Employees' Provident Fund Organisation (EPFO) Circular on inspection in India

​published on September 6, 2019 | reading time approx. 2 minutes

On August 28, 2019, EPFO issued a circular with respect to ushering inspec­tion notices and inquiries to the employers by the EPF authorities in the wake of landmark judgement of the Hon'ble Supreme Court of India (Supreme Court) in the matter of Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir and Others Civil Appeal 6211 of 2011. The said circular is addressed to the EPF authorities restricting them from issuing inspection notices and initi­ating inquiries to establishments without any prima facie evidence of arbitrary bifurcation of wages with the intention to avoid EPF liability.

In our earlier newsflash dated April 2, 2019, we have analysed the Supreme Court's decision given on February 28, 2019. According to section 6 of Employees' Provident Fund Act 1952 (EPF Act) the monthly contribution towards Employees' Provident Fund shall be payable upon basic wages, dearness allowance and retaining allowance (if any). In the aforementioned judgement, the Hon'ble Supreme Court of India held that certain allowances which are universally and ordinarily paid to all employees irrespective of quan­tum of efforts put in or the quantum of the output, shall deemed to be considered a part of “basic salary” for the purpose of computing contribution towards the Employees' Provident Fund (EPF). 

Since the Supreme Court's decision was merely a clarifi­cation, the said judgement opened floodgates of inspection notices and inquiries by the EPF authorities to establishments for tracking down non-compliances. Through such inspection notices, the EPF authorities requisitioned records of past three to five years to ascertain wage structure to determine if any allowances which were supposed to have been a part of “basic wages” have been deliberately omitted from the ambit of “basic wages”. This usually involves lowering down the basic salary and segre­gating additional wages under 'special allowance' or in any other name in order to have an advantage of lower deduc­tion and contri­bution to the EPF. 

Accordingly, the EPFO under the said circular stated that no inquiries should be initiated into the salary struc­ture of the complying establishment merely on speculation that certain allowances forming a part of basic wages have been excluded for paying EPF contributions. Further, EPFO has directed its officers not to pursue any of such notices which have been issued unless there is any prima facie evidence of arbitrary bifurcation of wages with the intention to avoid EPF liability. Accordingly such inquires on the part of EPF authorities are impermissible in law and indulging in such practices may invite for administrative actions against such EPF authorities.

It is pertinent to note that the said circular at the same time does not preclude inspections/investigations in those cases where there is plausible justification available leading to form a view that the employer has prima facie indulged in illegal practice of avoiding EPF liability by splitting the basic wages. In such case the EPF autho­rities may proceed with such inquiries/investi­gations subject to the prior per­mission from the Central Analy­sis Intelligence Unit (CAIU) consti­tuted by EPFO and shall also follow the administrative guidelines and policy of the EPFO.