APPLICABILITY OF PF - SOURCE DELOITTE

AUDIT ALERT ON THE APPLICABILITY OF PROVIDENT FUND (PF) ON ALLOWANCES

Many companies have been taking a view that “Basic Wages”, for the purpose of determining the PF liabilities, represent only the Basic Salary and Dearness Allowance, if any, as per the terms of the employment contract. Normally, the amounts of additional allowances paid to employees are not being considered for the purposes of PF computations.
Recently, the Honourable High Court of Judicature at Madras passed an order dealing with the issue of whether various employee allowances paid by employers would get covered within the definition of “Basic Wages” under Section 2(b) of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (the Act), read with Section 6 of the Act. Pursuant to the same, the Employees Provident Fund Organization has issued clarification dated 29th June, 2011 to various Officers/Commissioners asking them to take note of this judgement and utilize the same as per merits of the case as and when similar situation arises in the field offices. There has also been a similar clarification dated 21st June, 2011 issued by the Employees Provident Fund Organization on a similar matter pursuant to a judgement of the Honourable High Court of Madhya Pradesh (Gwalior Bench).
In both the above judgements, it has been held that allowances like conveyance/transportation/special allowance/education/food concession/medical/ city compensatory, etc. are to be treated as part of “Basic Wages” under the Act for the purpose of determination of the Provident Fund (PF) liabilities if the same are being uniformly, necessarily and ordinarily paid to all employees.
The key principles emerging from the deliberations in the above judgments are:
• If the payments are of such a nature that they are uniformly, necessarily and ordinarily paid to all employees across the board based on the terms of the employment contract in the ordinary course of employment, they should be treated as “Basic Wages”.
• Even if the payments are not part of the employment contracts but have been agreed upon based on a settlement entered into between employees and the employer, then by necessary implication the same would become part of the contract of employment and would need to be treated as “Basic Wages”.
• Where such payments are made only to those employees who avail of the opportunity, the same would not be considered as “Basic Wages”. Thus, if a payment is made only to some employees who meet a certain specific criteria above the standard norm set by the company, the same would not be covered under “Basic Wages” since the same is not paid uniformly to all employees across the board.
• Payments that are based on contingencies, like performance bonus, etc. would not be made part of “Basic Wages”.

In light of the aforesaid High Court Orders and the PF Department’s clarifications, some of the allowances paid by the companies that have hitherto been excluded from “Basic Wages” for the purpose of determining the PF liability, could be considered as coming within the purview of “Basic Wages” and, therefore, be included for purposes of determining the PF liability. Therefore, the principles of whether the above type of allowances paid would get covered under “Basic Wages” may have to be re-examined by companies based on the actual facts and circumstances applicable to them as this matter could have a significant impact on companies, considering the largely prevalent practice of not including such allowances for determining the PF liabilities.
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;
(iii) any presents made by the employer;