It is an industry practice to engage persons on a contractual basis, particularly where the work is clearly delineated and the relationship is closed-ended, with a consolidated payout made to such person(s), conditional upon the deliverables, quality, timelines and other associated objectives. Such arrangements also envisage non-exclusive freelancer-like engagements, with the person so engaged being free to enter into other contracts and serve several clients/organizations simultaneously.
A legal conundrum arises as to the applicability of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) and the Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”) to such persons on the question of whether or not the individual concerned is an employee or a contractor. There have been few precedents governing the aforesaid aspect in recent years and this piece attempts to decipher the determining parameters for the applicability of the provisions of the EPF Act to such arrangements. A recent judgment of the High Court of Karnataka seems to create more confusion in the matter, potentially affecting contracts between companies and individual contractors who are engaged to provide specific services, either one time or on an ongoing basis.
Pawan Hans Ruling: Supreme Court Judgment of 2020
The Supreme Court of India in its 2020 judgment titled Pawan Hans Ltd and Ors vs Aviation Karamchari Sanghatana and Ors (“Pawan Hans decision”) dealt with the question of whether the company was under a statutory obligation to provide the benefit of provident fund to its contractual employees where the term “employee” had been defined to include “any person” employed “directly or indirectly”. On the basis of the definition, the Court held that the work of the employees being of a perennial and continuous nature, their relationship could not be termed to be ‘contractual’ in nature. Accordingly, the EPF Act was held to cover all contractual employees who have been engaged by the Company and drew their wages directly or indirectly from the Company. (Read our analysis here)
Express Publications Ruling: Karnataka High Court Judgment of 2022
A related issue involving applicability of the EPF Act to contractors, more recently came up before the Hon’ble Karnataka High Court on 21st October 2022 in Express Publications (Madurai) Private Limited vs. Union of India and Ors. (“Express Publications Ruling”). One of the substantive issues for consideration before the Court was whether, insofar as the EPF Act is concerned, there is a requirement for an employer-employee relationship to exist, and for the employer to have supervision and control over the employee. Interestingly, the bench examined the issue and rendered its finding without examining the applicability or non-applicability of the Pawan Hans decision to this case, apparently on the reasoning that since the Pawan Hans judgment operated prospectively it did not apply in the facts of the present case.
In this case, Express Publications had entered into a contract with a photographer to do some photography work, which was contended to be neither exclusive nor full time. The photographer not having been enrolled under the EPF Scheme, raised this issue before the Regional PF Commissioner, Bengaluru (“RPFO”). The RPFO, by an order dated 29th October 2020, held that the photographer is an employee of the company and directed the company to enroll him under the Scheme. The Company approached the Hon’ble Karnataka High Court seeking the quashing of this order.
On the question of whether an employer-employee relationship, with the employer having supervision and control over the employee is required, the company argued that a regular employee would be subject to both supervision and control, as well as disciplinary proceedings, but a person on contract would not be. As such, a contractual employee would not be covered under the EPF Act. Further, in the present case, the photographer was not offering services exclusively to the company.
What the Court said
At the outset, the High Court observed that it is clear that the state has encouraged contribution to the provident fund so as to provide security to an employee upon retirement, more so taking into account that there is no formal pension scheme available in the private sector. It further held that the definition of an ’employer’ in terms of Section 2(e) of the EPF Act is only for the purpose of identifying as to whom the responsibility lies to comply with the requirements of the EPF Act. The definition of employee under the Act is to identify who an employee is, as being someone who accepts his wages directly or indirectly from the employer and includes any person employed by or through a contractor in connection with the work of the establishment.
Answering the issue in question, the Hon’ble Court observed as follows:
“Thus, in terms of Subsection (f) of Section 2 of EPF Act, even a person who is engaged through a contractor being covered under the EPF act, in my considered opinion that (sic.) if an employer were to employ a person directly on a contractual basis, the EPF Act would apply to such a relationship also more so when there is no exemption issued under sub-section (ff) or (fff) of Section 2”.
Analysis by the Hon’ble Court:
The rationale the Court gave was as under:
- Given the definition of ‘employee’ in the EPF Act, if an employee were to get wages for work done for the employer or the establishment or in connection with the work of an establishment, whether directly or through a contractor, such person would qualify as an employee under the EPF Act.
- The EPF Act does not require the employer to exercise supervision or control over an employee, what is alone required is that wages are to be paid by the employer to such employee.
The Court also opined that in view of the pay structure and engagement model devised by the Company, it was clear the contract was used by the Company as a subterfuge to cover the employment and to organize its business to minimize its pay outs, which was not permissible. The Court held that the impugned order of EPFO did not suffer from any legal infirmity and the Photographer is required to be enrolled under the PF Scheme.
Why is the Karnataka High Court Express Publications Ruling, 2022 Significant?
This judgment is significant, in that it deviates from settled law laid down by various other High Courts.
In M/s. Satish Plastics v. Regional Provident Fund Commissioner (“Satish Plastics Judgment”), the position of an Accountant employed for writing accounts on a contractual basis who had the option to work likewise for others and also to work or write the accounts in his house, was considered. The Gujarat High Court laid down a detailed 7-point criteria for determining whether a person qualifies as an ’employee’ within the meaning of the EPF Act. To sum them up, work for monetary payment, in connection with the establishment under its supervision and control, and the existence of master-servant relationship, irrespective of the label of the contract were held to be critical determinants in considering whether a person is covered under the EPF Act. Basis this, it was held that the Accountant was covered under the EPF Act, despite the fact that he was permitted to work at his own establishment.
In fact, the Satish Plastics Ruling was later followed by Hon’ble Bombay High Court in Swift Couriers vs. The Assistant Provident Fund Commissioner (decided on 01.08.2016), wherein the tests laid down in the former were relied upon to hold that two pilots and two commission agents, though self-employed persons were ’employees’, under the EPF Act.
Though the Express Publications ruling did not examine the aforesaid decisions, the ruling becomes significant, inasmuch as it broadly holds that there is ‘no requirement’ of a master-servant relationship with the master exercising supervision and control for the purpose of coverage of a person under the EPF Act. Hence, the ratio in Express Publications seems to go against the judgments of the other High Courts.
What seems clear from the Express Publications ruling is that an employer-employee relationship and supervision or control by an employer is not a pre-requisite in the matter of coverage of a person under the EPF Act, and even a consultant- freelancer who has freedom to work under a contract for various establishments simultaneously would be required to be enrolled under the EPF, provided one is paid wages in connection with the work of such establishments.
Given that this is a judgment of a High Court, applicability of the judgment will be a question and it is possibly worth having the matter adjudicated by the Supreme Court for a final say. This judgment has the potential to create uncertainty where contractors are engaged for a specific task for periodic payment.
As on the date of publication of this piece the Registry of the Karnataka High Court has received an appeal against the Express Publications Ruling. It would be worth awaiting the outcome of the appeal in this matter.