The Employees Provident Fund Organization (EPFO) has recently issued instructions to all deputy, regional and assistant PF Commissioners on various subjects under the EPF Act (Guidelines). We have discussed the Guidelines and some of the essential clarifications they provide in this update.
Limitation Period for Inquiries and Investigations
The EPF Act and the Schemes do not contain a limitation period for the initiation of inquiries against an employer. Due to this, it was common to see authorities initiate inquiries to assess compliances right from incorporation of entities (which in some cases could be a 15-20 year period or even more). Such open ended inquiries were extremely difficult to manage for most entities.
Under the Guidelines, all PF commissioners have now been instructed to ensure that no inquiry/investigation shall ordinarily go beyond seven years, i.e., it shall cover the period of default not exceeding the preceding seven financial years. However, this is not an absolute rule. PF authorities could conduct longer investigations if they have verifiable complaints or information to warrant the same. In such a case, the EPFO may require the following documents for examination:
(a) Appointment letters;
(b) Pay slips;
(c) ID Cards;
(d) ESI Cards;
(e) Copy of bank account statements indicating the credit of salary, etc. from the employer; and
(f) Any document issued by employer to the employee.
Since the Guidelines are merely instructions meant to guide PF Commissioners, there may be instances where the authorities consciously choose to pursue enquiries for a longer period. Therefore, it would be advisable to continue to retain all documentation that is (i) mentioned above; and (ii) required to be maintained under the EPF Act, even if such documentation relates to an earlier period.
Returns and Filings
In order to ensure clarity on the contributions payable, and to keep track of compliance in relation to contract and deputed workforce, the EPFO is introducing several changes to the return filing and reporting requirements set out under the EPF Scheme. These include the following -
E-filing by Principal Employers and Contractors
Earlier, by a notification dated 4 May 2012, the EPF Scheme was amended to require all employers to file all returns electronically. These Guidelines now clarify that all principal employers are required to file returns and make provident fund contributions electronically in respect of all employees, regular and contractual, through the ‘Electronic Challan and Return’ system introduced by the notification mentioned herein. The Guidelines further state that contractors and establishments, which employ workers who are in turn deputed to other establishments on a contractual basis, are now required to mention the EPF codes of the establishments to which the said employees have been so deputed. The Guidelines propose the introduction of new filing systems where additional columns for this entry will be provided. Once these filing systems have been updated, all establishments which depute employees to other establishments on a contract basis will be required to obtain information regarding the EPF code numbers of the deputee establishments and include this as part of their returns.
So far, the practice has been for the principal employers to ensure that their contractors (who are independently registered under the EPF Act) are complying with the provisions of the EPF Act (including contributions and return filing) and are providing proof of the same on a monthly basis to the principal employers. It appears that these Guidelines want to reverse the onus and make the principal employer primarily responsible for contractual employees as well under the EPF Act. Such a departure from established practice may make it harder for principal employers to manage their compliances, and it would have to be seen over time whether authorities actually insist on revising the established practice.
It is important to note that employers, who fail to comply with the provisions set out above, are punishable in accordance with the provisions of the EPF Act. These penalties could include imprisonment for up to six months but not less than one month and a fine of Rs 5,000.
Definition of Basic Wages
The Guidelines have further attempted to clarify that all allowances which are ordinarily, necessarily and uniformly paid to the employees are included within the definition of ‘Basic Wages’.
Many companies follow the practice of only paying PF on the basic wages and dearness allowance components of the employee’s salary, on the basis that the legal definition of basic wages (under section 2(b) of the EPF Act) excludes various allowances. The Guidelines identify that the primary point of confusion in the definition of wages arises from the expression stating that "commission or any other similar allowance payable to the employee" are excluded. They point out that the expressions "commission" and "any other similar allowance" have till now been read as two separate expressions and that such an interpretation allows an employer to split the wages of an employee into several allowances, which could then be excluded for provident fund contributions. In order to avoid this splitting of wages, the Guidelines clarify that the expression "commission or any other similar allowance payable to the employee" must be read as a single expression. Accordingly, the term any other similar allowance would actually refer to any other allowance which is in the nature of a commission.
It must be noted that the question of whether certain allowances payable to employees could be treated as 'Basic Wages' is not entirely new, and has been put to test before various courts in the past. Courts have on several occasions held that allowances that are universally, necessarily and ordinarily paid to all employees across the board and are not incentive payments are to be considered as basic wages for the purpose of making provident fund contributions. On this basis, allowances such as transport allowance, conveyance allowance, special allowance, canteen allowance, washing allowance, medical allowance and food and entertainment allowance etc that are regularly paid to all employees are now considered to be 'Basic Wages'.
Having said this, it is important to note that so far there has been no amendment to the EPF Scheme which allows employers to limit PF contributions to only Rs. 6500, even if the employee may be earning a higher salary. Such being the case, these Guidelines on splitting of wages may present little real risk to employers who already pay basic wages above Rs 6500. However, in the event employees earn less than Rs. 6500 as the basic wages and dearness allowance, the PF authorities may insist that other “universally, necessarily and ordinarily” payable allowances be included for the purpose of PF contributions for such employees.
 Montage Enterprises Private Limited v. Employee Provident Fund and Anr MANU/MP/0503/2011 (Review Petition No. 82/2011 of Madhya Pradesh High Court, Gwalior Bench, decided on 22 November 2011)
 Surya Roshni Ltd v Employee Provident and Anr 2011 LLR 568
 Management of Reynolds Pens India Private Limited v. Regional PF Commissioner – II 2011 LLR 876