The Employees Provident Fund Organisation v. Sunil Kumar B 2022 INSC 1169, Supreme Court Of India, 2022

Facts of the case

This passage discusses a court case challenging the legality of modifications made to the Employees’ Pension Scheme (EPS) in 2014.

The employee pension scheme was established in 1995 which provides pensions to eligible employees. The Provident Funds and Miscellaneous Provisions Act, of 1952 initially did not have a pension scheme, but Section 6A was added in 1995 to create the employee pension scheme.

The case questions the legality of specific changes made to the Employee’s pension scheme scheme in 2014. These changes primarily affect paragraphs 3, 6, 11, 12, and 14 of the scheme.

The major modification is the increase in “pensionable salary” from Rs. 6500 to Rs. 15000, effective from September 1st, 2014.

The 2014 notification also implemented other modifications, including restrictions on scheme coverage. 

The calculation of “pensionable salary” within the Employees’ Pension Scheme. Here are the key points:

1. Calculation Method:

Divide total wages from the past 5 years (60 months) by the number of days for which salary was drawn.

If salary was only drawn for part of a month, multiply by 30 to get an equivalent monthly wage.

2. Maximum Pensionable Salary:

Previously it was Rs. 6,500 per month but now It has become Rs. 15,000 per month (unless opting for a higher contribution).

When one opts for Higher Contribution Employers and employees can jointly choose to contribute on a salary exceeding Rs. 15,000. This option results in a higher pension based on a higher salary.

Existing members who previously contributed on a salary exceeding Rs. 6,500 can continue doing so with this new option.

Their pensionable salary will be based on the higher chosen contribution amount. Employees can choose to contribute an additional amount on their salary exceeding Rs. 15,000.

This option increases their pension benefits based on the higher contribution. Originally, employees had 6 months from September 1st, 2014, to choose this option. The deadline could be extended by 6 months for valid reasons presented to the Regional Provident Fund Commissioner.

Challenge to Pension Scheme Changes

Different High Courts heard cases challenging the legality of modifications to the Employees’ Pension Scheme (EPS) implemented in 2014. The Kerala High Court ruled in favour of the employees, invalidating the changes. Other High Courts of Rajasthan and Delhi followed this decision.

Appeals and Review

The Employees’ Provident Fund Organization (EPFO) appealed the Kerala High Court decision, which was initially dismissed. Both the EPFO and the Indian government later appealed again, and the Supreme Court agreed to hear the case.

When a new pension fund is created, the existing “Family Pension Scheme” (the old scheme) will shut down. All its resources and responsibilities will be transferred to the new fund. Importantly, beneficiaries of the old scheme will continue to receive the same level of benefits as before, now funded by the new pension fund

Issues raised

The issue of the case involves amendments to the Employees’ Pension Scheme, 1995, addressing concerns about fund depletion and the impact on retired employees

Contention

The petitioners argued that the amendments to the Pension Scheme, creating different classes of pensioners based on the date of September 1, 2014, were unjustified and contrary to the objective of ensuring uniform benefits for all employees. They contended that the amendments were arbitrary, ultra vires the EPF Act, and unsustainable, leading to the successful setting aside of the Employee’s Pension (Amendment) Scheme, 2014. The court ruled in favour of the petitioners, allowing their writ petitions and overturning decisions made by the Provident Fund authorities regarding the Pension Scheme. The petitioners’ stance prevailed due to the unjustified classification and legal inconsistencies in the amendments.

The respondents argued that it is within the Central Government’s authority to differentiate between employees based on their wages, offering improved social benefits to those in the lower wage bracket. This argument was made in response to the submission that all employees of an establishment do not constitute a homogenous class, allowing for such differentiation. The reasoning behind this argument is to provide enhanced benefits to employees earning lower wages, justifying the classification based on salary levels.

Analysis of the law:

Establishment of Employees’ Pension Scheme (EPS):

Section 6A of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) empowers the Central Government to formulate the EPS. 

Employees were differentiated based on their wages to offer improved social benefits for those earning lower wages compared to those earning higher salaries. This differentiation was considered within the power of the Central Government to classify employees accordingly. The scheme originally applied to those earning wages up to Rs. 5000, with the provision for exercising an option introduced later in 1996. Distinctions based on monthly salary to determine the scheme’s operation for different employee categories were deemed reasonable and within the statutory authorities’ power.

Funding for the EPS comes from:

Employer contributions under Section 6 of the EPF Act, capped at 8.33% of basic wages, dearness allowance, and retaining allowance.

The funding for the employee pension scheme comes from contributions made by the employer and the employee. The employer’s contribution is specified under section 6 of the scheme, not exceeding eight and one-third per cent of the basic wages, dearness allowance, and retaining allowance of the employees. The employee is required to contribute a part of their salary, with no ceiling limit, which is 8.33 per cent of their pay. This contribution is essential for the operation and sustainability of the pension scheme

Eligibility for Employee Pension Scheme Membership:

The eligibility for the pension scheme includes employees who become members of the Employees’ Provident Fund Scheme, 1952, or Provident Funds exempted by the government. Those with a salary less than or equal to fifteen thousand rupees from the date of membership. Employees who were members of the Family Pension Scheme (which ceased in 1995) can opt to join the EPS under certain conditions. Membership ceases upon reaching 58 years of age or vesting of admissible benefits under the scheme, whichever is earlier.

JUDGEMENT 

The court upheld the validity of the 2014 amendments to the Employees’ Pension Scheme (EPS) in two aspects:

  1. Limiting membership: The amendments were found valid in restricting EPS membership to employees earning up to Rs. 15,000 per month.
  2. Pensionable salary calculation: The revised method for calculating pensionable salary was also deemed valid.

However, the court struck down the provision requiring employees to contribute an additional 1.16% of their salary exceeding Rs. 15,000 towards the pension fund, finding it ultra vires (beyond the powers) of the Act.

The court granted a six-month window for the legislature to consider enacting appropriate amendments to address the invalid contribution provision.

Adya Nair 

ICFAI Law School, Hyderabad