Introduction
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is a socio-beneficial welfare legislation intended to provide adequate social security to member employees in their old age and infirmity. The EPF Act is mandatorily applicable to every establishment employing 20 or more employees (covered establishment/employer) and the EPF Act and the Employees’ Provident Funds Scheme, 1952 (EPF Scheme), together envisage contributory provident fund (PF fund). The PF fund is regulated and managed by Employees’ Provident Fund Organisation (EPFO); a statutory body constituted by the Central Government.
The EPF Act and EPF Scheme encompass within their scope all the employees in a covered establishment that were previously members of the PF fund or new member employees drawing “monthly pay” (inclusive of basic wages, dearness allowance, retaining allowances and other ordinarily payable allowances) of up to INR 15,000 (eligible employees/employee). Under the scheme of law, all the eligible employees mandatorily contribute 12% of their “monthly pay”, and an equal contribution is compulsorily made by the covered establishments for all its eligible employees. While the entire contribution by the employee goes towards the PF fund, only 3.67% of the contributions by the covered establishment go towards the PF fund and the balance 8.33% of the said contribution goes to the employees’ pension fund.
The EPF Act is a unique substantive law, with a social welfare goal, providing within itself means and procedure for its enforcement. (Ref. Bank of India v. Provident Fund Commr.[1]) One such provision is Section 7-A of the EPF Act, which empowers the Provident Fund Commissioner (PF Commissioners), appointed by the EPFO, to initiate an inquiry for determination of any deficit in the contributions remitted by any establishment under the provisions of the EPF Act. Pertinently, neither the EPF Act nor any of its schemes have laid down any procedure for holding these inquiries. Accordingly, practically, the PF Commissioners are following different yardsticks for initiating inquiries under Section 7-A of the Act. As a matter of fact, in many cases, inquiries are being initiated for wholly insufficient and untenable grounds causing general resentment amongst the employers on the one hand and prolonged pendency of the inquiries on the other.
Considering the wide powers conferred on the PF Commissioners under this provision and the draconian financial and reputational impact the orders have on businesses of covered establishments and establishments exempted from the EPF Scheme, it has become imperative that there is some regulation of the inquiries so that establishments are not subjected to harassment of a fishing and roving inquiry.
Scope and Power of the PF Commissioners
Section 7-A of the EPF Act vests the PF Commissioner with powers similar to that of a civil court i.e. enforcement of the attendance of any person or examination of the person on oath, discovery and inspection of documents, receipt of evidence on affidavit, and issuance of commissions for the examination of the witness. The scope of this section is extensive to protect the interest of the employees in various instances. The PF Commissioners can initiate an inquiry into the matters including but not limited to:
(a) cases where a dispute arises regarding the applicability of the EPF Act to an establishment;
(b) cases involving the determination of the amount due from any covered establishment under the EPF Act, and the schemes framed thereunder;
(c) cases involving the determination of entitlement of an employee for the membership; and
(d) cases involving breach of any of the provisions of exempted provident fund trust.
Given the exercise of quasi-judicial powers by the PF Commissioners under Section 7-A of the EPF Act, the PF Commissioners are required to act reasonably, fairly and in accordance with the principles of natural justice while conducting an inquiry thereunder. However, in recent years, in the absence of any yardstick or statutorily mandated procedure to conduct such inquiries, there has been a sharp rise in fishing and roving inquiries by the PF Commissioners against covered establishments and also establishments exempted from the EPF Scheme which has consequently led to a sharp rise in litigation arising from the orders passed under Section 7-A of the EPF Act.
Set out below are some common instances of possible misuse and misapplication of the inquiry provisions under the EPF Act.
- Initiation of inquiries without identification of beneficiaries
The avowed object of Section 7-A of the EPF Act is to ensure that the eligible employees are not deprived of their social security benefits. Thus, the contributions remitted under the EPF Act, or any dues recovered pursuant to any inquiry under Section 7-A thereof, is not for the benefit of the Central or the State Government; rather it is a collection for the benefit of the specific eligible employees. Given the same, it becomes imminent that the PF Commissioners necessarily identify the employees for whose benefit the dues are being assessed in an inquiry initiated against a covered establishment. A corollary to this is that unless the beneficiaries of the dues assessed by the PF authorities are identified, any amounts collected pursuant to a proceeding under Section 7-A would not benefit the eligible employees and therefore, fail to serve the purpose of the EPF Act.
In this background, the Supreme Court of India had opined in H.P. State Forest Corpn. v. Regl. Provident Fund Commr.[2], that amounts due from the employer will be determined only with respect to those employees who are identifiable and whose entitlement can be proved on evidence, and in the event the record is not available, it would not be obliged to explain its loss or any adverse inference on this score.
Similarly, the High Courts across the country have repeatedly held that the determination of employees’ provident fund dues without identification of beneficiaries by the authorities will not be tenable. In Regl. Provident Fund Commr. v. Faridabad Thermal Power Station[3], the Punjab and Haryana High Court has held that:
(a) An order passed under Section 7-A of the EPF Act is not sustainable if the employees’ provident fund contributions, etc. have been determined without identification of actual beneficiaries.
(b) In case the authority under Section 7-A of the EPF Act passes an order, determining the employees’ provident fund contributions to be remitted by the employer without identification of beneficiaries, it would not be appropriate.
(c) In case the authority under Section 7-A of the EPF Act fails to exercise the modes prescribed by law to identify the actual beneficiaries, it would be construed that the order passed is without application of mind and not sustainable.
To the same effect, in Provident Fund Commr. v. Nand Lal and Co.[4], a Division Bench of the Patna High Court held that assessment of the dues is payable under the EPF Act is for the benefit of the identified individuals. The court further held that assessment under Section 7-A of the EPF Act should not be confused with an assessment of tax. These are provident fund dues that are to accrue to an individual and not a tax, and not an amount payable to the PF Commissioner. Unless the nature of employment and the names of employees are identified with certainty, the assessment cannot be said to be in accordance with the law.
This position that there shall be no assessment without identifying the individual members in whose account the fund is to be credited has also been acknowledged by the Central Provident Fund Commissioner in its guideline/circular bearing Reference No. 7(1) 2012/RCs and Review Meeting/345 dated 30-11-2012 regarding “guidance of quasi-judicial proceedings under Section 7-A, ‘the determination of money due from employers’ of the Employees Provident Fund and Miscellaneous Provisions Act, 1952”. Although the said guideline/circular has been kept in abeyance vide EPFO’s subsequent circular bearing number 7(1)2012/RCs Review Meeting/21224 dated 18-12-2012, the principle is well established and followed in general.
In view of the above, in the absence of the identification of beneficiaries, liability cannot be saddled upon an establishment in the name of compliance or enforcement of the law. The PF Commissioners have to mandatorily identify the actual beneficiaries before the assessment and collection of dues. However, despite this settled position of law, in most cases the PF Commissioners are conducting inquiries and compelling employers to pay dues for the faceless, nameless, or non-identifiable workers. Resultantly, in such cases, the amounts collected by the PF Commissioners never reach the beneficiaries concerned thereby frustrating the whole objective of Section 7-A of the EPF Act.
- Conducting inquiries without application of mind
The inquiry proceeding before the PF Commissioners under Section 7-A of the EPF Act is a quasi-judicial proceeding and the fundamental principles of natural justice are intrinsic to such proceedings. A bare reference to Section 7-A of the EPF Act makes it clear that determination under the said section is a liability on the part of the covered establishment for which drastic action can be taken, like in a certificate proceeding. Hence, it is incumbent upon the PF Commissioners to exercise their powers independently, fairly and justly without being prejudiced by any submissions/contentions raised by the Provident Fund Inspectors (PF Inspectors) in their report. In Glamour v. Regl. Providend Fund Commr.[5], a Single Judge Bench of the Delhi High Court observed that the investigation made by the Inspector, or the report submitted by him was no substitute for quasi-judicial inquiry envisaged by Section 7-A. In an appeal filed against this case (Regl. Provident Fund Commr. v. Glamour Proprietor Seth Hassaram & Sons[6]), the Division Bench of the Delhi High Court confirmed the views of the Single Bench.
However, in practice, it is often seen that the PF Commissioners conduct inquiries in a preconceived and mechanical manner while ignoring submissions made by the covered establishment under inquiry, thereby disregarding the principles of natural justice. Such fishing and roving inquiries have also been acknowledged by the EPFO, which has time and again reiterated in its guidelines (ref. guideline/circular bearing Reference No. 7(1)2012/RCs Review Meeting dated 6-8-2014; guideline/circular bearing Reference No. /110001/4/3(71)MIS.C/2013/DI/Vol II/ dated 8-2-2016; and guideline/circular bearing Reference No. C-11/20/76/Misc./2020/CBE/TN/1027 dated 14-2-2020) that the existence of a prima face case is necessary before the initiation of inquiry under Section 7-A of the EPF Act. Notwithstanding the same, both at the stage of the initiation of an inquiry, as also at subsequent stages till the final assessment, the PF Commissioners have a tendency to mechanically refer and rely upon the report(s) submitted by the PF Inspectors rather than assess the existence of a prima facie case against the covered establishment and subsequently, the veracity of the allegations raised thereunder, causing severe hardship to the employers against whom such proceedings are initiated.
- Initiation of inquiry for a bygone period
The EPF Act does not prescribe any period of limitation for initiation of inquiry under Section 7-A or a period within which the said inquiry is to be completed. Even though it is a well-settled position of law that when a statute does not prescribe a period of limitation, the authorities must take action within a reasonable period of time, there have been instances where Section 7-A inquiries have been initiated against the covered establishment for periods going as far as eight to fifteen years. While the EPFO also has issued clarification, vide its circular bearing Reference No. C-11/20/76/Misc./2020/CBE/TN/1027 dated 14-2-2020, that any initiation of proceedings for period beyond 5 years without evidence of such prolonged default would be legally untenable, the PF Commissioners continue to initiate inquiries against the employers for the bygone periods, without any evidence of the prolonged period of default.
In this context, it is pertinent to highlight that as per the provisions of the Companies Act, 2013, a company is required to maintain and preserve its books of accounts only for 8 years immediately preceding a financial year. In view of the same, when an inquiry is initiated for a period beyond 8 years, the covered establishment is unable to produce the relevant records and is invariably fastened with penal consequences on the ground of non-production of the documents. While this issue has been highlighted by the employers time and again, the same has been ignored by the PF Commissioners on the ground that EPF Act does not prescribe a period of limitation for initiating inquiries under Section 7-A of the Act.
On 29-9-2020, the Central Government enacted the Code on Social Security, 2020 (Code) to amend and consolidate the existing labour laws relating to the social security with the object of providing social security benefits to all the employees and workers irrespective of belonging to the organised and unorganised sectors. When enforced, the Code will repeal and re-enact 9 central labour legislations relating to the social security, including the EPF Act. The Code has introduced a statutory limitation period of 5 years for recovery for such proceedings, which is in consonance with the limitation period prescribed under Section 45-A of the Employees’ State Insurance Act, 1948. The introduction of a limitation period of 5 years for initiating an inquiry akin to the one under Section 7-A is surely a welcome move that will provide better clarity on the issue and huge relief to the employers.
- Initiating inquiries against the principal employer when contractors have independent employees’ provident fund codes
Many employers outsource business processes of their establishment to contractors and engage workers in connection with the work of the establishment by or through contractors. As per the scheme of the EPF Act, the contractors are allotted an independent employees’ provident fund code (PF Code) and on allotment of the same are recognised as an “establishment” by the EPFO.
It is a settled position of law that contractors having separate PF Codes are independent employers and the establishment cannot be considered as principal employer for such contractors. Accordingly, if the relevant authorities seek details as to the payment of contributions or arrears payable by such contractors, the duty of the owner of the establishment is limited to only providing the list of contractors to the relevant authorities. This position has been set out in numerous cases including Food Corporation of India v. Provident Fund Commr.[7]; Pardeep Kumar v. Presiding Officer[8]; Group 4 Securitas Guarding Ltd. v. Employees Provident Fund Appellate Tribunal[9]; Madurai District Central Cooperative Bank Ltd. v. Employees’ Provident Fund Organisation[10]; Calcutta Constructions Co. v. Regl. Provident Fund Commr.[11]; and Regl. Provident Fund Commr. v. Ropar Thermal Plant[12]. In these cases, it has been held “with respect to the contractors, who are registered with the Provident Fund Department, having the independent code number, they are to be treated as independent employer”.
In view of the above settled position of law, the authorities cannot treat the employers (engaging such contractor’s workers) to be a “principal employer” for the purposes of the contractors having an independent PF Code or be held liable for purported non-payment of dues under the EPF Act. It is also practically not possible nor feasible for the establishment to keep track of all the personnel deputed to work by a contractor engaged. Further, such deployment of personnel by a contractor is subject to constant change and the discretion of contractor. In general practice, a principal employer has neither any knowledge nor any records of the actual number of workmen/contract labours deployed by such individual contractors for rendering the services or executing the work in terms of the work order. For instance, the principal employer may require certain work to be completed, in a certain manner and by a certain time. In such a scenario, the number of personnel deputed and selection of personnel would be at the discretion of the contractor and the principal employer for whose benefit the work is being carried out cannot reasonably be expected to make employees’ provident fund contributions on their behalf.
However, despite this settled position of law, it is generally seen that when the contractors default in depositing the contribution of their workmen or delay in depositing the same, the authorities initiate inquiry against the employer (and not the contractor) and fasten liability by treating them as the principal employer. In fact, it is in line with this practice that the EPFO has recently, vide its circular bearing Reference No. C-I/3(28) 2016/7A&14B/Pt./7212 and dated 27-4-2022, issued a “standard draft informed letter instructing the principal employer to declare the contractors on the EPFO’s unified portal for employees” wherein the EPFO has observed that even if contractors engaged by an employer have separate PF Codes, the employer will be treated as “principal employer” and the overall responsibility for ensuring the compliance under EPF Act will lie with the employer. The said circular has been issued in contravention of the above settled position of law that contractors having separate PF Codes are independent employers and the establishment cannot be considered as principal employer for such contractors.
- Initiating inquiries without establishing the existence of an employer-employee relationship between the covered establishment and casual workers
In the case of the vendors/contractors who do not have PF Code, the primary obligation is on the covered establishment to contribute employees’ provident fund in respect of workers who are engaged by vendors/contractors in connection with the work of the establishment and recover the amounts from the invoices of the contractors. However, in case it can be shown that the vendors/contractors have executed only a “contract for services” (and not a “contract of service”) with the workers for work which is neither regular nor in connection with the work/business of the establishment, it can be contended that such engagement does not establish an employer-employee relationship between the establishment and casual workers.
Hence, before the assessment of any liability, the authorities must first establish the existence of employer-employee relationship between establishment and casual workers. It is a settled position of law that the relevant factors to be considered for determining the question of employer-employee are: (a) who the appointing authority is; (b) who the pay master is; (c) who can dismiss; (d) the extent of control and supervision; and (e) how long alternative service lasts i.e. whether the ultimate authority over the man in the performance of his work resides in the employer so that he is subject to the latter’s order and direction (New Street Textiles Ltd. v. Union of India[13]). In view of the same, the authorities should appreciate and/or take into consideration the facts of the case and assess whether the establishment in any way (either directly or indirectly) exercises any control and supervision over such casual workers who are engaged on a non-exclusive basis and are providing services to other organisations also.
However, it is generally seen that the authorities initiate inquiries against the employers without establishing the existence of an employer-employee relationship between the establishment and the casual workers.
- Blanket application of judgment Vivekananda Vidyamandir
In the recent past, there was a lack of clarity as to the legal position on the inclusion of special allowance within the ambit of wages for calculation of employees’ provident fund contribution and the divergent views had resulted in ambiguity amongst stakeholders including the employers, employees and the provident fund authorities. In this context, vide Regl. Provident Fund Commr. v. Vivekananda Vidyamandir[14] (Vivekananda Vidyamandir), the Supreme Court clarified the longstanding question of whether special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the EPF Act for computation of deduction towards employees’ provident fund. It was held that the crucial test is one of universality and “special allowances” which are uniformly, necessarily and ordinarily paid to all employees (generally or in a particular category) can be treated as part of “basic wages” for the purpose of computing provident fund contribution under the EPF Act.
Pursuant to the judgment, given the lack of clarity concerning the retrospective or prospective effect of the judgment of Vivekananda Vidyamandir[15], several PF Commissioners launched fishing and roving inquiries and issued inspection notices to employees proposing inspection of records of the previous years for ascertaining the wage structure as well as the allowances which may have been excluded from “basic wages”. Subsequently, a review petition was also filed against the judgment in Vivekananda Vidyamandir[16] which was dismissed by the Supreme Court on 28-8-2019.
Due to immense confusion caused post the judgment, on 28-8-2019, the EPFO issued a notice (bearing number C-I/1(33)2019/Vivekananda Vidyamandir/717) directing the curbing of unwarranted roving inquiries being initiated by authorities pursuant to a clarification issued by Vivekananda Vidyamandir[17] judgment regarding the ambit of “basic wages” under the EPF Act. The EPFO directed that all notices issued without any prima facie evidence to avoid EPF liability should not be pursued any further. Any investigation/inspection required to be initiated will require prior permission of the Central Analysis and International Unit (CAIU) and such inspection will be for cases having a credible basis that the employer has prima facie engaged in avoidance of liability under the EPF Act. Furthermore, all PF authorities were directed to adhere to the administrative guidelines pertaining to initiation of proceedings upon a prima facie and credible evidence of arbitrary splitting of basic wages. The said direction specifically stated, “there is no reason or justification to initiate roving inquiries into the wage structure of the complying establishments on the surmise that certain allowances in the nature of basic wages may not have been treated as part of pay for EPF contributions”.
Even though the EPFO in the notice dated 28-8-2019 has categorically stated that there is no reason or justification to initiate such roving inquiries into the wage structure of compliant establishments, the authorities continue to issue notices to the employers proposing inspection of their records of the previous years, solely for the purpose of determining allowances which may have been part of “basic wages” of the employees and had been excluded.
It is significant to state that the clarification provided by the Supreme Court in Vivekananda Vidyamandir[18] matter is in the nature of a change in law and in such context, strictly speaking, the authority cannot direct the employers to unilaterally bear the burden of such contribution. Even if the authority imposes liability to make contributions in respect of such previously excluded allowances in proceedings under Section 7-A of the EPF Act, the burden has to be shared by both the employer and the employee. Given that there is no provision under the EPF Act that allows for retrospective recovery of dues from the employee of an establishment, such large deductions cannot be made from the salaries of employees. Further, an employer has no right to deduct the contribution from the future wages payable to the employees, as has also been held by the Supreme Court in District Exhibitors Assn. v. Union of India[19] . Therefore, an employer cannot single-handedly make contributions to the authority. In the event any differential contribution is sought to be recovered from the principal employer, the same shall constitute undue hardship as was held in Shri Mahila Griha Udyog Lijjat Papad v. Union of India[20] . In view of the same, such inquiries initiated and conducted by PF Commissioners may be argued to be arbitrary and contrary to the settled position of law.
The Need for Regulation
The previous sections make it apparent that in many instances, the authorities tend to initiate fishing and roving inquiries against employers causing a deleterious impact on their pecuniary interests without benefiting the employees. In order to curb such inquiries, firstly, it is indispensable to bring a change at the grassroot level. It must be ingrained in the PF Inspectors, carrying out audits for exempted trust funds and inspections for unexempted trust funds, that an assessment under Section 7-A is different from the assessment of tax so that frivolous proceedings under Section 7-A of the EPF Act can be curbed at the preliminary stage of the issuance of a show-cause notice itself. Secondly, given that PF Commissioners are clothed with trappings similar to that of a court, they should act reasonably and fairly. As a quasi-judicial authority, the PF Commissioners must assess the veracity of the allegations raised by the PF Inspectors in their report rather than mechanically relying on the reports submitted by a PF Inspector to help ensure that unwarranted Section 7-A proceedings can be avoided while still protecting the interests of the eligible employees in genuine cases. Further, the issue of lack of identifiability of the employees in respect of whom dues are being assessed is at large, and more so in cases where the inquiries are initiated for periods prior to 3-4 years. Moreover, the authorities, in view of the settled position of law, should not fasten liability on principal employers when contractors have independent PF Codes. Lastly, the authorities must assess the relationship between the establishment and the casual workers before initiating inquiry against the employer. While the Code on Social Security, 2020 appears to have recognised and addressed the issue of limitation, the other practical issues highlighted above in the present article require further regulation and more importantly, change in the approach/mindset of the PF Inspectors and the PF Commissioners from treating the EPF Act as a taxing statute to that of a socio-benevolent legislation intended to benefit the actual beneficiaries.
† Partner, Khaitan & Co.
†† Senior Associate, Khaitan & Co.
††† Associate, Khaitan & Co.
[1] 2005 SCC OnLine Ker 658 : (2006) 2 KLJ 135.
[2] (2008) 5 SCC 756 : 2008 LLR 980.
[3] 2015 SCC OnLine P&H 20497 : 2015 LLR 269.
[5] 1974 SCC OnLine Del 224 : 1975 Lab IC 954.
[6] 1981 SCC OnLine Del 220 : 1982 Lab IC 1787.
[7] (1990) 1 SCC 68 : 1990 LLR 64.
[8] 2015 SCC OnLine P&H 20678 : 2015 LLR 726.
[9] 2011 SCC OnLine Del 4010 : 2012 LLR 22.
[10] 2011 SCC OnLine Mad 1350 :2015 LLR 635.
[11] 2015 SCC OnLine P&H 20665 : 2015 LLR 1023.
[12] 2012 SCC OnLine P&H 22038 : 2013 LLR 243.
[13] 1974 SCC OnLine Ker 120 : 1975 KLT 426.
[19] (1991) 3 SCC 119 : AIR 1991 SC 1381.
[20] (1999) 6 SCC 38 : (2000) 84 FLR 155.
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