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Background

India’s Employees’ Provident Funds Scheme, 1952 (EPF Scheme) was amended with the introduction of Paragraph 83 in 2008 to extend the coverage of the Indian Provident Fund (PF) law to “International Workers.” Further, Paragraph 43A was introduced under the Employee’s Pension Scheme, 1995 (EPS) to extend the coverage of EPS to international workers.

These provisions of the PF law applicable to international workers have now been held by the Karnataka High Court to be discriminatory and in violation of Article 14 (Right to Equality) of the Indian Constitution in a ruling dated 25 April 2024.1

Facts of the case

An employer (a covered establishment employing 20 people or more during the financial year) is required to make PF contributions for its employees. Such PF contributions are not required in the case of “excluded employees,” defined as Indian citizen employees earning a monthly salary exceeding INR 15,000.

Paragraph 83 of the EPF Scheme was introduced to define international workers as:

• An Indian employee working in a foreign country with which India has entered into a Social Security Agreement (SSA) and who is eligible to avail himself or herself of the benefits under a social security programme of that foreign country; or
• A foreign employee holding a non-Indian passport and working for a covered establishment in India.

It further provides that an international worker is considered an excluded employee, and the employer is thereby not required to make PF contributions if the following conditions are met:

• The international worker is covered under a social security programme in the country with which India has signed an SSA; and
• The international worker has obtained a certificate of coverage from his or her home country under such an SSA.

With the introduction of Paragraph 83, the following features of the EPF Scheme became applicable to foreign employees working in India and not covered under any SSA signed with India:

• The employer is required to make PF contributions without any wage ceiling limit on the wages received in India as well as outside India for the services provided in India.
• International workers from non-SSA countries are not allowed to withdraw the balance in their EPF account until they reach the age of retirement as per PF laws,  58 years.

The respondent in this case – the Union Government of India -- contended that the objective behind entering into SSAs and the introduction of the EPF Scheme provisions related to international workers was to protect Indian employees going abroad to work from being subjected to the foreign country’s social security, and to provide reciprocal treatment to the foreign nationals of such countries while they work in India.

The petitioners claimed that in reality, an Indian employee who participates in the EPF Scheme and goes to work in a foreign country with which India has entered into an SSA has the option to contribute on the sum of INR 15,000. Conversely, a foreign worker from a non-SSA country is mandatorily required to contribute EPF on his entire global salary.

In light of these provisions, the petitioners raised a question to the Karnataka High Court: “Whether the introduction of para 83 of Provident Fund Scheme and para 43A of Pension Scheme is unconstitutional and hit by Article 14 of the Constitution of India?”

High Court ruling

The High Court struck down Paragraph 83 of the EPF Scheme and Paragraph 43A of the EPS as “unconstitutional” and “arbitrary.” It further stated that all orders passed thereunder by the EPF authorities are unenforceable.

The High Court relied on the following arguments:

• The PF Act was introduced as social welfare legislation meant to protect industrial workers to enable them to have an alternative to a pension.
• The PF Act nowhere mentions covering employees irrespective of the salary drawn by them; hence, a specific wage ceiling limit is prescribed by the PF Act. The benefit is not intended for high-salaried employees such as international workers.
• Paragraph 83 of the EPF Scheme provides an unlimited wage threshold for international workers. However, the EPF Scheme is a subordinate legislation and therefore, cannot travel beyond the scope of the mother act (the PF Act) under which a monthly wage ceiling of INR 15,000 has been prescribed as a threshold for eligibility to participate in the EPF Scheme.
• The government of India has entered into SSAs with other countries as a matter of reciprocity for international workers of those countries.

International workers who qualify as excluded employees are free to withdraw the accumulated PF balance upon cessation of their employment in India. This benefit has not been extended under Paragraph 83 of the EPF Scheme to international workers from non-SSA countries.

In the absence of parity and reciprocity, there is no justification to demand PF contributions on the entire global pay of a foreign employee from a non-SSA country.

The difference between the contribution by an employee going to a non-SSA country and an employee from a non-SSA country coming to India is clearly discriminatory and violative of Article 14 of the Indian Constitution, according to the court.
Foreign citizens and Indian citizens working in India are being considered as two different classes, which violates Article 14 of the Indian Constitution, because both groups are equal but are being treated differently.

BDO India comments

The Employees’ Provident Fund Organisation (EPFO) acknowledged the ruling via a press release dated 7 May 2024. It stated that SSAs aim to guarantee uninterrupted social security coverage for employees during international employment. It further stated that such SSAs are very important for India to promote international mobility and leverage the demographic dividend.

The ruling is likely to be challenged by the Indian government and the EPFO, and may receive finality in the Supreme Court. Similar matters are pending with other High Courts as well.

This ruling could have a far-reaching impact on all ongoing litigation matters relating to PF contributions and damages imposed for IWs. Hence, employers should evaluate the impact of the ruling on their compliance strategy for IWs working in India.

  1 W.P. No.18486/2012 and others


Deepashree Shetty
BDO in India