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The Supreme Court of India (“SC”) has, in the case of Pawan Hans Limited and Others v. Aviation Karmachari Sanghatana and Others (decided on January 17, 2020), held that the contractual employees in an establishment (not hired through a contractor) are also entitled to provident fund (“PF”) benefits.

Pawan Hans Limited (“Appellant”) is a company where Government of India holds 51% stake and the balance 49% is with Oil and Natural Gas Company Limited. The Appellant notified ‘Pawan Hans Employees Provident Fund Trust Regulations’ (“Regulations”) in 1986 and constituted ‘Pawan Hans Employees Provident Fund Trust’ (“Trust”) in 1987 for giving PF benefits to the employees.

Relevant clauses in Regulations are reproduced hereunder:

“1.3 – These Regulations shall apply to all the employees of the Corporation.

2.5. –“Employee” means any person who is employed for wages/salary in any kind of work, monthly or otherwise, in or in connection with the work of the Corporation and who gets his wages/salary directly or indirectly from the Corporation, and excludes any person employed by or through a contractor or in connection with the work of the Corporation but does not include any person employed as an apprentice or trainee. ”

Although the Regulations defined the term ‘employee’ to include any person employed directly or indirectly, the Appellant provided PF benefits only to its regular employees. Consequently, Aviation Karmachari Sanghatana (“Respondent”) made representations to the Appellant to extend the benefit under Regulations even to contractual employees.

However, the Appellant did not give response to the representations. Accordingly, the Respondent approached Honourable Bombay High Court (“BHC”) by filing a writ petition. By its order dated September 12, 2018, BHC concluded that the contractual employees are entitled to benefits under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“Act”) and Employees’ Provident Funds Scheme, 1952 (“Scheme”). Hence BHC directed the Appellant to enrol contractual employees under the Scheme. Further, it directed the Appellant to deposit PF contribution for the period commencing from the date when such employees became eligible under Scheme till the time they worked for the Appellant. Being aggrieved by the said order, the Appellant preferred an appeal before the SC.

(i) Whether the Appellant is under a statutory obligation to provide the PF benefit.
(ii) If contractual employees are entitled to PF benefit, whether such benefit is payable under the Regulations or the Act?
(iii) If contractual employees are entitled to PF benefit, from what date the aforesaid benefit be extended to them?

The Appellant, inter alia, argued that: neither the Act nor notification dated March 22, 2001 (the said notification made provisions of the Act applicable to certain specified establishments including the airlines industry, other than airlines owned or controlled by the Central or State Government) thereunder is applicable to it. As under Section 1(b) of the Act, an establishment belonging to or under the control of the Centre and whose employees are entitled to the benefit of contributory PF in accordance with any scheme or rules framed by the Central or State Government in respect of such benefits, is exempted under the Act. The SC in Regional Provident Fund Commissioner v. Sanatan Dharam Girls Secondary School [(2007) 1 SCC 268] laid down a twin-test for an establishment seeking exemption from the Act, namely, (I) the establishment must be either “belonging to” or “under the control of” the Central or State Government and (ii) employees of such an establishment should be entitled to the benefit of contributory provident fund or old age pension in accordance with any scheme or rule framed by the Central Government or State Government governing such benefits. As far as the question of scheme was concerned, the Company already had its own Regulations in force.

It was also contended that since several contractual employees had superannuated, passed away, resigned or ceased to be in the employment of the Appellant, the BHC had committed an error by applying provisions of the Act retrospectively from the date the contractual employees joined the Appellant. Finally, it was contended that the BHC order had doubled the Appellant’s liability as the contractual employees had already been paid their full monthly financial benefits/emoluments.

Respondent No. 3, that is, Regional Provident Fund Commissioner (“RPFC”) submitted that Appellant was not covered under the Act and thus BHC’s direction to deposit contribution from the date of eligibility of the contractual employees till the date of remittance was not workable and could not be sustained.

The Respondents, inter alia, argued that: (i) Regulations defined the term ‘employee’ to include all employees, including employees engaged on contractual basis, who are in the direct or indirect employment of the Appellant; (ii) the contractual employees were employed directly by the Appellant and not through any contractor; (iii) the Appellant directly remunerated the contractual employees; and (iv) the Appellant is not a government owned/ controlled company since its affairs were managed and controlled by a board of directors.

Observations of the Supreme Court
In order to be exempted from the Act, the Appellant had to meet the ‘twin test’ to seek exemption under the Act as laid down in Regional Provident Fund Commissioner v. Sanatan Dharam Girls Secondary School [(2007) 1 SCC 268]– (i) being a government company; and (ii) providing PF benefits to all employees. While the Appellant did in fact have its own scheme in force, it restricted the applicability of such scheme only to the ‘regular employees.’ Moreover, the Appellant’s scheme was not framed by the Central or State government, nor applicable to all of its employees. Therefore, the SC observed that the Appellant did not fulfil the second test and, held that the Appellant was liable to provide PF benefits to contractual employees.

The SC observed that the contractual employees would be entitled to PF benefits either under the Act or Regulations as: (i) they were not engaged through any contractor; (ii) they received wages/salary directly without involvement of any contractor since the date of their engagement; (iii) they have been in continuous employment of the Appellant for long periods of time; and (iv) their work was of perennial and continuous nature owing to which they cannot be termed ‘contractual’ in nature. However, SC preferred to cover the contractual employees under the Regulations over the Act so as to ensure uniformity in the service conditions of all the employees of the Appellant.

The SC elaborated on the predicament faced by the Appellant in complying with BHC’s order by holding that the BHC order would create imbalance if it were to be applied retrospectively. The SC observed as under:

“Provident Fund is normally managed on actuarial basis; the contributions received from employer and the employee are invested and the income by way of interest forms the substantial fund through which any pay-out is made. For all these years the Fund in question was subsisting on contributions made by the other employees and, if at this stage, the benefit in terms of the judgment of the High Court is extended with retrospective effect, it may create imbalance. Those who had never contributed at any stage would now be members of the fund. The fund never had any advantage of their contributions and yet the fund would be required to bear the burden in case any pay-out is to be made. Even if concerned employees are directed to make good contributions with respect to previous years with equivalent matching contribution from the employer, the fund would still be deprived of the interest income for past several years in respect of such contributions.” (emphasis supplied).

Decision of the Supreme Court

1. The Appellant to provide PF benefit to the contractual employees from January 2017 when writ petition was filed before the BHC. However, PF benefit would not be extended to contractual employees who have superannuated, expired, resigned or ceased to be in employment of the Appellant on the date of SC judgement;

2. RPFC to compute the PF amount for the period of January 2017 to December 2019 (“Contribution Period”) to be deposited in to the Trust by Appellant and the contractual employees;

3. The Appellant was directed to pay simple interest at the rate of 12% per annum for the Contribution Period under Section 7Q (interest payable by the employer) of the Act on the amount so computed by RPFC;

4. Contractual employees to deposit matching PF contribution for the Contribution Period along with interest at the rate of 6% per annum; and

5. From January 2020 onwards, the Appellant and the contractual employees to make their respective contributions as per the Regulations.

Vaish Associates Advocates View:

The SC has established a progressive stance by bringing ‘contractual employees’ on the same footing as that of the regular employees in terms of PF contribution. Further, SC’s direction to the employer as well the contractual employees to pay PF contribution from the date of writ petition (January 2017), instead of a retrospective date (from the date when the contractual employee became eligible) is carefully thought out. SC has also undertaken a positive approach by directing employees to make the same PF contribution as the employer. As such, the Act or the Scheme nowhere provides that the employee needs to make PF contribution for the past period or that the employee needs to pay interest on such contribution in respect of the said period.

Further, in light of the peculiarity of the facts and circumstances of this case, the SC exercised pragmatism in holding that contractual employees who have superannuated, expired, resigned or ceased to be in employment of the Appellant are ineligible to receive PF benefit.

For more information please write to Mr. Bomi Daruwala at [email protected]