PF lens on companies tweaking pay to reduce contributions

NEW DELHI: In a bid to protect the retirement benefits of low-wage workers, the provident fund ( PF) department has instructed its officers to crack down on companies that structure employees' salaries into different allowances to reduce contributions.

The Employees' Provident Fund (EPF) Act of 1952 mandates all firms with 20 or more employees to remit 24% of workers' salaries into their retirement account. EPF contributions are mandatory for workers earning up to 6,500 a month while those earning a higher salary can contribute on a voluntary basis.

EPF is not payable on the house rent allowance component in workers' salaries.

In several sectors such as private security and construction, companies tend to split workers' salaries into basic pay and special allowances like overtime or night duty. This, according to senior EPFO officials, is aimed at reducing companies' burden on statutory EPF dues.

According to an internal circular issued on November 30, the EPFO has clarified that all allowances that are 'ordinarily, necessarily and uniformly paid' to employees must be treated as part of the basic wages. The lack of clarity on this issue, it said, was 'encouraging the subterfuge of splitting of wages to exclude the PF liabilities.'

Companies that split their workers' wages to evade paying PF on their entire basic pay typically cite the definition of wages in the EPF law which includes the expression 'commission or any other similar allowance payable' to the employee. "Commission and any other similar allowance are read as two separate expressions and hence 'any other allowance' is read as an omnibus exclusion," the department's circular noted. "The expression commission or any other similar allowance is one continuous term," it clarified.

States like Punjab have already woken up to employers' practice of splitting wages to deny benefits to low-income workers.

In February this year, Punjab added a clause to its minimum wages law that bars firms from bifurcating the minimum wages paid to workers.