Employment Law Social Security Benefits - January 2023

Employment Law Newsletter: Payment Of Social Security Benefits To Employees – January 2023


Currently, separate contributions are made towards the EPF, pension and insurance contributions of employees in India. For Ease of compliance for small enterprises (enterprises that have 10-20 employees), the government of India is considering doing away with these separate contributions towards provident fund, pension and insurance and is proposing to allow a single payment towards social security of their employees. 

To analyse the viability of this option, it is necessary to look into the current scheme of things and to understand if this is really the best way forward!

The Current Scheme

The Employees’ Provident Funds and Miscellaneous Provisions (EPF & MP) Act, 1952 (“EPF Act”) and the Employees State Insurance Act, 1948 (“ESIC Act”) are two of India’s most important social benefit legislations.

Under the EPF Act and the ESIC Act, the employer and the employee need to make certain contributions which are made towards the welfare of the employees. 

The law is clear on the amount and the method through which these contributions are made. 

Under the current scheme of things, separate contributions are made towards Employees’ Provident Fund Organisation (EPFO) and Employees’ State Insurance Corporation (ESIC).

Compliance as per EPF Act:

Applicability: As per Section (1) 3 (b) of the EPF Act applies to every establishment having at least 20 employees (“Establishments”). If any establishment employs less than 20 employees (along with certain other prerequisites as per the EPFO rules), the contribution rate from both employee and the employer is limited to 10%, however, it is not mandatory for such establishments to advance PF to its employees.

As per the EPF Act, PF contributions are required to be made in respect of (a) all employees of covered Establishments who draw wages up to Rs. 15,000 per month and (b) employees who continue to hold a PF account based on their previous employment, irrespective of the Wages that they draw and (c) employees who fall under the category of International Workers (An International Worker (IW) is any employee who is a foreign national working in India under an employer registered with the EPFO or an Indian employee who is working in a foreign country with which India has a Social Security Agreement (SSA) under the EPF Act) (“Eligible Employees”).

As per the EPF Act, Covered Establishments are required to make PF contributions for all Eligible Employees, at the rate of 12% of the employee’s monthly ‘basic wages’, dearness allowance, retaining allowance and cash value of any food concession (“Contributory Wages”), subject to a maximum cap of Rs.1800 per month for domestic employees.

Compliance as per the Employees State Insurance Act, 1948 (“ESIC”) Act:

The ESI Act along with the schemes framed thereunder is one of India’s social security legislations enacted with the objective of protecting the interests of workers in contingencies resulting in the loss of wages or earning capacities, such as sickness, maternity, temporary or permanent disablement, or employment injury.

The ESI Act applies to all factories and specified establishments employing at least 10 persons (“Covered Establishments”). Covered Establishments are required to provide benefits envisaged under the ESI Act to all employees who draw ‘wages’ up to INR 21,000 per. The ESI Act is administered by the Employees’ State Insurance Corporation (“ESIC”). The monthly contribution payable to the ESIC with respect to each employee comprises both the employer’s contribution as well as the employee’s contribution. 

The rates are revised from time to time. Currently, the employee’s contribution rate (w.e.f. 01.07.2019) is 0.75% of the wages and that of employers is 3.25% of the wages paid/payable in respect of the employees in every wage period.

The Social Security Code, 2020:

The Social Security Code, 2020, allows the government to formulate new schemes or tweak the existing ones through notification to allow for enhanced coverage under various social security schemes. 

The Future Prospect

Consolidation of Contributions:

As per the news reports, the proposal, which is likely to be finalised by an expert committee, a single contribution of 10-12% of wages may be fixed towards insurance, provident fund, pension and other benefits for establishments with 10-20 workers. While rolling out this plan, it is obvious that this decision shall have a certain impact on the total amount of contributions paid to the employers and the employees. As per the reports, an expert committee will also be set up to arrive at the final unified rate.

Probable Implications

Burden of compliance on small-scale industries:

Currently, only those establishments which have more than 20 employees are mandated to comply with the EPF Act and factories with more than 10 workers are required to comply with the ESIC Act. If this threshold for EPF is reduced to 10 from 20, all such small-scale establishments shall be forced to comply with the provisions of the EPF Act.  While it shall be certainly beneficial to the employees, it is an added expense for the employers with such small companies.

Financial Security to Employees:

A consolidation of an amount under EPF and ESIC act will ensure that the employee is doubly benefited from both the legislations. However, this shall also have an impact on the amount of 

contributions to be made by both the employers and the employees. Additionally, the amount shall depend on the percentage that the govt., fixes in this regard.

Ease of compliance or added compliance?

As per the news reports, the government is looking to reduce the employee threshold to 10 from 20 now under the EPFO, a move that will bring several small-scale entities under the ambit of the EPFO. Under the ESIC, the criterion for mandatory coverage is already 10 employees and above. With the government moving towards universal social security and reducing the threshold for employees, it is important to protect the interest of small-scale industries as this will only act as an added cost to such small companies/industries/establishments.

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