The Employees’ Provident Fund Organization, Ministry of Labour, Government of India (“EPFO”) has recently issued a circular on 6 August 2014 (“Circular”) pursuant to which it has directed the officers-in-charge of the EPFO field offices to inspect all establishments where the employers have deducted provident fund contribution on fifty percent (50%) or less of the total wages paid to their employees. As per the Circular, the said inspection has to be completed by the field officials by 31 August 2014 and the report needs to be submitted to the EPFO head office by 7 September 2014.

Reason for the issuance of the circular

The provident fund contribution payable by the employer under the Employees Provident Funds Scheme, 1952 is calculated on the total of basic wages, dearness allowance (including the cash value of any food concession) and retaining allowance, payable to each employee to whom the said scheme applies. Basic wages, as defined in Section 2(b) of the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (“EPF Act”), includes all emoluments which are earned by an employee while on duty but excludes cash value of food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee and any presents given by the employer to his employees.

EPFO has been observing that many employers split the total wages payable to their employees into several allowances in such a way that the said allowances are covered under the category of exclusions provided under Section 2(b) (as explained above), thereby encouraging the subterfuge of splitting the wages to reduce the provident fund liability.

Accordingly, in order to chart out the establishments which are following the aforesaid practice, EPFO has instructed to inspect all establishments where the employers have deducted provident fund contribution on fifty percent (50%) or less of the total wages paid to their employees.

Overview of the EPF act

EPF Act is a social security legislation to provide for provident fund, pension and insurance to the employees working in factories and other establishments. In terms of the EPF Act, both employer and employee are required to contribute a prescribed percentage of the monthly salary of each employee towards the employees’ provident fund.