The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the EPF Act) is the primary social security legislation covering private sector establishments in India. With the enhancement of the wage threshold to INR 15,000 per month from 1st September 2014, a significantly higher number of employees have found coverage under this law. With defaults attracting interest and penalties, the onus of ensuring compliance on organizations has never been greater and the PF authorities too have stepped up efforts to inspect establishments on a regular basis. However, one area of compliance which tends to get overlooked by organizations, largely due to a lack of awareness on this issue, is with regard to the treatment of Persons of Indian Origin (PIO) and Overseas Citizens of India (OCI) under the EPF Act.
In late 2008, the coverage of the EPF Act was extended to 'International Workers' (IWs), essentially comprising of foreign expats working in India. As per the provisions of the EPF Act and the Employees' Provident Fund and Miscellaneous Provisions Scheme, 1952 (EPF Scheme), 'International Workers' are defined to include:
- an Indian employee having worked or going to work in a foreign country with which India has entered into a social security agreement (SSA) or certain bilateral comprehensive economic agreements;
- an employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the EPF Act applies.
Hence, in relation to individuals working in India in establishments to which the EPF Act applies, an employee other than an Indian employee, holding other than an Indian passport, can be treated as an International Worker. One would also need to examine whether such an individual comes from a country with which India has signed a SSA, and if so, whether contributions need to be made in India or in the home country of this individual, based on the terms of the SSA. If an employee is classified as an International Worker and provident fund contributions are payable in India (either because India does not have an SSA with the country from which such individual comes, or because the SSA benefits are not triggered based on various factors), the Indian employer will be required to make contributions under the EPF Act on the entire global income of such individuals (without any upper limit).
The major difference between regular Indian workers, and IWs, is that for Indian employees, companies are entitled to limit their provident fund contribution to 12% of INR 15,000 (i.e. INR 1,800 per month)(the upper limit), even if the 'monthly pay' (defined to mean basic wages, dearness allowance and retaining allowance) of the employee exceeds INR 15,000. PF inspections for domestic staff therefore assume greater relevance in the context of individuals whose monthly pay is below INR 15,000. However, this upper limit does not apply to IWs. Therefore, in the event of any alleged non-compliance with the obligation to make PF contributions for IWs, organizations can face significantly greater liability to make good any pending contributions (along with interest and penalties), subject to the manner in which the salary of the International Worker is structured.
In February 2015, the Employees Provident Fund Organization (EPFO) issued a clarification in response to a Right to Information query, whereby it stated that any employee holding a foreign passport and working in an establishment in India to which the EPF Act applies, would be considered as an International Worker. The circular went on to state that PIOs and OCIs would be considered as International Workers under the EPF Act. Accordingly, as per the EPFO, organizations would have to make PF contributions on the entire monthly pay of OCIs and PIOs, without any wage or upper limit.
In our experience, such an interpretation creates several difficulties for organizations. Considering PIOs and OCIs (now all clubbed together under a common OCI scheme) are of Indian origin, and do not require an employment visa to enter and work in India, many organizations do not even realize that they have employed OCIs/PIOs on their payroll. It is not a standard practice for organizations to ask for every employee's passport copy, especially if the individual is a lateral hire from another Indian organization and not an expat especially brought into the country on an employment visa. There are several instances of OCIs / PIOs holding foreign passports merely on account of their birth in a foreign country, but actually having lived in India almost entirely thereafter. Since many such OCIs/PIOs look and sound Indian, and have long tenures of employment in India, it can become very difficult for organizations to detect that someone is in fact not an Indian citizen.
One can argue that the very reason the definition of IWs is qualified to only cover "employees other than Indian employees", is to avoid covering OCIs/PIOs within the definition of IWs, since these individuals are in fact Indian. Various dictionaries define "Indian" as "a person of Indian descent" or "belonging to or relating to India or its people", which all OCIs/PIOs tend to be. This interpretation is also borne out from the Indian government's own policy on OCIs/PIOs, which allows such individuals all the same rights as regular citizens, with few exceptions associated with the right to public sector employment and voting. In fact, several of these employees have either settled in India permanently or plan to do so, and do not have any intention of returning to the country where they have acquired citizenship. Therefore, classifying such PIOs and OCIs as International Workers, and creating a distinction between Indian citizens and PIOs/OCIs, could potentially be considered discriminatory in nature.
Having said that, as matters stand, since the EPFO has taken the stance that PIOs and OCIs should be considered as 'International Workers', companies should take care to ensure that they comply with the provisions of the EPF Act and Scheme in relation to these workers. We have seen a number of companies receiving notices from the PF department, on the grounds that they have failed to pay the accurate amount of provident contributions for PIOs and OCIs on the basis that they are IWs. Since there is no upper limit on PF contributions for IWs, the PF department makes every attempt to argue that the employer is making PF contributions on a "lesser than normal" portion of the salary being paid to these individuals. It attempts to argue that the employer is splitting salary into a smaller 'basic wage' and paying out a larger portion under the head of other components (such as LTA, medical allowance, conveyance allowance, etc.), as a 'subterfuge' to reduce its obligation to contribute PF. Based on such arguments, various allowances are clubbed with 'basic wages' and employers are made liable to contribute PF on the larger monthly pay – sometimes on almost 70%- 90% of the salary being paid to OCIs/PIOs depending on internal pay structures – relying solely on the fact that there is no upper limit applicable to IWs. Coupled with interest and penalties, such assessments can result in significant financial exposure to organizations even if the number of OCIs/PIOs is relatively small. Please note that such arguments are applied by the PF department in the context of OCIs/PIOs even if the employer in question may have been voluntarily paying monthly PF in excess of INR 1,800 per month under the belief that OCIs/PIOs are no different from its domestic/Indian employees.
While Indian Courts have indeed interpreted the term 'basic wages' to mean all components of salary, which are guaranteed, payable to all employees in the concern, and are not conditional in nature, there are several petitions pending before the Supreme Court on this very issue. Further, the PF department seems to be entirely ignoring the qualifying language other than Indian employees in the definition of IWs and determining IW status solely based on the passport of the individual. Such an approach is liable to be challenged, since both tests need to be met – i.e. one must not only be able to demonstrate that the individual holds a foreign passport, but also that he/she is not Indian. The word "Indian" is not interchangeable with the phrase "citizen of India". Further, it is an established principle that no words in a statute are superfluous and such a practice adopted by the PF department is effectively rendering the phrase other than Indian employees superfluous. We therefore believe it is important for the PF department to closely re-assess its practices and interpretations associated with coverage of OCIs/PIOs as International Workers, or for the legislature to amend the law to make it clear that a person has to be a citizen of India (and not an overseas citizen of India) to avoid being treated as an IW.
From a more practical perspective, in order to limit the future exposure from such assessments, organizations must take immediate steps to identify OCIs/PIOs and re-assess their compensation practices for such individuals to avoid unnecessary incremental and disproportionate exposure to PF liability. Since PF authorities could potentially view any salary restructuring with suspicion, its best if such restructuring is supported by justifiable business reasons.
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