Inclusion Of Foreign Workers In Provident Fund Nullified By High Court. What Happens Next?

A recent Karnataka High Court ruling found certain provisions of the Provident Fund Law, pertaining to foreign nationals, discriminatory and in violation of Article 14 of the Indian Constitution, which guarantees the Right to Equality.

Under the current law, Indian nationals are subject to a wage ceiling of Rs 15,000 for mandatory Provident Fund contributions, with any additional contributions being optional.

As a direct result of the ruling, the financial burden of the employers where international workers are employed will come down drastically since the amount of contribution will go down in accordance with the wage ceiling limit, according to Noorul, partner at Lakshmikumaran and Sridharan.

However, this wage ceiling does not apply to foreign nationals working in India who are ineligible for benefits under a Social Security Agreement (SSA) between India and their home country.

Consequently, these foreign nationals must contribute to the Provident Fund based on their entire income earned both in India and their home country if they work in India. Additionally, foreign nationals from non-SSA countries are prohibited from withdrawing their Provident Fund balance until they reach the retirement age of 58.

Now, the ruling invalidates these provisions from the time they were introduced in 2008, making them null and void across India. This applies to all employers covered by the EPF Act. Consequently, expatriate employees will now be treated similarly to Indian citizens regarding eligibility criteria.

The ruling could be applied retrospectively because it struck down these provisions as unconstitutional and arbitrary, making them unenforceable, according to Padmanabhan Ananth, partner at Counselence, Advocates & Legal Consultant.

However, in such a situation, what happens to any pending or past litigation against the employers or the foreign workers?

Unless this ruling is challenged and overturned, the present judgement shall be applicable unless set aside by the Appellate Court and/or larger bench as per Manmeet Kaur, partner at Karanjawala & Co.

Hinting at the further course of action, through a PIB release on May 7, the Employees' Provident Fund Organisation has stated that it is “actively evaluating the course of action in response” to this judgement.

As per Abe Abraham, partner at Cyril Amarchand Mangaldas, it is expected that the government/EPFO will challenge this judgement and seek a stay on its operation until a final decision on this matter is arrived at.

Abraham further explained that employers may keep contributing for current expatriate workers due to the possibility of the judgement being challenged.

They should also think about enrolling new expatriate hires under the same provisions (with their agreement). This way, if the court ruling changes later, the organizations won't be seen as breaking the rules, he said.

Furthermore, as a relief for the employers, the ruling now requires them to contribute to EPF for wages up to only Rs. 15,000 per month. However, what about those expatriate employees who have been making these contributions until now?

As per Vaibhav Bhardwaj, partner at IndusLaw, this ruling means that new procedures need to be created to decide if international workers who have already been contributing to EPF will get refunds.

These procedures will clarify when refunds will be given, such as whether they'll get them before or after they turn 58. It will also consider how this refund will affect their income taxes, he said.

Currently, for foreign nationals who do not fall under the definition of ‘excluded employees’, the PF contribution is 24% (employer and employee) of their salary which is a substantial cost. Over and above this, there is tax impact on such contributions.

As per Preeti Sharma, partner at BDO India, There are so many instances where foreign nationals are unable to withdraw their PF funds due to such procedural issues.

Regardless of what happens next, as per Sharma, the government must consider the challenges faced by foreign nationals employed in India. One potential solution could involve introducing a new law specifically for international workers, she said.

Further commenting on the need for government action, Ananth explained that it needs to be seen as to whether the government would effect legislative changes to the parent Act or to the Social Security Code, 2022, which is a part of the new labour codes that are yet to be brought into force by the Central Government.