India: Ministry of Labour and Employment proposes to amend the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952

The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (“Act”) is one of India’s most important social security legislation for employees. It is applicable to every establishment employing 20 or more persons, which is either a factory engaged in any industry specified in Schedule – I of the Act, or an establishment to which the Act has been made applicable by the Central Government by notification in the Official Gazette.

The Ministry of Labour and Employment has introduced the draft of the Employees’ Provident Fund and Miscellaneous Provisions (Amendment) Bill, 2019 (“Bill”) to significantly amend certain provisions of the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952. The Bill has been introduced with the intention of addressing issues that have been the focus of several litigation proceedings in the past, especially ‘basic wages’ and ‘allowances.’

The major amendments under the Bill are as follows:

1. Substitution of the definition of ‘wages’ in place of the existing definition of ‘basic wage: Under the Act, the basis for determining an employer or employee’s provident fund (‘EPF’) contribution is basic wage, dearness allowance and retaining allowance. The proposed amendment seeks to fix components of remuneration paid. In this regard, the Bill suggests that, if identified components of wages paid are above 50%, or such other percentage as may be notified later, then such components, as per the percentage identified, will be included in the definition of wages. Accordingly, a new definition of ‘wages’ has been introduced in the Bill, which will amend the existing definition of ‘basic wages.’ The said definition of wages is in conformity with the definition provided in the Code on Wages, 2019, passed earlier this year by the Parliament and assented to by the President of India on 8 August 2019.
2. Flexibility with the Central Government to specify rates of contribution and the period for which such rates shall apply for any class of employees: The Bill proposes to introduce a concept where the Central Government will have the flexibility to specify rates of contribution and the period for which such rates shall apply for any class of employees. The rates of contribution will depend on various factors like age, income and gender. No change in the employer’s contribution has, however, been proposed. This move is a logical step, after an announcement was made under paragraph 62 of the budget of the financial year 2015-16, which set out that, for employees below a certain monthly income threshold, contributions to EPF should be optional, without affecting or reducing the employer’s contribution.
3. Introduction of a period of limitation to initiate inquiries under Section 7A of the Act: Section 7A of the Act does not provide any period of limitation for the concerned authorities to initiate inquiries or settle disputes regarding (i) the applicability of the Act; and (ii) the determination of the amount due from any employer under any provision of the Act. The Bill proposes an amendment to Section 7A(1) of the Act to introduce a limitation period of 5 years for this purpose.
4. Enhancement in the quantum of fines and penalties: The Bill proposes to enhance the quantum of fines, in pecuniary terms, by ten times.
5. Composition of certain offences under the Act: The Bill proposes to introduce a new section, Section 14AD, which provides for the composition of certain offences under the Act, except those specified in sub-section (1), sub-section (1A) and sub-section (1B) of Section 14 of the Act.
6. Option to subscribe to the National Pension System (the “NPS”): The Bill proposes to insert new sections, Sections 16B and 16C, under the Act, to provide an option to the EPF subscriber to opt for the NPS in lieu of benefits under the Act. The subscriber will also have an option to revert to the benefits under the Act. This amendment is also being tabled as a subsequent step to the announcement made under paragraph 62 of the budget of the financial year 2015-16.
7. Introduction of guidelines for the grant of exemption under the Act: Currently, the Act does not stipulate any pre-condition for the grant of exemptions. Given this, the Bill proposes to introduce guidelines for the grant of exemption under the Act on lines such as past performance, net worth and group performance, as well as minimum strength of workers, collections, contributions and corpus of establishments.

The proposed amendment to the Act is a positive step towards providing an inclusive and wholesome workplace to the employees. Particularly, the revised definition of ‘wages’ is likely to have a significant impact for employers in India, particularly for expatriate employees.

The financial liability for employers (for retrospective periods), especially in the case of international workers, has been a matter of grave concern. While the liability for the past non-compliances will not be eliminated, the Bill will help to bring about some method and uniformity by introducing a fixed limitation period. The Bill proposes to introduce a provision on limitation for actions under the Act. The proposal is in line with similar principles provided in legislation such as the Employees’ State Insurance Act, 1948 (prescribing a limitation period of 5 years) and the Income Tax Act, 1961 (prescribing a limitation period of 7 years). This step is likely to ensure effective compliance and uniformity, and also reduce the element of uncertainty for businesses across all sectors. The biggest take-away and relief for employers once the Bill is enacted would be the introduction of a much-needed limitation period under the Act. Which of the proposed provisions will be introduced with retrospective effect, and which with prospective effect, remains to be seen.

Given the fact that the penalties under the Act were last revised in 1988, the proposal to increase the penalties seems to be in line with the Indian government’s desire to be far more stringent with the compliance obligations of employers. The Indian government also seems to be trying its best to address the industry’s demand of providing higher take-home salaries for certain categories of employees.