India: Employees' Pension (Amendment) Scheme 2014 Struck Down: Employees' Gain Or Employers' Problem?

Last Updated: 11 April 2019
Article by Anshul Prakash, Abhisek Choudhury and Deeksha Malik

Most Read Contributor in India, July 2019

On 1 April 2019, the Supreme Court of India (Supreme Court) in Employees Provident Fund Organisation v Sunil Kumar and Ors, SLP (C) 9610/2019 dismissed a special leave petition filed by the Employees Provident Fund Organisation (EPFO) against the judgment of the Kerala High Court in the case of P. Sasikumar and Ors v Union of India and Ors, (2019) ILLJ 494 Ker (Sasikumar), holding that it found no merit in the petition. The Kerala High Court had set aside the Employees' Pension (Amendment) Scheme, 2014 (EPS Amendment), which inter alia capped the maximum pensionable salary at INR 15,000 (Indian Rupees Fifteen thousand) per month and created additional obligations of payment of contribution on the salary exceeding the said ceiling.

Background

Prior to the EPS Amendment, Paragraph 6 of the Employees' Pension Scheme 1995 (EPS Scheme) provided that the EPS Scheme would apply to every employee who, on or after 16 November 1995, became a member of the Employees' Provident Fund Scheme 1952 (EPF Scheme). Further, Paragraph 11 of the EPS Scheme provided that the pensionable salary shall be the average monthly pay drawn during the contributory period of service in the span of the 12 (twelve) months preceding the date of the employee's exit from the membership of the employees' pension fund. The said provision had capped the maximum pensionable salary at INR 6,500 (Indian Rupees Six thousand five hundred) per month but had allowed the contribution to be made as per the actual salary of the employees at the option of the employer and the employees.

Through the EPS Amendment which became effective from 1 September 2014, the conditions of membership of the EPS Scheme underwent a change. The EPS Scheme was now applicable to such employees who on or after 16 November 1995 became a member of the EPF Scheme and whose monthly salary on the date of joining was less than or equal to INR 15,000 (Indian Rupees Fifteen thousand). Further, determination of pensionable salary was as per the average monthly salary drawn during the contributory period of service in the span of 60 (sixty) months preceding the date of the employee's exit from the membership of the employees' pension fund. The maximum pensionable salary was set at INR 15,000 (Indian Rupees Fifteen thousand) per month. While the option of contribution on a monthly salary exceeding INR 15,000 (Indian Rupees Fifteen thousand) was allowed upon making a fresh option, such option had to be exercised within a period of 6 (six) months from 1 September 2014. Further, the employees were required to contribute at the rate of 1.16% (one point one six per cent) of the salary exceeding INR 15,000 (Indian Rupees Fifteen thousand) as an additional contribution to the contributions payable by them under the EPF Scheme. It was further provided that for the computation of the monthly pension payable to employees, the employees' salary shall be capped at INR 6,500 (Indian Rupees Six thousand five hundred) per month up to 1 September 2014 and at INR 15,000 (Indian Rupees Fifteen thousand) per month for the period thereafter.

The Sasikumar Case

The petitioners in Sasikumar were employees working in different establishments and had approached the Kerala High Court to challenge the validity of the EPS Amendment on the ground that the same had placed them in an adverse position by making it onerous for them if they contribute towards the pension fund based on their actual salary. It was also argued that the cap of INR 15,000 (Indian Rupees Fifteen thousand) was unrealistic and had no relation to the actual salaries drawn by employees across the country. Another contention put forth by the petitioners was that the cut-off date provided by the EPS Amendment for making a fresh option to contribute on the basis of a higher salary was inconsistent with the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act 1952 (EPF Act) and the schemes framed thereunder. They referred to Paragraph 26(6) of the EPF Scheme, which does not set any cut-off date for making a similar option for employees' provident fund contribution.

The Kerala High Court held in the petitioners' favour, observing that nowhere in the EPF Act does it allow an additional rate of interest to be imposed for making contributions based on the actual salary of the employees. Since employees have the option to make contributions in excess of the wage ceiling, no other restriction could be imposed on their right to exercise such option. The Kerala High Court also held that the respondents' contention of depletion of the pension fund was unsustainable as the respondents failed to adduce any evidence in this regard. On the contrary, the contributions paid by the ever-increasing workforce in India based on their actual salaries led to accretion of the pension fund. The stipulation of a cut-off date for conferring the benefits under the EPS Scheme was also held to be invalid, for such a requirement would have the effect of classifying the employees based on their retirement before or after the prescribed date.

In view of the above, the Kerala High Court set aside the EPS Amendment along with all consequential orders and proceedings issued by the provident fund authorities based on the EPS Amendment.

Comments

The order of the Supreme Court dismissing the special leave petition of the EPFO and thereby reaffirming the judgment of the Kerala High Court in Sasikumar is indeed a relief for employees working across different establishments. The earlier position regarding membership of the EPS Scheme appears to have been restored, thereby allowing any member of the EPF Scheme, including those earning more than INR 15,000 (Indian Rupees Fifteen thousand) per month and who became members by virtue of a request under Paragraph 26(6) of the EPF Scheme, to become members of the EPS Scheme. Similarly, the pensionable salary would now be based on the average salary in the span of 12 (twelve) months instead of 60 (sixty) months. The amount of monthly pension would, therefore, increase as employees normally draw a higher salary towards the end of their service.

However, with the EPS Amendment including the ceiling of INR 15,000 (Indian Rupees Fifteen thousand) being shown the door, there is lack of clarity regarding the situation where an employer has chosen to limit the provident fund contribution to of INR 15,000 (Indian Rupees Fifteen thousand), as is permissible under the EPF Scheme. In this case, the pension fund contribution would also be based on INR 15,000 (Indian Rupees Fifteen thousand) and not the actual salary of the employees since the pension fund contribution is made from the employer's contribution (that is, 8.33% out of 12%).

Regarding the question of the date on which the Supreme Court's order becomes effective, one may take a cue from the order passed by the Kerala High Court in Sasikumar. As per the said order, the employees 'shall' be entitled to exercise their right of option without any restriction of a cut-off date. With the Supreme Court reaffirming the said order, it appears that the same would have a prospective operation regarding the option the employees may exercise under the EPS Scheme. However, it does appear that the orders passed by the EPFO in relation to exercise of fresh option based on the EPS Amendment will be impacted.

With the Supreme Court's dismissal of the special leave petition, it is hoped that the EPFO issues a clarification on the aforementioned aspects and allays confusion within the industry.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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