Srishti Ramchandani (___)

CASE ANALYSIS: THE REGIONAL PROVIDENT FUND COMMISSIONER (II), WEST BENGAL
AND ORS. VS. VIVEKANANDA VIDYAMANDIR AND ORS.

INTRODUCTION

The Employees' Provident Fund and Miscellaneous Provisions Act, 1952 ("EPF Act") as we
all know, has been enacted to provide retirement benefits to the employees eligible to receive
the same and has always been a subject of much discussion and debate.

The Hon'ble Supreme Court of India ("SC") on February 28, 2019, in the matter of The
Regional Provident Fund Commissioner (II), West Bengal And Ors v. Vivekananda
Vidyamandir & Others1 issued a judgment on the law governing calculation of the provident
fund contributions under the EPF Act. The SC (whilst disposing off multiple appeals),
decided on the issue of whether certain allowances (particularly 'special allowance') are to be
taken as part of 'basic wages' for the purpose of computation of provident fund contribution in
accordance with the provisions of the EPF Act. Whilst the SC judgement is being hailed as a
landmark judgement which is changing the way that contributions are being calculated under
the EPF Act, the reality is that the SC has only reiterated what has already been set out under
various judgements and therefore there is no question of this being new law but only a fresh
statement on what has already been law as set out by the SC in its decision in the case of
Manipal Academy of Higher Education v. Provident Fund Commissioner 2 which followed
the principles laid down in previous judgments by the court in Jay Engineering Works Ltd.
and Ors. v. Union of India and Ors3; Bridge & Roof Co. (India) Ltd. v. Union of India.4

The appellant’s in the case are establishments covered under the Employees' Provident Fund
and Miscellaneous Provisions Act, 1952. The appellants were providing its employees with
special allowances by way of incentives, conveyance allowance, canteen/lunch incentives etc.
However, the same was not included in the computation of basic wages for the deduction of
provident fund.

ISSUES INVOLVED
The appellants raised a common question of law whether the special allowances would fall
within the expression ‘basic wages’?

1
The Regional Provident Fund Commissioner (II), West Bengal And Ors. v.. Vivekananda Vidyamandir And
Ors AIR 2019 SC 1240
2
Manipal Academy of Higher Education v. Provident Fund Commissioner AIR 2008 SC 1951
3
Jay Engineering Works Ltd. and Ors. v. Union of India and Ors AIR 1963 SC 1480
4
Bridge & Roof Co. (India) Ltd. v. Union of India AIR 1963 SC 1474
 APPLICABLE LAW

The EPF Act in section 6 mandates that the contribution to PF will be calculated on monthly
pay comprising of the following components:

(a) Basic Wages

(b) Dearness Allowance
(c) Retaining Allowance
(d) Cash value of any food concession

Basic Wages has been defined in Section 2(b) of the act to mean all emoluments which are
earned by an employee while on duty or on leave or on holidays with wages in either case in
accordance with the terms of the contract of employment and which are paid or payable in cash to
him but does not include cash value of food concession, dearness allowance or presents made by
the employer.

ANALYSIS AND CONCLUSION

It was argued that the special allowance paid to the teaching and non-teaching staff of the
respondent school was nothing but camouflaged dearness allowance to reduce the
contribution towards EPF. It is liable to taken into account for the purpose of calculating
contribution towards EPF. The allowance shall fall within the term dearness allowance,
irrespective of the nomenclature, since it was being paid to all employees on account of rise
in the cost of living.

The Supreme Court held that the allowances were to be included in the definition of "basic
wages" since the employers had not demonstrated that they were variable or "linked to any
incentive for production resulting in greater output" and further no material was produced by
the employers to demonstrate that the allowances were not paid universally to all employees
in a particular category or that they were “being paid especially to those who avail the
opportunity”.

Further the court held:

1. Basic wages which vary from individual to individual according to their efficiency
and diligence will stand excluded for the purpose of computation of contribution
towards EPF. In other words, the allowances in question can be excluded only if; it is
variable or linked to any incentive for production resulting in greater output by an
employee.
2. Test to be adopted to determine if any payment is to be excluded is that the payment
under the scheme must have direct access and linkage to the payment of such special
allowance as not being common to all. The crucial test is one of universality. Where
the wage is universally, necessarily and ordinarily paid to all across the board such
emoluments are to be considered for the purpose of contribution towards EPF.
 3. Where the payment is specially paid to those who avail of the opportunity is not to be
considered. By way of example, it was held that overtime allowance, though it is
generally in force in all concerns is not earned by all employees of a concern. It is also
earned in accordance with the terms of the contract of employment but because it may
not be earned by all employees of a concern, it is to be excluded. In other words, the
amount can be excluded only if it is shown that the workman concerned had become
eligible to get this extra amount beyond the normal work which he was otherwise
required to put in.

In short, as had been laid out earlier, the SC, in its current judgment, has held that allowances
which are made universally, ordinarily and necessarily to all employees across the board or to
all employees in a particular category/grade will fall within the definition of 'basic wages' for
the purposes of computation of provident fund contributions. The SC has also clarified that in
order for an amount to not be included as "basic wages", it has to be shown that the workman
concerned has become eligible to get this extra amount beyond the normal work which he
was otherwise required to put in.

Consequently, the SC has reiterated (and upheld) the position that, in addition to the basic
wage, dearness allowance and the retaining allowance paid to the employee eligible for
contributions under the EPF Act (in case they form a part of the salary structure/components
of the employee) all other allowances (other than House Rent Allowance which is
specifically excluded under the definition of "basic wages"), forming a part of the employee's
salary and that are universally, necessarily and ordinarily paid across the board to all the
employees, would form a part of/ constitute 'basic wage' for the purpose of computation of
the contribution towards provident fund under the EPF Act. Employers should keep this in
mind when determining the provident fund contribution to be made with respect to eligible
employees under the EPF Act.

Pursuant to the decision of the Vidyamandir Case, the Employees' Provident Fund
Organization ("EPFO") issued a notice dated March 14, 2019 wherein it circulated the
judgement of the Vidyamandir Case and stated that “thereafter, this order of Hon'ble Apex
Court is circulated to all concerned for information, utilizing this judgment while defending
similar cases and taking necessary action keeping the aforesaid judgment of the Hon'ble
Supreme Court”.

Subsequently given the lack of clarity concerning the retrospective or prospective effect of
the judgement of the Vidyamandir Case (possibly due to the reiteration of the established
principles), several field offices launched a fishing expedition and issued inquiry/inspection
notices to employers 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'.

Thereafter, a review petition was also filed against the judgement of the Vidyamandir Case
which was dismissed by the Hon'ble Supreme Court on August 28, 2019.