EPF for International Workers
The definition of IWs covers both Indian employees and foreign employees within its scope: (i) Indian employees: Employees who have worked, or are going to work in a foreign country with which India has entered into a social security agreement, and who are eligible to avail benefits under a social security programme of that country, by virtue of the eligibility gained or going to gain, under the said agreement. Indian expatriate employee who having been an IW earlier, comes back to India, such Indian employee will no longer be considered an IW; and (ii) Foreign employees: Employees, other than Indian employees, holding other than an Indian passport, working for an establishment in India to which the EPF Act applies.
Legal Framework
A) Membership: IWs (other than Excluded Employees (as defined below)) are required to join the Fund and make PF contributions. The membership shall continue until occurrence of one of the following events: (i) IW withdraws amount standing to his credit in the Fund; (ii) IW is exempted from making contributions by appropriate government authority; or (iii) PF benefits are settled in terms of the relevant social security agreement entered into between India and his country of origin.
Classes of IWs (“Excluded Employees”) that are not required to join the Fund are: (i) IWs who are contributing to a social security program of their country of origin, either as a citizen or resident, with whom India has entered into a social security agreement (“SSA”) on reciprocity basis. Such IW must be enjoying the status of a ‘detached worker’; and (ii) IWs who are contributing to a social security program of their country of origin, either as a citizen or resident, with whom India has entered into a bilateral comprehensive economic agreement containing a clause on social security prior to 1 October 2008, which specifically exempts natural persons of either country to contribute to the social security scheme/fund of the host country.
B) PF Contribution: The actual PF contribution is 12% of the Monthly Pay (as defined below), and is made as follows: (i) 12% of the Monthly Pay is deposited by the employer with EPFO as its share of PF; (ii) 12% of the Monthly Pay is deducted from the IW’s salary by the employer and deposited with EPFO, as IW’s share of PF.
PF contribution shall be calculated on the basis of monthly pay of the IW containing the following components actually drawn during the whole month whether paid on daily, weekly, fortnightly or monthly basis: (i) basic wages; (ii) dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living); (iii) retaining allowance; and (iv) cash value of any food concession (collectively “Monthly Pay”)
C) Withdraw of the Fund: IW may withdraw the full amount standing to his credit in the Fund upon (i) retirement from service in the establishment at any time after the attainment of 58 (fifty eight) years; or (ii) retirement on account of permanent and total incapacity for work due to bodily or mental infirmity duly certified by a medical officer; or (iii) ceasing to be an employee of the establishment (in respect of IW covered under a notified SSA).
Challenges/ Practical Problems:
A) Scope of ‘basic wage’: Determination of salary components on which PF contribution must be made has been a subject of numerous interpretations and has undergone in-depth judicial analysis. Employers argue for minimizing the salary components which qualify for calculating PF contributions. On the other hand, EPFO place counter-arguments for elongating the scope of this list.
In Bridge and Roof Company (India) Limited v Union of India AIR 1963 SC 1474, the Hon’ble Supreme Court, holding that ‘production bonus’ will not qualify under ‘basic wages’, laid down the principle that such salary items are excluded from ‘basic wages’ that are (i) not earned in all concerns; and (ii) not earned by all employees of the concern. The Supreme Court exemplified its principle with ‘dearness allowance’ - an item that was originally considered to be not uniformly applicable in concerns (and hence included as an exclusion to ‘basic wages’ in Section 2(b)), but 8 (eight) years later was found by the legislature to be uniformly applicable in concerns. The Supreme Court also stated that all wages arising out of ‘basic wages’ can be considered as ‘basic wages’ by default. In Manipal Academy of Higher Education v Provident Fund Commissioner AIR 2008 SC 1951, the Hon’ble Supreme Court held that ‘basic wage’ was never intended to include amounts received for leave encashment.
B) No upper cap on PF contribution: While an upper monthly salary cap of INR 15,000 (Indian Rupees Fifteen thousand) is prescribed for calculating the PF contributions for employer/employee in case of a domestic employees, there are no such caps for IWs. Effectively, 12% (twelve per cent) of the total Monthly Pay is payable by employer towards PF contribution for the IW, and an equal amount is to be deducted from an IW’s salary towards his PF contribution. The employers/ companies therefore, face a great burden of PF contribution resulting in employers possibly facing significantly greater liability to make good any shortfall in contributions (along with interest and penalties) for IWs.
C) Limitation on withdrawal: The facility to receive PF refund on the date of completion of Indian employment is not available for IWs who are not covered under SSA, such IWs are eligible for withdrawal only after attaining 58 years of age. Since, IWs would require a bank account in India to receive the withdrawal from the PF account at a later date, it would cause practical difficulties to the IWs at the time of withdrawal at such time of eligibility.
D) Overseas contributions: Except for the IWs covered under SSA, EPF Scheme does not recognize any special carve-out for contributions by the IWs towards the social security in the home country during the Indian assignment. EPF Scheme also does not recognise employer’s contribution towards various insurances such as life/medical/dental/accidental etc. in the home country. Therefore, in such cases, the IW as well as the employer who are not covered under SSA shall bear multiple liability in the home country as well as in India.
E) Ambiguity: The legal framework still comprehends ambiguities interalia relating to the scope of Monthly Salary in respect to allowances such as inclusion or exclusion of hardship allowance, per-diem, cost of living allowance, goods and services allowances, special allowance, location allowance, travelling allowance etc; reimbursements by employers; notional hypothetical tax deducted from IW’s salary by the employer; etc. and other compliance processes for different classes of IWs.
Conclusion
The laws relating to PF for IWs are continuously evolving. The Ministry of Employment & Labour has, by way of clarifications, Frequently Asked Questions, etc. tried to streamline the issues faced by the stakeholders and ensure compliance by the stakeholders. Considering the ambiguity and challenges interalia as suggested above, the legal framework shall be subject to several changes, requiring the stakeholders to keep a close watch on such developments to ensure appropriate compliance.
The authors of the article are Anshul Prakash, Partner and Utkarsh Kumar, Associate from Khaitan & Co.
