Mar 11,2020 | 15 min read

Supreme Court On Employee Provident Fund

The Supreme Court in the Employees Provident Fund Organisation & Anr. vs. Sunil Kumar B & Ors. S.L.P (Civil) No.9610/2019 ("Judgement") has dismissed the Special Leave Petition (SLP) filed by Employees Provident Fund Organisation (“EPFO”) against a Kerala High Court judgment in P. Sasikumar & Ors. vs. Union of India (UOI) WP(C). No. 13120 of 2015 dated 12.10.2018 ("KHC 2018") setting aside the amendment brought in the Employee Pension Scheme, 1995 vide Employee's Pension (Amendment) Scheme, 2014, that capped maximum pensionable salary to INR 15,000/- per month. 

The Kerala High Court had earlier allowed the writ petitions filed by employees of various establishments covered by the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The employee's grievance was with the changes brought about by Employee's Pension (Amendment) Scheme, 2014 dated August 22, 2014 which has been applicable with effect from September 1, 2014 ('EPS 2014 Amendment'), which drastically reduced the pension payable to them. For details, please follow the link https://www.epfindia.gov.in/site_docs/PDFs/Circulars/Y2014-2015/Acturial_WageCeiling_7738.pdf. 

In order to do an analysis on KHC 2018, we need to understand the factual background of the case referred herein and legal framework which the said case relates to. A brief summary outlining the legal and factual background is outlined below: 

Legal and Factual Background: 

✓ The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 ("Act") provides for the institution of provident funds, pension fund and employees deposit linked insurance fund for employees in factories and other establishments. Following three schemes have been framed and notified under the Act: 

(a)  the Employees' Provident Fund Scheme, 1952 under Section 5 of the Act ("Scheme");
(b)  the Employee's Pension Scheme, 1995 under Section 6A of the Act ("EPS"); and
(c)  the Employees' Deposit Linked Insurance Scheme, 1976 under Section 6C of the Act. 

The subject matter of the case discussed and analysed revolves around EPS read with EPS 2014 Amendment. 

✓  EPS was introduced on November 16, 1995 and at that time the maximum pensionable salary was fixed as INR 5000/- and by the amendment of 1996 it was later on enhanced to INR 6,500/-. Subsequently, a proviso was added to paragraph 11(3) of the EPS with effect from March 16, 1996 granting an option to the employer and the employee to contribute amounts towards the pension fund at the rate of 8.33% of the actual salary drawn by the employee, where the salary exceeded INR 6,500/-. Thereupon, most of the employees who were drawing salaries in excess of the prescribed limit opted to pay contributions on the basis of the actual salaries drawn by them. However, requests made by some of the employees were rejected on the ground that the option was not exercised on or before December 1, 2004. 

✓  The said action was challenged before the Kerala High Court in K.Krishnankutty vs Union Of India (UOI) WP(C).No. 449 of 2015 (E) dated 07.01.2015 ("KHC 2015"). In the said case, the Kerala High Court held that the proviso to paragraph 11(3) of EPS, added with effect from March 16, 1996 was retrospective in operation, applicable from the date of commencement of the EPS. It was further held that, 

Judgement - Impact Analysis For information purposes only 

the cutoff date of December 1, 2004 on the basis of which some of the options made by the employees were rejected was unsustainable. In the absence of any cutoff date, the Kerala High Court found that a joint application by the employer and the employee could be made at any time and on the basis of such joint application they would be entitled to avail the benefit of the proviso to paragraph 11(3) of the EPS. 

✓  The EPFO filed an appeal before the division bench of Kerala High Court which was dismissed by the said Court. 

✓  Subsequently, the EPFO filed a Special Leave Petition in R.C. Gupta & Ors. Etc. etc. vs. Regional Provident Fund Commissioner & Ors. SLP(C) Nos. 33032-33033/2015, Dt/–4-10-2016 ("SLP 2016") against the KHC 2015 which was also dismissed, and it was held that the proviso to paragraph 11(3) of the Pension Scheme was not a cut-off date to determine the eligibility of the employer-employee to indicate their option under the said proviso. 

The Supreme Court in SLP 2016 advised and permitted EPFO to seek a return of all such amounts that the concerned employees may have taken or withdrawn from their provident fund account before granting them the benefit of the proviso to paragraph 11(3) of the EPS. Once such a return is made in whichever cases such return is due, consequential benefits in terms of this order should be granted to the said employee. 

✓  It appears that the Government to overcome with the aforesaid ruling brought out the amendment in EPS vide EPS 2014 Amendment and made following key changes: 

  • EPS 2014 Amendment limited the maximum pensionable salary to INR15,000/-per month. Prior to EPS 2014 Amendment, though the maximum pensionable salary was only INR 6,500/- per month (enhanced from INR 5,000/-), the proviso to the said paragraph permitted an employee to be paid pension on the basis of the actual salary drawn by him provided, contribution was remitted by him on the basis of the actual salary drawn by him preceded by a joint request made for such purpose jointly with his employer. The said proviso was omitted by EPS 2014 Amendment thereby capping the maximum pensionable salary at INR 15,000/-. 
  • EPS 2014 Amendment gave an option to the existing members as on September 1, 2014 to submit a fresh option jointly with their employer to continue to contribute on salary exceeding INR 15,000/- per month. 
  • EPS 2014 Amendment provided that monthly pension shall be determined on pro-rata basis for pensionable service up to September 1, 2014 at the maximum pensionable salary of INR 6,500/- and for the period thereafter at the maximum pensionable salary of INR 15,000/- per month. 
  • Prior to EPS 2014 Amendment, EPS was to be calculated on the basis of the salary drawn by an employee over a period of twelve (12) months prior to his retirement, however, vide EPS 2014 Amendment the said period was extended to sixty (60) months. 

✓ Consequently, it was pointed out by the employees that the pension that is to be drawn by them has been drastically reduced without any justification. EPS 2014 Amendment was thus under challenge in KHC 2018. 

Key issues examined 

Judgement - Impact Analysis For information purposes only 

The key issue / question examined by the Court in KHC 2018 was that whether the following features introduced by EPS 2014 are valid and sustainable or not: 

  1. EPS 2014 Amendment again stipulated a cutoff date to determine the eligibility of the employer-employee to indicate their option and to confer the benefits under EPS. 
  2. The new provision introduced by EPS 2014 Amendment whereby the employees are required to make an additional contribution of 1.16% on the salary exceeding INR 15,000/-. 
  3. EPS 2014 Amendment limits the maximum pensionable salary to INR15,000/- per month. Prior to the said amendment, though the maximum pensionable salary was only INR 6,500/- per month, the proviso to the said paragraph permitted an employee to be paid pension on the basis of the actual salary drawn by him provided, contribution was remitted by him on the basis of the actual salary drawn by him preceded by a joint request made for such purpose jointly with his employer. The said proviso was omitted by EPS 2014 Amendment thereby capping the maximum pensionable salary at INR 15,000/-. 
  4. Prior to EPS 2014 Amendment, the pension was to be calculated on basis of the salary drawn by an employee over a period of twelve (12) months prior to his retirement, whereas, the said period was extended to sixty (60) months vide EPS 2014 Amendment. 

What has been upheld by the Supreme Court? 

The observations and decisions made by the Kerala High Court in KHC 2018 and which were later on upheld by the Supreme Court in the Judgement are outlined herein below (in line with the issues contemplated above): 

  1. The Supreme Court in SLP 2016 held that the date of commencement of EPS referred to in the proviso to paragraph 11(3) of the EPS was not a cut-off date to determine the eligibility of the employer-employee to indicate their option under the said proviso. The Supreme Court has also in the said order approved the view taken by KHC 2015 in this regard. Therefore, the stipulation of a cut-off date for conferring the benefits under the EPS cannot be sustained. In other words, the proviso to paragraph 11 of the EPS does not stipulate a cutoff date at all. Any such stipulation of a cutoff date for conferring benefits under the EPS would have the effect of classifying the employees into persons who have retired before or after the said date. The Court found no rationale in such classification. The object sought to be achieved is stated to be prevention of depletion of the Pension Fund, which cannot be accepted as a justification to support the classification. 
  2. As per the paragraph 26 of the Scheme, every employee who is a member of the provident fund is entitled and required to become a member of the pension fund from the day the provision comes into force. No employee has any other option. However, sub paragraph 6 of the said paragraph gives an option to an employee to make contributions to the provident fund on the basis of the actual salary drawn by him. There is no provision in the Act contemplating the payment of any amount by either the employer or employee in addition to what has been stipulated by Section 6 of the Act, it was not possible to require any further payment to be demanded from the contributories. That appears to be the reason why both the employer and the employee are given an option to express in writing their willingness to make contributions in excess of the salary limit of INR 15,000/-.

Judgement - Impact Analysis 

As per EPS 2014 Amendment, the maximum pensionable salary has been fixed at INR 15,000/- thereby disentitling the persons who have contributed on the basis of their actual salaries to any benefits on the basis of the excess contributions made by them. The said provision is arbitrary and cannot be sustained. The employees, who have been making contributions on the basis of their actual salaries after submitting a joint option with their employers as required by the EPS, are denied the benefits of their contributions by the said amendments without any justification. Apart from the above, to cap the salary at INR 15,000/- for quantifying pension is absolutely unrealistic. 

The Court observed that EPS 2014 Amendment in so far as it stipulates the average monthly pay drawn over a span of sixty (60) months preceding the date of exit as the pensionable service is also arbitrary for the reason that it deprives the employees of a substantial portion of the pension to which they would have been eligible had EPS not been amended vide EPS 2014 Amendment. The provision as it originally stood stipulated computation of pensionable salary on the basis of the monthly pay drawn over a period of twelve (12) months prior to their exit. 

EPS 2014 Amendment was therefore held ultra vires. 

The potential impact of the aforesaid judgement 

Based on the aforesaid, our analysis with respect to the potential impact of the Judgement has been summed up below: 

(a)  The Judgement shall not impact contributions being made by employers/employees under the EPS, unless the said contribution has been made (or to be made) on basis of the actual salary drawn by the respective employee (which salary is currently not less than INR 15,000/-) and preceded by a joint request made for such purpose by the employer and the employee (to the EPFO). However, the employers and employees who have jointly applied / requested the EPFO for paying contribution on actual salaries will be entitled to pension benefits in proportion to their contribution based on actual salaries.
(b)  Subject to the aforesaid, the employees may also avail the benefit of higher pension by paying the difference of contribution as per actual salary drawn by them and contribution they have already made as per EPS Amendment 2014. 
(c)  It may be envisaged that EPFO may come up with a new circular to implement the order of the Supreme Court. 
(d)  Following the advice made by Supreme Court as indicated above, the likelihood of ‘the employees being given the following option by the EPFO cannot be ruled out: (i) to return all such amounts that the concerned employees may have taken or withdrawn from their provident fund account before granting them the benefit of the EPS at their actual salary basis; and (b) upon such return being made, grant of the benefits (to the said employee) - accruing on account of setting aside of EPS Amendment 2014. 

We trust that you found this analysis useful. Please feel free to reach us for any clarification on the above. 

Note: This document is for information purposes only and should not be relied upon or construed as legal advice or our opinion. 

 

 

 

 

 


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ABOUT THE AUTHOR


Raunak Singh

Avitr Legal is a boutique law firm recently established with a vision to assist clients with legal services being at par with international standards. With due credits to our experienced attorneys, we have carved for ourselves, a niche space in certain selected practice areas being Employment laws, Corporate & Commercial laws and Real Estate laws. We offer a distinctive and engaging culture that focuses on providing effective solutions to our clients.

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