The flexibility exercised by employers and the provident fund authorities in the definition of basic wages has finally caught the attention of the Employees Provident Fund Organisation (EPFO). It has sought to clarify the definition of basic wages based on which provident fund is calculated seeking to include payments made by employers under sundry heads to ensure that the basic wages remain small.
The clarification is meant to help workers get higher PF contributions from employers, PF officials said, adding that only an amendment in the EPFO Act can ensure that allowances do not eat into basic wages or that the latter is as big as the minimum wages.
The Central Provident Fund Commissioner has in a circular issued on November 30 clarified the definition of basic wages based on which provident fund is calculated for workers.
Workers pay 12% of their basic wages and employers are obliged to pay a matching contribution. The circular addresses a rampant practice of splitting basic wages to reduce the amount payable under PF. So basic wages are split to numberable other allowances on which PF need not be paid.
The clarification titled Splitting of Wages says that basic wages "encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages."
As per the EPFO Act PF does not cover certain "specified exclusions" like "cash value of any food concession; any dearness allowance... all cash payments by whatever name 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 ...."
However, the circular does not specify any criterion for identifying those allowances which are not excluded from PF.
A senior EPFO official said that the clarification is just a reiteration of what the EPF Act says and is meant to stop the exploitation of workers by employers. It is meant to minimise the discretion that is now exercised by employers and PF officials in calculating the PF contributions to be deducted from workers.
He said that splitting of wages has kept a lot of workers outside the social security cover of PF. Since only those drawing up to Rs 6,500 are covered under PF, splitting basic wages shows a bulk of the amount to be house rent allowance or some such allowance on which PF need not be given, says the official, adding that the law itself needs to be amended if the distortions are to stop completely.
The law itself does not provide an exhaustive list of allowances on which PF cannot be or can be calculated, he says.
| WHAT THE EPF ACT SAYS EPF Act 1952 Section 2(b)ii (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 name 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; |
AD Nagpal representative of trade unions in the Central Board of Trustees in the EPFO said that a committee formed to suggest amendments to the Act had suggested that minimum wages should be fixed as basic wages and allowances if any should be besides this amount.
At present, if the basic salary is Rs 5,600, the employer shows the house rent allowance as Rs 3,500 or more. Since HRA is excluded from PF, the worker's PF contribution would be tiny, and that helps the employer who has to pay only a small amount as matching contribution, he explains.
BP Pant, director labour employment in FICCI agrees that the minimum wage should be fixed as basic wages to stop unfair distortions of the law by employers. The clarification by the PF authorities helps in bringing some clarity to the law, he said.
| EPFO ON SPLITTING OF WAGES Basic wages by its own definition encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages. The confusion in definition of wages (and hence the issue of splitting of wages) primarily arises from the expression commission or any other similar allowance payable to the employee" in Section 2(b) (ii) of the Act as "commission" and "any other similar allowance" are read as two separate expressions and hence "any other allowance" is read as an omnibus exclusion, thereby encouraging the subterfuge of splitting of wages to exclude the PF liabilities. The expression "commission or any other similar allowance payable to the employee" is one continuous term meaning commission or any other "commission" like allowance by whatever nomenclature referred. Thus "basic wages" is subject to exclusions expressly referred to in the above definition and no other." |
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- EPFO circular dated November 30 |
However, the circular does not equate basic wages with minimum wages for which an amendment might be needed. For that an amendment is needed, say PF officials.
