EPF Pension Case : 2014 Amendment Not Whimsical, Classification Based On Salary Reasonable - Reasons Cited By Supreme Court

In a significant judgment impacting lakhs of workers across the country, the Supreme Court on Friday upheld the Employees' Pension (Amendment) Scheme 2014, which, among other things, capped the maximum salary for joining the EPF Pension Scheme as Rs 15,000 per month with effect from September 1, 2014. 

However, the Court has allowed an additional window of four months period for those who were members of the scheme before the 2014 amendment and whose salaries exceed the threshold introduced in 2014 to join the scheme by exercising the higher option.  As per the 2014 amendment, members whose monthly salary exceeded Rs.15,000/- had to exercise a fresh option to join the scheme within a period of six months from September 1, 2014.  Also, such employees had to make an additional contribution at the rate of 1.16 per cent on salary exceeding fifteen thousand rupees. This condition for additional contribution has also been invalidated by the Court on the ground that it is ultra vires the Employees Provident Fund and Miscellaneous Provisions Act 1952.

On all other counts, the Court has approved the 2014 amendments, including the changes brought to the method of computation of pensionable salary. The Court clarified that the relaxations allowed by it in the judgment will not be available to employees who retired before September 1, 2014 without exercising the option. As per the 2014 amendment, employees who join service after September 1, 2014 are not eligible to join the pension scheme if their monthly salary is above Rs.15,000/-. Since this clause has not been interfered with by the Court, the benefit of the judgment will be available to only those who were members of the scheme as on September 1, 2014.

Here are the reasons given by the bench of Chief Justice of India UU Lalit, Justice Aniruddha Bose and Justice Sudhanshu Dhulia while allowing the appeals filed by the Employees Provident Fund Organization and the Union of India against the judgments of the Kerala, Rajasthan and Delhi High Courts which had quashed the 2014 amendments.

Centre has power to make amendments; amendments made not whimsically

The Court noted that Section 7 of the EPF Act gives power to the Central Government to modify the pension scheme prospectively or retrospectively. Also, Paragraph 32 of the Pension Scheme authorises the Centre to make alterations.

"We find that the amendment was made in exercise of power otherwise vested in the authority making such amendment and the amendments were made on the basis of certain relevant materials and not whimsically", the judgment authored by Justice Bose stated.

The EPFO told the Court that the provident fund and pension fund are distinct. While provident fund scheme entails a one­time settlement in favour of the member, the pension scheme carries, by its very nature, benefits for an unspecified time, which has to be based on actuarial calculation. The EPFO produced an actuarial report of December 2018 in which the net liability of the fund is projected to be Rs.5,75,918.88/­ crores for the pension fund, exclusive of the provident fund balance that might be transferred. 

Employees of pension scheme not a homogeneous class; authorities can make classifications based on salary

The Court rejected the argument of the employees  that the pension scheme considers employees as a homogenous group and no distinction can be made among different categories of employees based on their monthly salary.

"It is well within the power and authority of the statutory authorities to reasonably classify different sets of employees and categorise them for the nature of benefits they might get from an existing scheme", the Court observed.

"In our view, classification of the employees made by the authorities on the basis of the salary drawn in the 2014 amendment meets the test of reasonable classification contemplated in Article 14 of the Constitution of India", the Court held.

The Court highlighted that when the scheme was launched in 1995, it  was made applicable to only those drawing wages upto Rs.5000/­. The provision relating to exercising option for those drawing salary above the threshold was introduced later, in the year 1996.

The EPFO had argued that the pension fund was introduced for the benefit of low-scale employees and if employees drawing higher salaries are allowed to draw pension in proportion to their salaries, it will create huge imbalance within the fund.

Limited scope of judicial review

The Kerala High Court, in coming to its finding that the amendment was arbitrary, based its reasoning on macroeconomic factors like general increase in salary, addition to the base of the fund and the negative impact on denial of pension benefits for a large number of employees. The High Court had observed that Rs.15,000/- monthly income was a very low threshold as a manual labourer will also get at least Rs 500 as daily wages. Therefore, the High Court expressed the concern that the 2014 amendment will deprive several low-scale workers of pensionary benefits.

Though the Supreme Court did not completely discard the concerns expressed by the High Court, it said that such considerations are within the policy domain and outside the scope of judicial review.

"We are alive to the concern expressed by the High Court as regards impact on the economic stability of retired employees suddenly being deprived of pension. But, based on such macro­level social disparities, we do not think in exercise of judicial power we can require the State to operate a pension scheme in a particular manner. These factors would be for the policy makers to examine and prescribe. We cannot issue directions on the Central Government to work out statutory scheme in a particular fashion".

Condition for additional contribution by employee invalid

The requirement in the scheme for employee's contribution to the extent of 1.16 per cent for option members was held to be  illegal. This is for the reason that the parent Act, the EPF Act 1952, does not require contribution from the employees' side.

"There is nothing in the 1952 Act which requires payment to the pension fund by an employee. Section 6A of the Act also does not have any such stipulation. Since the Act does not contemplate any contribution to be made by an employee to remain in the scheme, the Central Government under the scheme itself cannot mandate such a stipulation".

Without a legislative amendment, such a condition cannot be imposed on the employee. However, the Court suspended this part of the judgment for a period of 6 months to enable the Centre to explore legislative amendments.

"We shall, however, suspend the operation of this part of our judgment for a period of six months so that the legislature may consider the necessity of bringing appropriate legislative amendment on this count. For the aforesaid period, the scheme as it stands shall continue. Till such time, if no such legislative exercise is undertaken, the duty to contribute 1.16 per cent of the salary shall apply on option members as well. This contribution shall be adjusted depending on any amendment that may be brought. For the period of six months, however, the opting employees shall make payment of 1.16 per cent contribution as stop gap measure. In the event no amendment to the statute or the scheme is made within such extended time, then the administrators of the fund will have to operate the pension fund for the option members from out of the existing corpus". 

No flaw in altering the basis for computation of pensionable salary

As per the 2014 amendment, computation of pensionable salary is based on average monthly pay of the period of 60 months preceding the exit of the employee. Before the amendment, this span was 12 months preceding the exit.

This, according to EPFO, has been done to achieve a clearer picture of the pensionable salary to eliminate the possibility of fluctuations in pay drawn in the last 12 months for determining the quantum of pension. The EPFO illustrated the cases of manual labourers and women who drawing low wages, who may suffer such fluctuation on account of ill health, incapacitation, etc., and in the case of such employees, if only 12 months' pay is accounted for, they may get reduced pension.

The Court accepted this justification and said : "There is a reasonable basis for effecting change in the computation methodology for determining pensionable salary and we do not find any illegality or unconstitutionality in effecting this amendment".

Accepts RC Gupta decision which held that there could be no cut-off for option

The judgment accepted the verdict given by a division bench in 2016 in the case RC Gupta vs Regional Provident Fund Commissioner (2016) as regards interpretation to paragraph 11(3) of the pre-amended scheme. In that judgment, it was held that the date specified in paragraph 11(3) of the pre-amended scheme cannot be construed as a cut-off date. Based on this decision, the Court held :

"The dual option, as is contemplated in paragraph 11(4) of the pension scheme (post 2014 amendment), has to be merged into one. In the event the employer and employee jointly opt for coverage beyond the salary limit of Rs. 15000/­, without giving an earlier option under the unamended Clause 11(3) of the pension scheme, they would not be automatically excluded from their right to exercise option under paragraph 11(4) of the scheme, post amendment." 

Amendment applicable to exempted establishments

The Court held that the 2014 amendment shall apply to the employees of the exempted establishments in the same manner as the employees of the regular establishments. The provident funds of exempted establishments are managed by their own trusts instead of the EPFO.

"The employees of exempted establishments are integrated into the pension scheme and we are of the opinion that the employees of an exempted establishment should not be deprived of the benefit of getting option to remain in the pension scheme while drawing salary beyond the ceiling limit, in situations where similarly situated employees of unexempted establishments can exercise such option. In the event the scheme is construed in a way which would exclude them, that would lead to artificial classification of otherwise same categories of employees. Thus, the pension scheme ought to apply to the employees of the exempted establishments in the same manner as this scheme applies to the employees of unexempted or regular establishments". 

In order to be entitled to the benefits of the pension fund, the employer and the employee, simultaneously with exercising option in terms of the order of this Court, shall also have to give an undertaking of transferring the employers' contribution at the stipulated rate maintained by the trusts, which shall be equivalent to and not lower than the sum which would have been transferable, had such fund been maintained by the provident fund authorities. S

Other directions :

The employees who had exercised option under the proviso to paragraph 11(3) of the 1995 scheme and continued to be in service as on 1st September 2014, will be guided by the amended provisions of paragraph 11(4) of the pension scheme.

All the employees who did not exercise option but were entitled to do so but could not due to the interpretation on cut­off date by the authorities, ought to be given a further chance to exercise their option. Time to exercise option under paragraph 11(4) of the scheme, under these circumstances, shall stand extended by a further period of four months

Rest of the requirements as per the amended provision shall be complied with.

The employees who had retired prior to 1st September 2014 without exercising any option under paragraph 11(3) of the pre­amendment scheme have already exited from the membership thereof. They would not be entitled to the benefit of this judgment.

The employees who have retired before 1st September 2014 upon exercising option under paragraph 11(3) of the 1995 scheme shall be covered by the provisions of the paragraph 11(3) of the pension scheme as it stood prior to the amendment of 2014.

Case Title : Employees Provident Fund Organization versus B Sunil Kumar and connected cases.

Employees Provident Fund Act- Employees Pension Scheme - Supreme Court holds Employees Pension (Amendment) Scheme 2014 as legal and valid- Extends cut-off date to exercise option by four months- Holds condition for additional contribution by employees as ultra vires the EPF Act

Constitution of India - Article 14- Reasonable Classification - It is well within the power and authority of the statutory authorities to reasonably classify different sets of employees and categorise them for the nature of benefits they might get from an existing scheme-classification of the employees made by the authorities on the basis of the salary drawn in the 2014 amendment meets the test of reasonable classification contemplated in Article 14 of the Constitution of India - Para 30, 32

Employees Pension Amendment Scheme - The amendment was made in exercise of power otherwise vested in the authority making such amendment and the amendments were made on the basis of certain relevant materials and not whimsically (Para 32)

Judicial Review - Limited scope of judicial review over policy matters of executive-we do not think in exercise of judicial power we can require the State to operate a pension scheme in a particular manner. These factors would be for the policy makers to examine and prescribe. We cannot issue directions on the Central Government to work out statutory scheme in a particular fashion (Para 32). 

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