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Supreme Court's Feb 28, 2019 judgement on applicability of EPF contributions

The Supreme Court (SC) on February 28, 2019, delivered a judgement (disposing off multiple appeals) on whether the special allowances paid by an establishment to their employees would form part of basic wages and consequently attract Employees’ Provident Fund (EPF) contributions.

Over the past few years, there have been a number of High Court rulings on coverage of allowances under basic wages for calculation of Employees’ Provident Fund contributions and these High Court rulings were challenged before the Supreme Court. Five such High Court rulings were clubbed together and heard by the Supreme Court.

In its ruling on 28 February, 2019, the Supreme Court has held that 'allowances' paid by employer to its employees, will be included in the scope of 'basic wages' and hence subject to Employees’ Provident Fund contributions. The Supreme Court has clarified that only allowances of the following nature can be excluded from 'basic wages' for calculation of Employees’ Provident Fund contributions:

  • Allowances which are variable in nature; or

  • Allowances which are linked to any incentive for production resulting in greater output by an employee; or

  • Allowances which are not paid across the board to all employees in a particular category; or

  • Allowance which are paid especially to those who avail the opportunity

The Supreme Court, in the instant cases noted that no material had been placed by the establishments to demonstrate that the allowances in question (i.e. travel allowance, conveyance canteen allowance, management allowance, special allowance, education allowance, medical allowance, etc.) were either variable or the allowances in question were not paid across the board to all employees in a particular category.

Hence, the test of universality (i.e. allowances paid to all employees/all employees in a particular category, etc.) and whether the allowance paid in question is linked to specific/additional performance, become the guiding principles for all establishments.

Impact on Allowances for EPF contributions: Employees whose EPF (Basic) Wages are lower than statutory wage ceiling i.e. INR 15000/-.

The principles elaborated by the SC would need to be applied by the establishments in determining the salary on which EPF is being contributed.