Provident Fund Contributions and Accounts

Section 17(2). A contractor from whom those amounts may be recovered may in turn recover from the employee the employee's contribution only, by deduction from the wages payable to him.

Section 17(3). Notwithstanding any contract to the contrary, no contractor shall be entitled to deduct the employer's contribution, or the administration charges, from the wages payable to an employee, or otherwise to recover them from the employee.

Put the three together and the design is clear. The employer is liable in the first place, whoever the worker is engaged through. He may pass the cost down to the contractor. The contractor may pass down only the employee's own share. The employer's share can never reach the worker's wage packet, and section 17(3) says so with a non obstante clause so that no contract can arrange otherwise.

That is the answer to the commonest problem on this section: a contract clause saying "the worker shall bear all statutory contributions" is void to the extent it touches the employer's contribution.

Section 18: recognition under the Income-tax Act

For the purposes of the Income-tax Act 1961, the Provident Fund shall be deemed to be a recognised provident fund within the meaning of clause (38) of section 2 of that Act. The proviso adds that nothing in the Income-tax Act operates to render ineffective any provision of the Provident Fund Scheme which is repugnant to that Act or its rules.

The practical point is that the statutory fund does not have to apply for recognition; it has it by force of section 18. And where the Scheme and the tax law conflict, the Scheme prevails.

Section 19: priority over other debts

Notwithstanding anything in any other law, any amount due under Chapter III shall be a charge on the assets of the establishment to which it relates, and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code 2016.

Two halves, and both matter. The dues are secured on the establishment's assets rather than being a bare personal claim. And the priority is not free standing: it operates in accordance with the Insolvency and Bankruptcy Code, so the order of payment in an insolvency is the one that Code lays down.

Section 20: establishments outside the Chapter

Section 20(1) puts four categories outside Chapter III altogether:

Clause (a) has two conditions and both must be met: fewer than fifty persons and working without the aid of power. A co-operative society with thirty workers using power is not excluded. Reading the two as alternatives is the standard mistake.

Clause (d) is a transitional protection and should be read with section 164(2). It keeps employees already receiving provident fund benefits under an earlier enactment where they were.

Section 20(2), executive exemption. If the Central Government is of opinion that, having regard to the financial position of a class of establishments or other circumstances, it is necessary or expedient, it may by notification and subject to conditions exempt that class, prospectively or retrospectively, from the operation of the Chapter, for a specified period.

Section 21: employers who may keep their own accounts

Section 21(1). On an application made by the employer and the majority of employees in relation to an establishment employing one hundred or more persons, the Central Government may, by order in writing, authorise the employer to maintain a provident fund account for the establishment, in the prescribed manner and on the terms specified in the Provident Fund Scheme.

The proviso is the integrity test. No such authorisation shall be made if the employer had committed any default in the payment of provident fund contribution, or any other offence under this Code, during the three years immediately preceding the date of authorisation.

Section 21(2). An authorised employer must maintain the account, submit returns, deposit contributions, provide facilities for inspection, pay administrative charges and abide by the other terms specified in the Provident Fund Scheme.

Section 21(3). The Central Government may cancel the authorisation by order in writing if the employer fails to comply with any term or condition, or commits any offence under the Code. The proviso requires that before cancelling, the employer be given a reasonable opportunity of being heard.

Note the three safeguards packed into one short section: joint application by employer and a majority of employees, a clean record for three years, and a hearing before cancellation. That combination is a good short answer.

Section 22: transfer of accounts

Where an employee:

• (a) employed in an establishment to which the Chapter applies relinquishes that employment and obtains employment in any other establishment, whether or not the Chapter applies to it; or
• (b) employed in an establishment to which the Chapter does not apply relinquishes it and obtains employment in an establishment to which the Chapter does apply,

then his accumulated amount in the provident fund account or pension account is transferred or dealt with in the manner specified in the Provident Fund Scheme or the Pension Scheme.

The two clauses between them cover movement in either direction, into and out of coverage. The section does not itself say what happens to the money; it sends the question to the scheme. That is the pattern of the whole Chapter: the Code fixes the entitlement and the scheme carries the mechanics.

Section 23: appeal to the Tribunal

Section 23(1), what may be appealed. A person aggrieved by an order of any authority may appeal to the Tribunal constituted by the Central Government in two matters only:

1. determination and assessment of dues under section 125 relating to Chapter III; and
2. levy of damages under section 128 relating to Chapter III.

Section 23(2), form. The appeal is filed in such form and manner, within such time, and with such fees as the Central Government prescribes.

Section 23(3), the pre-deposit. No appeal against a determination under clause (a) shall be entertained from an employer unless he has deposited with the Social Security Organisation concerned twenty-five per cent of the amount due from him as determined under section 125.

Section 23(4), time. The Tribunal shall endeavour to decide the appeal within one year from the date it was preferred.

Three precise points, all examinable. The appeal lies in two matters only. The pre-deposit is twenty-five per cent and applies to the assessment appeal, not to the damages appeal. And the one year in section 23(4) is an endeavour, not a limit: nothing happens to the appeal if it takes longer.

The wages on which all of this is computed

Every figure in this Chapter is a percentage of "wages", so the definition decides the money. Section 2(88) is worked in [Definitions under the Social Security Code], but the reason it reads as it does belongs here.

Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir, (2019) 6 SCC 240, is the leading modern decision.

Facts. A group of appeals raised one common question: whether allowances such as canteen, conveyance, management, medical, night shift, rent, special and travel allowances formed part of "basic wages" under section 2(b) of the Employees' Provident Funds and Miscellaneous Provisions Act 1952, so that provident fund contributions had to be paid on them. The provident fund authority and the appellate authority had found as a fact that these allowances were essentially part of the basic wage, camouflaged as allowances so as to avoid contribution.

Held. Wages which are universally, necessarily and ordinarily paid to all employees across the board are basic wages, and the crucial test is one of universality. A payment available only to those who avail an opportunity more than others, or which is variable, or which is linked to an incentive for production beyond the norm, falls outside: overtime and leave encashment are the Court's own examples. Since the establishments had produced no material to show that these allowances were variable, incentive linked or not paid across the board, the concurrent findings of fact stood.

Why it matters here. Because it names the abuse this Chapter is exposed to. If contributions are computed on a narrow wage, an employer can shrink the base by paying a small basic salary and a large bundle of allowances, and the retirement savings of every employee shrink with it. But note carefully what the case can and cannot be used for now. It construed "basic wages" under the 1952 Act, which item 3 of section 164(1) has repealed, and the Code does not use that phrase. Under section 2(88) the same abuse is met arithmetically: if the excluded payments exceed one half of all remuneration, the excess is deemed to be remuneration and added back into wages. Cite the case for the mischief and the history. Cite the first proviso to section 2(88) for the present test.

A worked example

Deepak works at a warehouse run by Zeta Logistics, which has 140 employees. He is on the roll of Metro Manpower, a contractor. His wages are 18,000 rupees a month and no notification raises the rate to twelve per cent.

Step 1. Who is liable for the contribution? Zeta, as the employer. Section 16(1)(a) fixes the employer's contribution on wages payable to each employee "whether employed by him directly or by or through a contractor". Engaging Deepak through Metro does not move the primary liability.

Step 2. Can Zeta get the money back from Metro? Yes. Under section 17(1) Zeta may recover the contributions and administration charges from Metro, either by deducting them from what is payable under the contract or as a debt.

Step 3. Can Metro get the money back from Deepak? Only the employee's share, 1,800 rupees, by deduction from his wages: section 17(2).

Step 4. Metro's contract with Deepak says he bears all statutory contributions. Effect? None, so far as the employer's contribution and the administration charges are concerned. Section 17(3) operates notwithstanding any contract to the contrary and forbids the contractor from deducting or otherwise recovering them from the employee.

Step 5. Zeta wants to keep the provident fund accounts itself. It employs 140 persons, so it clears the hundred person threshold in section 21(1). It needs an application by the employer and the majority of employees, and it must not have defaulted on a contribution or committed any offence under the Code in the three years immediately preceding.

Step 6. Zeta is assessed for arrears of 6,00,000 rupees under section 125 and wants to appeal. It may appeal to the Tribunal under section 23(1)(a), but the appeal will not be entertained unless it first deposits twenty-five per cent, that is 1,50,000 rupees, with the Social Security Organisation concerned: section 23(3).

Step 7. Zeta goes into insolvency owing provident fund dues. Under section 19 the amount is a charge on the establishment's assets and is paid in priority in accordance with the Insolvency and Bankruptcy Code 2016.

Step 8. Deepak leaves and joins an establishment Chapter III does not cover. His accumulated balance is transferred or dealt with as the Provident Fund Scheme or the Pension Scheme specifies: section 22(a), which covers a move to any other establishment whether or not the Chapter applies to it.

What this does NOT mean

Engaging workers through a contractor does not shift the liability. Section 17 is a right of recovery given to the employer, not a transfer of the obligation. If the contractor does not pay, the employer is still liable.

Section 19 does not put provident fund dues ahead of everything. It creates a charge and directs priority in accordance with the Insolvency and Bankruptcy Code 2016, so the statutory waterfall in that Code governs.

Section 20(1)(a) does not exclude all co-operative societies. Only those employing fewer than fifty persons and working without the aid of power.

Section 21 does not let a large employer opt out of the Chapter. He remains bound by it and merely maintains the accounts himself, on terms, under inspection, and subject to cancellation.

Section 23 is not a general appeal. It lies only against determination and assessment under section 125 and levy of damages under section 128, so far as they relate to Chapter III.

Limits and criticism

The pre-deposit can be a barrier. Twenty-five per cent of a disputed assessment must be paid before the appeal is even entertained, which weighs hardest on the small employer with the weakest cash position, and it is required whether or not the assessment turns out to be wrong.

The one year in section 23(4) is unenforceable. It is an endeavour, with no consequence attached to failure.

Section 20(2) allows retrospective exemption of a whole class by notification, which can remove accrued coverage by executive act.

The exclusion in section 20(1)(a) is dated. A power threshold and a fifty person threshold for co-operative societies made sense in 1952 and are hard to justify as a distinction now.

Quick revision

• Section 17: employer liable even where the worker comes through a contractor; employer may recover from the contractor; contractor may recover only the employee's share from the employee; section 17(3), notwithstanding any contract, the contractor may never deduct the employer's contribution or administration charges from wages.
• Section 18: the Provident Fund is deemed a recognised provident fund under section 2(38) of the Income-tax Act 1961; the Scheme prevails over repugnant tax rules.
• Section 19: dues are a charge on the assets, paid in priority in accordance with the Insolvency and Bankruptcy Code 2016.
• Section 20: four exclusions. Co-operative societies with fewer than fifty persons and no power; Government establishments whose employees already have contributory provident fund or old age pension; establishments under other laws with the same; employees already receiving provident fund benefits at commencement. Section 20(2): class exemption by notification, prospective or retrospective.
• Section 21: employer of one hundred or more may be authorised to keep his own accounts, on joint application with a majority of employees, only if no default or offence in the preceding three years; cancellation only after a reasonable opportunity of being heard.
• Section 22: accumulations transferred on change of employment, in either direction, as the Scheme specifies.
• Section 23: appeal to the Tribunal against section 125 determination and section 128 damages only; twenty-five per cent pre-deposit for the assessment appeal; decision to be endeavoured within one year.

Test yourself

1. A contractor deducts both his own and the principal employer's share of provident fund from a worker's wages, relying on a clause in the worker's contract. Is that lawful? No. Section 17(3) provides that notwithstanding any contract to the contrary, no contractor is entitled to deduct the employer's contribution or the administration charges from the wages payable to the employee, or otherwise to recover them from him. Only the employee's own contribution may be deducted, under section 17(2).

2. Is a co-operative society with forty employees, using power, within Chapter III? Yes. Section 20(1)(a) excludes such a society only if it employs fewer than fifty persons and works without the aid of power. Both conditions must be satisfied and only one is.

3. What must an employer show before he may keep his own provident fund accounts? That the establishment employs one hundred or more persons; that the application is made by the employer and the majority of employees; and that he has not defaulted in payment of provident fund contribution or committed any other offence under the Code during the three years immediately preceding: section 21(1) and its proviso.

4. An employer is assessed under section 125 for 4,00,000 rupees. What must he do before appealing? Deposit twenty-five per cent of the amount due as determined, that is 1,00,000 rupees, with the Social Security Organisation concerned. Without it the Tribunal will not entertain the appeal: section 23(3).

5. Against which orders does an appeal lie under section 23? Only two: determination and assessment of dues under section 125 relating to Chapter III, and levy of damages under section 128 relating to Chapter III.

6. Why can Vivekananda Vidyamandir not be quoted as the present test for what wages the contribution is computed on? Because it construed "basic wages" in section 2(b) of the Employees' Provident Funds and Miscellaneous Provisions Act 1952, an Act repealed by item 3 of section 164(1) of the Code, and the Code uses "wages" as defined in section 2(88). The present answer to the same abuse is the first proviso to section 2(88), which adds back into wages any excluded payments exceeding one half of all remuneration.