 2011. Punjab and Haryana High Court has opined that minimum wages can be bifurcated into allowances and PF contribution is not required to be deducted on allowances even when the same are part of the minimum wages.

The following valid arguments are put forth by Employers:

There can be practical difficulties in implementing the Said Circular even if the same were to be implemented. The minimum wages fall under the State powers and are determined by each State Government independent of each other. Even the definition of minimum wages as adopted by different State Governments varies from state to state. Therefore, it would be difficult to link the same with the EPF and MP Act, 1952, which is enacted by the Central Government. An internal circular issued by the EPF department is not binding on the employer and the validity of the same can be challenged in Courts of law.

The Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23 May 2011 regarding splitting of wages for the purpose of PF contribution is kept in abeyance in view of verdict given by Punjab and Haryana High Court in a writ petition No.15443/2009 (LPA 1139 of 2011)between APFC vs.G4 Security vide order dated 1 February 2011 till there is a Supreme Court ruling in the matter SLP(C) NO 20085/2011 filed by EPFO against the above decision of High Court of Punjab & Haryana

EPFO Circular dt. 2 Dec. 2011 reg. Circular dt 23 May 2011 to be kept in Abeyance

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