Does the relaxation on PF contribution rates really benefit employers

As part of the ‘Atmanirbhar Bharat’ (Self-Reliant India) campaign, which is the Central Government’s initiative in its war against the Covid-19 pandemic, the Ministry of Labour and Employment (“EPF Amendment”) through a notification dated May 18, 2020, has introduced an amendment to the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”).

The EPF Act is the key social security legislation in India, under which both the employer and employee are required to contribute a certain percentage of the employees’ salary to the Employees’ Provident Fund Organisation (“EPFO”) (or to a trust in case of exempted establishments). Pursuant to the EPF Amendment, read with the FAQs dated May 20, 2020 issued by the EPFO (“FAQs”)[1], the statutory rate of provident fund (“PF”) contributions under the EPF Act, for both employers and employees, has been reduced from the existing 12 percent to 10 percent, for the months of May, June and July, 2020. The EPF Amendment is applicable to all establishments except: (i) Central/State Public Sector Enterprises; (ii) establishments owned or controlled by the Government; and (iii) establishments covered under the Pradhan Mantri Garib Kalyan Yojana (for whom the Central Government is already contributing both the employer’s and employee’s share – at the rate of 12percent – for the period from March to August 2020). The EPF Amendment is expected to benefit more than 40 million members of the EPFO and more than half a million establishments.

The EPF Amendment has been promulgated with the aim to provide liquidity in the hands of employers and employees. Simply put, since the employer and employee will both be making PF contributions at the rate of 10 percent instead of 12 percent, the cash equivalent of 2 percent of the employees’ salary will become available to both the employer and employees. However, there are various nuances that add a few layers of complexity, which this article attempts to discuss.

Impact on employers following a CTC Model

It is a common practice across industries to indicate the salary package of an employee in terms of a cost-to-company model. Under such a model, besides the salary and allowances of an employee, the total remuneration of an employee also includes other costs which are covered by an employer, including premium paid towards any group insurance policy and retirals such as gratuity and employer’s share of the PF contributions. (“CTC Model”). The terms of the CTC Model are regulated contractually between an employer and an employee and given that all components under the CTC Model form part of the total remuneration package, it is generally assumed that the employee is entitled to all components of CTC, subject to any exceptions under the employment contract. Even though the EPF Amendment specifically states that it aims to provide liquidity to both employers and employees and does not make any exception for employers following a CTC Model , the FAQs and Press Release[2] issued by the EPFO indicate that employers adopting the CTC Model will not be able to derive the benefits of the EPF Amendment, and any benefit will have to be passed on to the employee. In other words, employers adopting the CTC Model will not get the benefit of the 2 percent following a reduction in their PF contribution to 10 percent and the same will have to be passed on to the employee. In effect, this will result in a cumulative increase of 4 percent in the take-home salary of the employee (2 percent from the employee’s share and 2 percent from the employer’s share). However, there may be provisions in the terms of employment which could alter the above position, and the same would have to be analysed before an employer can definitively conclude on this issue.

For employers who do not follow the CTC Model, the EPF Amendment will definitely create greater liquidity since there will be a direct reduction of employers’ outflow towards PF contribution by 2 percent per employee.

Reduction in contributions whether mandatory

Question 12 of the FAQs clearly indicates that the reduced rate of contribution (10 percent) is the minimum rate and the “the employer, employee or both can contribute at higher rate also”. Therefore, while it is clear that it is not mandatory for an employer to remit contributions at the reduced rate of 10 percent, the question remains who gets to opt for the higher rate of contribution — the employer or the employee. There may be a few different scenarios that need to be considered.

Section 6 of the EPF Act allows an employee to contribute at a higher rate if he desires, subject to the condition that the employer will not be under an obligation to contribute at such higher rate. Therefore, the employee may choose to continue contributing at 12 percent (or higher) while the employer may restrict his share to 10 percent only, if he so wishes.

If an  employer, not following the CTC  Model, wants to continue making his contributions at 12 percent  (or more), he may do so at his discretion. If the employer is adopting the CTC Model and wishes to raise PF contribution beyond 10 percent, he would need his employees’ consent (subject to the terms of employment), since they have a contractual right to this amount, and the intent of the EPF Amendment is to provide financial liquidity to the party entitled to the said amount. For an employer intending to increase the employees’ PF contribution beyond 10 percent whether or not the CTC Model is followed, the employees’ consent will have to be sought. Do note that tax exemptions and benefits are available in respect of contributions under the EPF Act, and if there is a reduction in the amount of contributions, these exemptions and benefits will no longer be available in respect of the differential amounts that are not contributed pursuant to the EPF Amendment.

Since it is clear that various combinations are possible for payment of PF contributions by the employer and employee, it would be best to ensure that appropriate consents from the employees are obtained to avoid any claims on a later date.

Impact on exempted establishments

Section 17 of the EPF Act read with the corresponding scheme provides for certain establishments to be exempted from the scope of the EPF Act. Such establishments operate their own trusts and provide PF benefits to employees under the rules of their trust. It needs to be analysed whether the EPF Amendment would be applicable to such establishments or not.

The EPF Act and corresponding schemes make it clear that an establishment’s PF rules must not provide for rates less favourable than that specified in Section 6 of the EPF Act (which is the provision that the EPF Amendment relates to) and that  “any amendment… which is more beneficial to the employees than the existing rules of the establishment, shall be made applicable to them automatically pending formal amendment of the rules of the trust”. It is, therefore, clear that the benefits under the EPF Amendment will also have to be implement in the exempted establishments, as has also been expressly stated in the FAQs. There is no clarification on whether the rules of the trust need to be amended, and it would be recommended to confirm if the rules itself provide any guidance in this regard. In its absence, it may be inefficient to amend the rules considering the brief period for which these relaxations are in place. If the relaxations are extended for a significant period of time, amendment of the rules should be considered for good order.

Other PF relaxations

Employers and employees have already been provided certain other relaxations under the EPF Act such as extension for employers in the date of filing the electronic challan cum return for the month of March 2020 and permitting employees (employed in areas declared as affected by the pandemic) to withdraw a non-refundable advance of 75 percent of their PF accumulation or three-months wages, whichever is lower. Recognising the fact that employers are faced with operational and economic difficulties during this time, the EPFO has also informed all commissioners and regional heads not to impose penal damages against employers for delay in filing of contributions during the lockdown. The FAQs now clarify that even such employers who are unable make timely payments will be able to avail the benefits of the reduced rate of the contributions under the EPF Act, irrespective of the date of payment.

While the EPF Amendment presently finds application for only 3 months, there is a reasonable likelihood of the Government extending this period considering the deep economic distress that employers and employees will be reeling under, even in the aftermath of the pandemic. Policy decisions in this space are evolving rapidly and it is recommended to stay updated with and closely monitor the Government’s measures as subsequent policy decisions or clarifications may alter the position as it currently stands.

*The authors would like to thank Richa Mohanty Rao, Partner for her inputs