The story so far: In a landmark ruling, the Karnataka High Court recently struck down a 15-year-old amendment to the law which permits the incorporation of foreign workers in the employees’ provident fund (EPF). Accordingly, it quashed the special provisions for international workers under paragraph 83 of the Employees’ Provident Funds Scheme, 1952 (EPF Scheme) and paragraph 43A of the Employees’ Pension Scheme, 1995 (EP Scheme) for being “unconstitutional and arbitrary.”
Justice KS Hemalekha highlighted that while the schemes prescribe a salary cap of ₹15,000 per month for domestic workers to avail of provident fund benefits, no such limit exists for international workers. She reasoned that this disparity amounts to a violation of Article 14 of the Constitution, which guarantees equal protection of the laws.
According to Sonu Iyer and Puneet Gupta, partners at EY India, the ruling is likely to be challenged before a larger bench of the High Court or the Supreme Court. “Until then, employers may analyse the impact of the ruling and devise their compliance strategy accordingly, also considering the fact that similar writs are pending before other High Courts in the country,” they told The Hindu.
Pooja Ramchandani, partner and head of the employment law practice at Shardul Amarchand Mangaldas pointed out that while the High Court’s ruling may have a persuasive value before the Courts outside of Karnataka, PF authorities can still enforce these provisions in other States in the interim period. This might result in employers having to continue with provident fund compliances for international workers in certain regions.
EPF benefits for international workers
The Employees’ Provident Funds Miscellaneous Provisions Act, 1952 (1952 Act) is India’s pivotal social security legislation and was enacted to extend provident funds, pension funds and deposit-linked insurance funds for employees in factories and other establishments. It regulates three main schemes — the EPF Scheme, the EP Scheme and the Employees’ Deposit Linked Insurance Scheme, 1976.
The Union government administers the 1952 Act through a statutory body — the Employees’ Provident Fund Organisation (EPFO). An establishment with a minimum of 20 employees is required to register with the EPFO and make provident fund (PF) contributions for eligible employees.
In 2008, the 1952 Act was amended to bring international workers or expatriates within the fold of the statute. As per the amendment, international workers employed in India for a minimum period of six months are mandated to make PF contributions which include 12% of the employee’s total salary. A matching contribution is made by the employer for each of these workers. However, contrary to their domestic counterparts, the wage ceiling of ₹15,000 per month for availing PF benefits does not apply to international workers. Moreover, exemptions are permitted subject to existing Social Security Agreements (SSAs) and bilateral economic partnership agreements.
An SSA, also known as a “Totalisation Agreement,” is a bilateral instrument executed to protect the social security interests of workers posted in a foreign country. Indian employees who are posted in other countries by their Indian employers continue to make social security contributions in India as per domestic law. They may also be required to make similar contributions under the host country’s laws. However, due to restrictions on withdrawals and stipulations relating to their duration of stay, such employees rarely reap benefits from PF contributions made outside India. As a result, SSAs are executed to avoid such double coverage — coverage under the social security laws of both the domestic as well as the host countries.
Notably, withdrawal of such PF accumulations by international workers based in India is permitted by the scheme only under the following conditions — upon retirement from service in the establishment at any time after the attainment of 58 years of age; upon retirement on account of permanent and total incapacity for work due to bodily or mental incapacity and pursuant to any stipulations under existing SSAs.
Since 2008, more than one lakh workers employed by about 1000 companies have enrolled in the provident fund for international workers. At present, India has operating SSAs with the following countries — Belgium, Germany, Switzerland, Denmark, Luxembourg, France, the Republic of Korea, Netherlands, Hungary, Finland, Sweden, Czech Republic, Norway, Austria, Canada, Australia, Japan, Portugal and Brazil. Since several Indian companies frequently send their employees to the UK on secondment/deputation assignments, India is currently negotiating an SSA with the UK under the proposed Free Trade Agreement (FTA). The two countries launched talks for an FTA in January 2022 to bolster economic ties.
Also Read: India negotiating social security pacts with U.S., U.K.: Bhupender Yadav
The arguments
The High Court passed the ruling on a batch of petitions moved by Stone Hill Education Foundation and others seeking to declare para 83 of the EPF Scheme and para 43A of the EP Scheme as unconstitutional. These provisions for international workers were introduced vide a Union government notification and given effect from October 1, 2008.
Contending that international workers constituted a “separate class”, the petitioners pointed out that they worked in India only for a limited period and thus requiring them to make PF contributions on their entire global salary would cause “irreparable injury.” The petitioners also highlighted that while domestic workers earning above the specified amount— ₹15,000 per month— fell outside the purview of the scheme, international workers were covered under it irrespective of their salary. This according to them results in a violation of Article 14 of the Constitution. By not stipulating any salary ceiling limits for international workers, the very object of the parent legislation was contravened, they contended.
On the other hand, the Union government argued that the parliamentary intent was to ensure that no person is deprived of social security benefits including Indian workers deputed to work abroad. Benefits under these schemes were extended pursuant to India’s international obligations under various SSAs executed with foreign countries, it said.
The verdict
The Court highlighted that the primary aim of the 1952 Act was to safeguard industrial workers by offering them an alternative to pensions. However, it clarified that the legislation was never designed to universally extend PF benefits to employees irrespective of the salaries drawn by them.
“The EPF & MP Act was (1952 Act) enacted with a view to see that those in lower salary brackets get retirement benefits and by no stretch of imagination, could it be said that the employees who draw lakhs of rupees per month should be given the benefit under the enactment,” the Court asserted. Acknowledging that the law envisaged heavy costs for non-compliance it emphasised that personnel “cannot be diverted to cater to the needs of rich international workers who earn huge amounts of money.”
Justice Hemalekha pointed out that an Indian employee working in a foreign country which has an SSA with India continues to make PF contributions on a meagre sum of ₹15,000, however, a foreign worker is made to contribute PF on his entire salary even though both are international workers. Deeming this disparity unconstitutional, she observed, “The Government of India is unable to substantiate any nexus with the object sought to be achieved, para 83 is clearly discriminatory in treating the international workers of Indian origin and foreign origin differently and thus violative of Article 14 of the Constitution of India.”
Agreeing with the petitioners that these provisions were violative of the 1952 Act, the Court ruled, “Para 83 of the EPF Scheme is in the nature of subordinate legislation and therefore, the subordinate legislation cannot travel beyond the scope of the mother Act...There being no commonality of interest of the aims and objectives of EPF & MP Act, 1952 and para 83 of EPF Scheme, para 43A of EP Scheme to be struck down as incompatible, arbitrary, unconstitutional and ultra vires.”
Dismissing the government’s contention that special benefits were extended to international workers as a result of existing international obligations, Justice Hemalekha reasoned, “There is no rational basis for this classification nor there is reciprocity that compels to classify foreign employees from non-SSA countries as international workers. The respondents neither have stated whether the Indian employees working in non-SSA countries [are] required to contribute their entire pay without statutory limit towards PF of that country. In the absence of parity and also in the absence of reciprocity, there is no justification to demand a contribution on the entire pay of a foreign employee from a non-SSA country.”
The EPFO’s response
Meanwhile, the Ministry of Labour and Employment through the EPFO has reacted to the verdict by saying that it was “actively evaluating the future course of action.”
“The appeal is being prepared and the argument will be based on special provisions in the scheme that are drafted with specific purposes of protecting the interests of Indian workers abroad. The EPFO is also consulting representatives of employers and employees to clear apprehensions”, an official said.
Referring to the SSAs executed with 21 countries so far, the EPFO’s press release said, “These agreements aim to guarantee the uninterrupted social security coverage of employees during international employment. These agreements are very important for India for promoting International mobility and leverage the demographic dividend. The EPFO serves as the operational agency in India for such social security agreements.”
Potential impact
“The question is not whether international workers should be extended provident fund benefits on account of their limited period of employment, it is whether there is a rationale for classification of foreign employees from non-SSA countries (as) different from Indian employees in terms of the rate of contribution. The EPF Scheme prescribes that provident fund contribution can be computed basis a salary of ₹15,000 for Indian employees regardless of the Indian employee’s salary being more than ₹15,000. However, for foreign employees, the provident fund contribution is computed on the entire salary and not ₹15,000”, Ms. Ramchandani said.
She also pointed out that India should consider introducing amendments to ensure that expats are treated at par with domestic workers with respect to provident fund benefits to attract foreign investments. The ruling is also likely to have an impact on India’s existing SSAs with other countries. “If the Karnataka High Court judgment is upheld by the Supreme Court, it remains to be seen what amendments it [India] will bring about in the law to continue the reciprocal arrangements enshrined in the SSAs”, Ms. Ramchandani added.
(with inputs from A.M Jigeesh)
