he EPFO has issued an inter-department clarification on May 23, 2011  indicating that splitting of minimum wages for the purposes of PF contributions is not permissible. This Clarification, which has been issued in view of the lack of a uniform approach followed by the PF authorities in different states, seems to be an attempt by the labour department to settle the ongoing ambiguity with respect to the calculation of provident fund contributions.

The Clarification seems to be in the interest of the employee community in general, since it is intended to ensure that the employer makes a certain level of PF contributions for its eligible employees and provide necessary social security. The contributions would help ensure adequate amounts in the employees’ provident fund account and provide sufficient pension benefits to the employees and their family members. The Clarification should help curb the malpractices adopted by some employers who make a very low amount of PF contribution as a result of the low basic salary, which also affects the benefits under certain other labour laws where the benefits are linked to the basic salary.

However, the stand taken by the EPFO and the position stated in the Clarification, does not appear to be consistent with law and may be tested in a court of law, leading to more litigation on this issue. This is in view of some of the points as mentioned below:

a. The EPF Act, being a standalone law, does not prescribe that the basic wages should be equal to the minimum wages. Moreover, if that was indeed the intention of the legislature, instead of providing a separate definition of basic wages under the EPF Act, it would have cross referred to the definition of wages under the MWA, since the EPF Act was enacted much after enactment of the MWA.

b. The EPF Act is silent on the issue with regard to the percentage of the salary that may be deemed to be basic wages. As a matter of fact, there is no statute in India that prescribes the percentage of basic wages and/or of any allowance. Accordingly, an employer can under the employment contract indicate the amount of basic wages (besides the other allowances) that shall be payable, as long as the employer ensures that the employee receives at least the minimum amount of wages as prescribed under the MWA.

c. The MWA does not contain a separate definition of basic wages. Infact, while the definition of wages under the MWA includes House Rent Allowance (“HRA”), the definition of basic wages under EPF Act specifically excludes HRA – therefore there does not appear to be any co-relation between ‘wages’ under the MWA and ‘basic wages’ under the EPF Act.

d. The latest judgement on this subject, being that on the Punjab and Haryana High Court in the case of Assistant Provident Fund Commissioner, Gurgaon vs. G4S Security Services (India) Ltd & Anr. (2011 LLR 316 (P&H HC) has permitted the employer to split the minimum wages for the purposes of PF contributions. Unless another court decision in the future overturns this judgement, this judgement shall continue to be the law on this subject. This judgement also makes necessary references to some of the earlier judgments as have been referred in the Clarification. It is surprising to note that this judgment has not been referred to in the Clarification.

Unless there is a further clarity issued by the EPFO on this issue or unless this matter is settled by the courts, this Clarification is likely to lead to more labour law litigation in India since the PF authorities, relying on the Clarification, are likely to take an aggressive stand.


EMPLOYEES’ PROVIDENT FUND ORGANISATION, (Ministry of Labour & Employment, Govt. of India), Head Office, Bhavrshya Yidhr Bhawan, 14, Bhikaiji Cama Place. New Delhi 110 066.
No.: Coord/4(6)2003/Clarification/Vol-II/
Dated: 23-05-2011
Sub: Splitting of Minimum Wages for the purpose of PF contribution not permissible.

Attention of all concerned is invited towards    this office circular no. Coord./4(6)2003/Clarification/13633 dated 06.06.2008 vide which it was advised to ensure that P.F. Contributions on at least Minimum Wages are remitted by the establishments. It was also directed to review all such cases disposed of u/s 7A of the Act where determination of dues has taken place on wages lesser than Minimum Wages.

2. However, it has been observed that still uniform approach in this regard is not followed by all the field offices which is viewed seriously. It is also observed that the field offices are not duly defending the issue in spite of the fact that the Division Bench of Hon’ble High Court, Karnataka in the matter of Group 4 Securities Guarding Ltd Vs. RPFC has categorically upheld the view that RPFCs u/s 7A of the Act can examine and look into the nature of contract entered between the employer and its employees as well as the pay structure to decide whether the pay is being split up under several heads as a subterfuge to avoid PF Contribution.

3. The order of the Division Bench was challenged by the establishment before the Apex Court. While tentatively upholding the order of the Division Bench, the Hon’ble Supreme Court in its order dated 23.07.2004 again granted liberty to the authorities to decide the matter in accordance with law on its merits. As such the authorities have to consider the order of the Division Bench of Hon’ble High Court, Karnataka unless there is substantial evidence to lead otherwise.

4. Accordingly, the matter has been examined in view of the Apex Court’s direction and the following guidelines are issued which should be adhered to and followed by all strictly.

5. The EPF & MP Act, 1952 is a beneficial social security legislation. In construing the provisions of the Act, it has already been settled earlier* that where ever two views are reasonably possible, the view which helps the achievement of the object should be preferred and accordingly the assessing authority while determining dues under Section 7A should curb any attempt to curtail the legitimate social security benefits of the employees. It is needless to reiterate the impact of contribution on lesser wages by splitting the wages into different heads, which results in lesser accumulations in PF account and miniscule pension to the member/family.

[*The RPFC, Punjab Vs Shibu Metal Works — 1965 (1) LU.473].

6. As you are aware, section 2(b) of EPF & MP Act, 1952 defines the basic wage which excludes all kind of allowances from being considered as basic wage. As the term suggests, ‘basic wage’ or ‘basic salary’ is the base salary which is provided to a person in lieu of his services. It is without any allowances which may or may not be added to basic wages in terms of employment.

7. However, it appears that some confusion is prevailing among field offices as to whether basic wages can be lower than the minimum wages or whether an establishment paying minimum wages to its employees can be allowed to split up the wages into various allowances reducing the PF contribution by making it a part of ” terms of employment or Contract” .
8. It would be worth to see that the terms ‘basic’, ‘basic wage’and ‘minimum wage’ are defined in Oxford Dictionary as below:

(i). “basic. Adj.1. forming an essential foundation; fundamental. 2. consisting of the minimum required or offered”

(ii). “basic wage . n. 1 a minimum wage earned before additional payments such as overtime. 2. Austral/NZ/ the minimum living wage, as determined by industrial tribunal”

(iii). “minimum wage, n. the lowest wage permitted by law or by agreement.”

9. Thus, whereas the minimum wage is the lowest permitted wage ought to be paid to a worker as per law as upheld and revisited on various occasions by the Hon`ble Supreme Court *, basic wage is only relevant for allowing additional allowances by treating it (basic wage) as a basic/floor level.

(*Crown Aluminum Works Vs Workers Union, [1958 Vola LU,

Page I], Unichoyi Vs State of Kerala [1961 Voll LL.3 P. 631], Kaman’ Metals & Alloys Ltd. Vs. Their Work Men [1967 Vil.11- 55; (1967) 2 SCR Page 463]).

10. Another aspect of basic wage/salary i5 that it is provided to all classes of employees irrespective of quantum of their salary and its quantum varies with every class/post of an employee where as minimum wage is prescribed only for the lowest paid employee to whom any lesser payment of wages is not permitted by law.
11. From above, it is abundantly clear that basic wage in no case can be lesser than the minimum wage as the same is not only contrary to law of land but is also beyond logic and rationale that an establishment which can not pay even minimum wages to its employees, would be willing to pay allowances to them and if such instances exist, there is certainly a malafide motive which may be considered as knowingly making or causing to make false statement/representation punishable u/s 14(1) of EPF & MP Act, 1952. It may also attract the provision of section 418 of IPC.
12. Further, it also needs to be kept in mind that any agreement which negates any law of land is ab-initio-void and would have effect of non-existence. Therefore, any such terms of agreement for employment where minimum wages is splitted to reduce the liability under EPF & MP Act, 1952 would be governed by the same logic as it is against the provisions of Minimum Wages Act and hence illegal.
13. Also Minimum Wage being a state matter, clarifications were sought from various state Governments. The replies received reveal that minimum wage is a lump sum composite amount arrived at by following the permissible procedure of fixation as revised from time to time and it can not be segregated and reclassified. Thus the State governments have also observed that splitting of minimum wages is not permissible in the eye of law,
14. Accordingly, all concerned are directed to ensure that P.F. Contributions are not remitted on wages less than Minimum Wages since every employer is legally bound to pay at least minimum wages to his/her employees and minimum wages are not amenable to split up. It is one pay package.*

(*Civil Appeal 4259 of 1999 Air Freight Ltd. Vs State of Karnataka and Ors., 1999 Supp. (1) SCR 22]

15. It is needless to mention that wherever the matter regarding splitting of wages is challenged or pending in a court of law, the stand of department along with all rules and guidelines of Hon’ble Supreme Court should be effectively utilized to defend the case. It is also mentioned that nothing said above shall come in way of implementation/execution of any order of a court of law.

16. The assessing officers shall examine full facts about the wage structure, minimum wages prescribed by the appropriate govt. for the relevant class and provide reasonable opportunity to the establishment before deciding the subterfuge, if any.

All the concerned officials/officers are requested to strictly comply with above said guidelines in regard to subject matter.

Please acknowledge receipt.

(This issues with the approval of CPFC)

(K.C. Pandey)

Addl. Central P.F. Commissioner(Compliance)

Copy to:

  1. FA & CAO/ CVO
  2. All Add I. CPFC5, Head Office
  3. Director, NATRSS
  4. All RPFC-I ,Head Office
  5. All RPFC II, HO
  6. All DD (Vig.)/DD ( Audit)
  7. All RPFCs (ZTIs)
  8. Web Administrator for uploading the circular on the central website of EPFO.
  9. DD (OL.), Head Office – for release of Hindi Version

(Anita S. Dixit)

Regional P.F. Commissioner-I(Coordination)



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