Labour Law Alert

BACKGROUND

The Employees’ Provident Funds Scheme, 1952 (EPF Scheme) was amended with the introduction of Para 83 in the year 2008, extending the coverage of Indian Provident Fund (PF) law to ‘International Workers’(IW). Further, Para 43A was introduced under the Employee’s Pension Scheme, 1995 (EPS) to extend the coverage of EPS to IWs.

These provisions of PF law applicable to IWs are now held by the Hon’ble Karnataka High Court as being discriminatory and in violation of Article 14 (Right to Equality) of the Indian Constitution vide the ruling dated 25 April 2024¹.

We, at BDO India, have analysed and summarised the said ruling hereunder:

Facts of the Case

An employer (covered establishment employing 20 people or more during the financial year) is required to make PF contributions for its employees. Such PF contributions are not required in case of an ‘excluded employee’.

An ‘excluded employee’ is an Indian citizen employee having a monthly salary exceeding INR 15,000. Thus, the employer is not mandatorily required to make PF contributions for such ‘excluded employees’.

Para 83 of the EPF Scheme was introduced to define IW as under:

• An Indian employee working in a foreign country with which India has entered into a Social Security Agreement (SSA) and is eligible to avail the benefits under a social security programme of that foreign country; or

• A Foreign employee holding a non-Indian passport and working for a covered establishment in India.

It further provides that an IW is considered an ‘Excluded Employee’ and thereby, not required to make a PF contribution if the following conditions are met:

• The IW is covered under a social security programme of the country with which India has signed SSA; and

• The IW has obtained a certificate of coverage from his home country under such SSA.

With the introduction of Para 83, the following features of the EPF Scheme became applicable to foreign employees working in India and not covered under any SSA signed with India:

• Employer is required to make PF contribution without any wage ceiling limit on the wages received in India as well as outside India for the services provided in India.

• IWs from non-SSA countries are not allowed to withdraw the balance in the EPF account until they reach the age of retirement as per PF laws i.e. 58 years.

The respondent (Union Government of India) contended that the objective behind entering into SSAs and introduction of EPF Scheme provisions related to IWs was to protect the Indian employees going abroad to work from being subjected to the foreign country’s social security and to provide for reciprocal treatment to the foreign nationals of such countries while they work in India.

The petitioners claimed that in reality, an Indian employee, who is a member of the EPF Scheme and going to work in a foreign country with which India has an SSA, has an option to contribute on the sum of INR 15,000. Whereas a foreign worker from a non-SSA country is mandatorily required to contribute EPF on his entire global salary.

In light of these provisions, the following question was raised by the petitioners to the Hon’ble Karnataka High Court:

“Whether the introduction of para 83 of Provident Fund Scheme and para 43A of Pension Scheme is unconstitutional and hit by Article 14 of the Constitution of India?”

Karnataka High Court Ruling

The Hon’ble High Court struck down the introduction of Para 83 of the EPF Scheme and Para 43A of the EPS as ‘unconstitutional’ and ‘arbitrary’. It further stated that all the orders passed thereof by the EPF Authorities are unenforceable.

In this regard, the High Court relied on the following arguments:

• The PF Act was introduced as a social welfare legislation meant for the protection of industrial workers to enable them to have an alternative to pension.

• The PF Act nowhere mentions covering employees irrespective of salary drawn by them and hence, a specific wage ceiling limit is prescribed by the PF Act. The benefit is not intended for high-salaried employees such as IWs.

• Para 83 of the EPF Scheme provides for an unlimited wage threshold for IWs. However, the EPF Scheme is a subordinate legislation and therefore, cannot travel beyond the scope of the mother Act (i.e. PF Act) under which a monthly wage ceiling of INR 15,000 has been prescribed as a threshold for eligibility of membership to the EPF Scheme.

• The Government of India has entered into SSAs with other countries as a matter of reciprocity to IWs of such SSA countries.

For IWs qualifying as an ‘excluded employee’, they are free to withdraw accumulated PF balance on cessation of employment in India. This benefit has not been extended under Para 83 of the EPF Scheme to IWs from non-SSA countries.

In the absence of parity and reciprocity, there is no justification to demand PF contribution on the entire global pay of a foreign employee from a non-SSA country.

The distinction in the amount of contribution between an employee going to a non-SSA country and an employee from a non-SSA country coming to India is clearly discriminatory and violative of Article 14 of the Indian Constitution.

• Foreign citizens and Indian citizens working in India are being considered as two different classes. This is violative of Article 14 of the Indian Constitution as both categories are equal but are being treated differently.

BDO India Comments

The EPFO has acknowledged the said ruling via a Press Release dated 7 May 2024. It mentioned that SSAs aim to guarantee uninterrupted social security coverage for employees during international employment. It further stated that such SSAs are very important for India for promoting international mobility and leveraging the demographic dividend.

The ruling is likely to be challenged by the Indian Government and Employees’ Provident Fund Organisation (EPFO) and may receive finality in the Supreme Court. Similar matters are pending with other High Courts as well.

This ruling could have a far-reaching impact on all ongoing litigation matters relating to PF contributions and damages imposed for IWs. Hence, employers may evaluate the impact of the ruling on their compliance strategy for IWs working in India.