Making EPF optional in a developing country

The Central government made EPF optional for certain made-up sectors to boost job prospects

The government has walked the path of making Employees’ Provident Fund (EPF) optional for certain sectors to boost employment.

“The Union Cabinet has given its approval to reforms to boost employment generation and exports in the made-up sector (a sub-sector of textiles and apparel)... making employees’ contribution to EPF optional for employees earning less than Rs 15,000 per month,” an official notification said. This basically means it is no longer compulsory for employees earning less than Rs 15,000 per month in such sectors to pay their 12 per cent contribution towards the Employee Provident Fund.

This is a significant departure from the EPF Act that makes the contribution mandatory. According to the Act, employees earning up to Rs 15,000 have to contribute 12 per cent of their basic pay towards the provident fund. The employer must match the employee’s minimum contribution of 12 per cent of basic pay.

This is part of the government’s push to create more jobs in labour-sensitive sectors and labour ministry officials say there is a possibility of stretching such initiatives to other industries, like automobiles, leather and coir. To be sure, both the present and previous governments were looking at amending the EPF Act, but stepped back in the face of opposition from trade unions, which see this as an anti-worker move. This raises the question whether provident fund should be compulsory in India, where social security is virtually absent.

The argument for making provident fund optional is that in a country where the average salary is much lower than world standards, contribution to the fund further reduces take home pay. The EPF Act requires employers to confiscate 45 per cent of the salary of employees whose wages are under Rs 1.8 lakh per annum and hand it over to various programmes and agencies like the Employees’ Provident Fund Organisation (EPFO), Employees’ Pension Scheme, Employees’ Deposit-Linked Insurance Scheme and Employees’ State Insurance Corporation.

“The money does not belong to these organisations or schemes and only a fool will argue that a person’s salary is not actually his to dispose of as he chooses,” says a person who is part of the employers’ lobby group.

More importantly, and painfully, government data is clear that employees with wages this low do not have any savings. It is impossible, or at least very difficult, for them to live on half their salary. According to the employers’ lobby group, the next round of labour law reform must set right this injustice and offer employees three choices in how they would like to receive their salary. “Employees should have three options: to opt out of this contribution when joining; to pay it into his National Pension Scheme account; or to pay it to the EPFO,” the person quoted above says.

Further, experts note, the EPFO faces quintessential problems of a governmental organisation. “The EPFO as a pension fund body should pull up its socks, it needs to handle the corpus more efficiently, and be more receptive to genuine complaints. Employers often find it problematic dealing with it, not for any compliance issue, but acute non-interpretation of the law,” says Atul Gupta, partner, Trilegal.

However, labour unions say making provident fund optional will take away a safety net for bottom of the pyramid workers. “Making it non-mandatory will offer leeway to employers to force workers to opt out. It is an essential security measure for the working class,” says DD Sachdev, secretary, AITUC.

It also goes against the government’s aim of making India a pensioned society. “The objective of this move seems to diverge from the idea of a pensioned society. It is also against the government attempts to bring sectors into the formal economy,” says Subramanyan Sreenivasaiah, chief executive officer of Ascent HR, a consulting firm.

The labour ministry is on a drive to increase the ambit of EPFO. Encouraging firms to enrol their workers under schemes run by EPFO, a three-month campaign has been launched beginning January 1 where employers will be granted amnesty for not registering their employees. It clearly sees no reason to do away with provident fund.