Employee provident fund act & misc prov.

Engaging contract labour has become a necessity for every employer in order to survive in the competitive scenario.  The provident fund authorities insist that principal employer will be liable for EPF contributions for the employees of the contractor.  The following articles highlights with judicial interpretations that the principal employer cannot be held liable for the dues payable by the contractor. 

By H.L. Kumar

On allotment of independent code number (after complying with the prescribed conditions) and submitting the list of 20 or more employees, a contractor acquires the status of ‘establishment’ (may it be a Company, firm, society or sole proprietorship) and becomes responsible for deposit of Employees Provident Fund contributions. Besides that administrative charges are paid to the EPFO by such establishment. The establishment of contractor maintains records of the employees, submits nomination forms, returns and complies with other formalities like maintenance of inspection book, etc. etc. it is intriguing as to why a principal employer should be held liable for the default in payment of contributions or delaying the same by the establishment of the contractor.

The Employees’ Provident Fund Organisation (EPFO) was conceptualized to take care of the employees but not to let loose the reign of ‘Inspector Raj’ on the employers. It is a sad commentary on the EPFO’s functioning that instead of simplifying the provisions of the Employees’ Provident Funds & Miscellaneous Provisions Act and its Schemes for the benefits of the employees and employers, it has often created the labyrinthine of the Byzantine complexity. A perception is gaining ground across the country particularly among the employers that the EPFO believes in circular made laws. This is really a travesty of justice and the administrative dispensation. Although circulars, which are against the grains of the statutory provisions or judicial pronouncements have no sanctity, yet they certainly have the potentiality to cause damage to peace and tranquility of the employers. Holding principal employers liable for the dues of the contractors having independent code numbers is not only fallacious but the deliberate mischief of the EPFO.

With the globalization of the economy engaging of contract workers has not only become a necessity but almost inevitable. High level and aggressive competition among multinationals and national organisations have necessitated reorientation of business and industry. In the present circumstances, production is not only to be enhanced but has to be cost-effective and, therefore, outsourcing of certain services has become a necessity.

So far as the implications under Employees’ Provident Funds & MP Act, (hereinafter referred to as Provident Fund Act) are concerned, it has gone a sea change over the last, more than a decade.  Till 22nd March, 2001 the contractors were not allotted independent code numbers under Provident Fund Act and, as such, their workers were covered on the code number of the principal employers.  The Scheme of Provident Fund Act provides that a code number is to be allotted to an establishment only then it will be entitled to deduct and deposit the contributions of the employees and the employer.  While allotting code number, every establishment including a contractor has to comply with following requirements :-

1.    Application Proforma for Coverage duly complete. (on Company letter head)

2.    Copy of Memorandum / Partnership Deed etc., whatever applicable.

3.    List of present Employees with salary break-up details and dates of appointment and parentage etc.

4.    Chart showing number of employees, month wise from the date of start of business.

5.    Chart showing number of employees, month wise, engaged through contractor(s)

6.    Date of commencement of business.

7.    Copy of first invoice, if any.

8.    List of Directors / Partners, i.e., Names, parentage, addresses, etc.

9.    Proof of residences of Directors.

10.  Identification document of Directors.

11.  Particulars of the Bank Account of the Company

12.  One blank cancelled cheque leaf.

13.  Pan number of the Company.

14.  Pan numbers of Directors/Partners/Proprietor

15.  Proof of ownership / tenancy, etc. of the premises.

16.  Board Resolution / Authority.

17.  Copy of Aadhar card (though not required immediately, but start obtaining from employees)

When a contractor has got an independent code number, his or her liabilities get increased vis-à-vis the employees.  On allotment of code number, the Provident Fund Authorities recognize the contractor as ‘establishment’ since it has complied with all the prescribed conditions.  A principal employer cannot be held responsible for the omissions and commissions of the contractor’s employees.  The Scheme of the Contract Labour (Regulation & Abolition) Act stipulates that the principal employer will not be supervising the workers of the contractor otherwise the contract labour system will be rendered as sham, ruse and camouflage as held in in Steel Authority of India Ltd. vs National Union Water Front Workers, 2001 LLR 961 (SC).

In Pardeep Kumar  vs. Presiding Officer and another, 2015 LLR 726, the Punjab and Haryana High Court has held that  employer-employee relationship, in respect of principal employer, would not exist if the contractor, engaged in supply of man-power, is having a valid licence under the Contract Labour (Regulation and Abolition) Act, 1970, records of payment of wages and attendance show payments made by the contractor, EPF Employee Code number allotted to the workman is through the firm of the Contractor.

Despite allotment of code number under the Provident Fund Act, some of the contractors default in depositing the contributions of their workers or delay in timely depositing the same.  As and when such contractors default, the Provident Fund Authorities hold the principal employer liable for the dues.  A question arises as to whether the principal employer can be held liable to pay Provident Fund dues payable by the contractor.  When asked about the justification of such demand, the Authorities under the Provident Fund Act refer to paragraph 30(3) of Employees’ Provident Fund Scheme, 1952 providing that “it shall be the responsibility of the principal employer to pay both the contributions payable by himself in respect of the employer directly employed by him and also in respect of the employees employed by or through a contractor and also administrative charges”.  It is pertinent to state here that paragraph 30 of the Scheme could be relevant only till 22nd March, 2001 when the contractors were not allotted code numbers under the Provident Fund Act.  However, for the applicability of Provident Fund Act, a contractor is treated as an establishment when code number is allotted after satisfying about completion of all the formalities.  As an independent establishment, it is responsible for payment of EPF contributions and other dues payable under Provident Fund Act, the principal employer cannot be asked by the Provident Fund Authorities in case a contractor holding independent code number defaults the Provident Fund dues.  It is pertinent to state here, that the contractor in the capacity of an employer of its ‘establishment’ pays 0.85% towards administrative charges in addition to its matching contribution which is termed as ‘employers share’ of EPF contributions.

The Employees’ Provident Fund Act and the Scheme stipulates that as and when there have been default of payment of contributions by establishment, the Provident Fund Authority has to initiate proceedings under section 7A of the Provident Fund Act only then the liability for payment can be fastened upon the employer.

In a landmark judgment Food Corporation of India vs. The Provident Fund Commissioner and ors., 1990 LLR 64 the Supreme Court has observed that “it is indeed a large amount for the determination of which the Commissioner has only depended upon the lists furnished by the workers Union.  It is no doubt true that the employer and contractors are both liable to maintain registers in respect of the workers employed.  But the Corporation seems to have some problems in collating the lists of all workers engaged in depots scattered at different places.  It has requested the Commissioner to summon the contractors to produce the respective lists of workers engaged by them.  The Commissioner did not summon the Contractors or the lists maintained by them.  He has stated that the Corporation has failed to produce the evidence.  While allowing the appeal that the powers of the Civil Court under section 7A of the Act to be the determining authority under Provident Fund Act was given by law.  This power was given to the Commissioner to decide not abstract questions of law, but only to determine actual concrete differences in payment of contribution and other dues by identifying the workmen.  Despite above, the Provident Fund Authorities keep on fastening the liability for the default of the contractors upon the principal employer.

In Group 4 Securitas Guarding Ltd. & Another vs. Employees’ Provident Fund Appellate Tribunal & Ors., 2012 LLR 22 the Delhi High Court has held that where the contractor, being employer providing services of man-power, is having control over the personnel being supplied by him to the establishments by way of issuance of appointment letters, making payment of wages and other allowances, taking disciplinary actions, effecting their placement, transfer and termination of services, the relationship between such a contractor and the establishment where the man-power is supplied by him would be of ‘principal to principal’ and not that of employer-contractor.

In the Madurai District Central Co-operative Bank Ltd. rep. by its Special Officer vs. Employees’ Provident Fund Organisation, 2012 LLR 702, the Madras High Court has held that when a separate code number was allotted, the employees of the contractor, by no stretch of imagination can be treated to be employees of the principal employer.  After hearing the arguments on behalf of the parties (Employees’ Provident Fund Organisation as respondent), the Court held as under :

“With respect to the contractors, who are registered with the Provident Fund Department, having independent code number, they are to be treated as ‘independent employer’.  The petitioner, therefore, cannot be treated to be ‘principal employer’ for the purposes of those contractors”.

In Brakes India Ltd. (Brakes Division), Sholinghur-631 102, rep. by its Vice-President (Pers. & HRD) vs. Employees’ Provident Fund Organisation, Vellore rep. by its Regional Provident Funds Organisation, 2015 LLR 635, the Madras High Court buttressed the same point in holding that the Employees’ Provident Fund Authority is not entitled to recover either Provident Fund contribution or damages from the principal employer in respect of employees engaged through contractors, registered with the PF Department, having independent code number.  The Hon’ble Court concluded :

“In the case on hand, the Contractor was allotted with EPF allotment number vide No.TN/VLR/38789/SDC.2013 in the year 2003 itself.  As per the ratio laid down in the judgment of this Court, the Contractor viz., Mr. A. Govindaraj should be treated as an independent employer.”

In Calcutta Constructions Company vs. Regional Provident Fund Commissioner and Ors., 2015 LLR 1023 the Punjab & Haryana High Court has held that however, when the contractor has not been allotted code number, the contributions in respect of contractor’s employees shall have to be paid at the first instance by the principal employer and recover the same later on from the contractor.

Rhetoric apart our judiciary one of the strongest in the world has a reputation of giving verdicts which display a rare jurisprudential vision. In this regard it is submitted that the Madras High Court in the case referred above has conceptualised the concept of Separate Code and Separate Establishment vis-a-vis EPF laws. Obviously, therefore, we persist with the view that when a contractor independently recruits, engages, controls, supervises and ultimately disciplines his workers under an establishment and obtains Separate Code under the EPF Act, he should be treated a separate entity. He would naturally have different principal employers because he would have contractual jobs at different points. This is also very relevant in the present economic scenario and situation when corporates benefit from outsourcing.  Business Process Outsourcing (BPO) is a buzz word in the economy of today.

So premised, it is all logical and sustainable that the principal employer of such a contractor would not be and should not be liable for proceedings under section 7-A or section 14B of the Act relating to the contractor but otherwise also the principal employer should not be held liable if such a contractor makes default in payment of contribution of his workmen. It is high time that the EPF department should come out with some clarification in this regard so that we may not trail behind the march of time. In the given set of circumstances the principal employer is to have complete immunity from the penal provisions of the law.

Thus, it becomes obvious that either the Employees’ Provident Fund Organisation is still frozen in time warp and does not want to keep pace with the time or it has completely lost its understanding of maintaining the conducive and harmonious ambience for the welfare of employees and peace of the employers. Be that as it may, the government and the industry, both will have to make concerted efforts to stop the Organisation usually going berserk. The reasons are not far to seek for such aberrations in the Employees’ Provident Fund Organisation.