The Karnataka High Court (“Karnataka HC”), vide its order dated April 25, 2024, in the case of Stone Hill Education Foundation v. Union of India and Others [W.P. No. 18486/2012], has struck down the provisions pertaining to contribution of the provident fund for international workers without any ceiling as to the wages, under paragraph 83 of Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”) and paragraph 43A of Employees’ Pension Scheme, 1995 (“Pension Scheme”), as unconstitutional and arbitrary.

Facts

Several writ petitions were filed by the employees as well as the employers (“Petitioners”) in the Karnataka HC and other High Courts, wherein the Petitioners questioned the vires of paragraph 83 (Special provision in respect of International Workers) of the EPF Scheme and paragraph 43A (Special provisions in respect of International Workers) of the Pension Scheme which was introduced by the Union of India (“Respondent No. 1”), vide its notification dated October 10, 2008, thereby enacting special provisions for the international workers. The said paragraphs of the EPF Scheme and the Pension Scheme were challenged on the grounds of being arbitrary, unconstitutional and opposed to the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) since the employees other than the international workers, who draw salary exceeding INR 15,000 per month, are outside the purview of the EPF Scheme.

The Petitioners also sought the orders passed by the Regional Provident Fund Commissioner-I, Bangalore (“Respondent No. 2”), seeking payment of contributions by the companies under the EPF Scheme and the Pension Scheme and in default to pay charges under the EPF Act, to be quashed. The Karnataka HC in the present case has taken into consideration all the writ petitions concerning the same issue.

Issue

Whether the introduction of paragraph 83 of EPF Scheme and paragraph 43A of Pension Scheme is unconstitutional and opposed by Article 14 (Equality before law) of the Constitution of India.

Arguments

Contentions of the Petitioners:

The Petitioners submitted that as per paragraph 83 of EPF Scheme, “international workers” are covered under the EPF Act and EPF Scheme, irrespective of the salary drawn by them. It was contended by the Petitioners that the insertion of paragraph 83 to EPF Scheme and paragraph 43A to Pension Scheme violates Article 14 of the Constitution of India.

The Petitioners also submitted that the said paragraphs are arbitrary, illegal and oppose the object and intent of the EPF Act since there is no ceiling limit on the wages of the international workers on which the contribution is payable by both the employer and the international worker, unlike INR 15,000 per month ceiling prescribed under the EPF Act for the excluded employee (that is, who are not international workers).

The Petitioners contended that the object of the legislature is to ensure compulsory institution of contributory provident funds for weaker sections of the workers working in industrial undertakings and at no point of time, was the EPF Act intended to cover high-ranking officials. The Petitioners also argued that the international workers work merely for a limited period and not till their retirement and the employer has to incur a huge financial burden as they have to make payment towards the provident fund contributions on the international workers’ global salary.

The Petitioners also submitted that no intelligible differentia exists between an Indian employee and an international worker who is not covered under a Social Security Agreement (“SSA”) or a Bilateral Comprehensive Economic Agreement (“BCEA”). Further, there is no nexus between the object sought to be achieved under the EPF Act and the EPF Scheme framed in relation to international workers and the classification made thereto. The Petitioners submitted that a separate statute should be enacted for an international worker who is not covered under a SSA or BCEA, containing a clause on social security prior to October 1, 2008.

Contentions of the Respondents:

The Respondents contended that Respondent No. 1 has effected several changes to the EPF Act by introducing special provisions for different types of workers from time to time, such as insertion of: (i) paragraph 80 (Special provisions in the case of newspaper establishments and newspaper employees) in the EPF Scheme with effect from December 31, 1956; (ii) paragraph 81 (Special provisions in the case of cine-workers) in the EPF Scheme in 1981; and (iii) paragraph 82 (Special provisions in respect of certain employees) in the EPF Scheme in 1999 to make special provisions in respect of an employee with a disability. Similarly, the EPF Act was amended in 2008, as a result of which paragraph 83 was inserted in the EPF Scheme to extend the coverage of international workers under the EPF Scheme and further introduced paragraph 43A under the Pension Scheme and the EPF Scheme was given effect from September 11, 2010, insofar as it relates to international workers.

According to the Respondents, bilateral SSAs were finalised by the Government of India with several countries and these SSAs were effective on several dates respectively. In order to honour the said bilateral agreements with the respective foreign countries, as a measure of reciprocity as well as for the welfare of the international workers, the provisions of the EPF Act and the EPF Scheme were amended and extended by Respondent No. 1 to the international workers.

The Respondents also contended that the intention of the Parliament behind amending the EPF Scheme was that no worker should be deprived of social security benefits and similarly no Indian workers who are posted to work in the foreign countries should not be deprived of the said social security benefits. Additionally, for the protection of the rights of the Indian workers, while they are deputed outside India for a limited period, they were required to make mandatory social security contributions in accordance with the laws of those countries.

As per the Respondents, the contributions which are deducted from the salaries of Indian workers deputed abroad were a loss for every worker as the benefits, according to the laws of the countries where the said workers were deputed, are generally payable on completion of the minimum qualifying period of contribution or residence (generally ten years or more) and an Indian worker deputed for a limited period of five years or so is generally less than the minimum qualifying period.

It was also contended by the Respondents that the EPF Scheme was amended as the Indian workers, after the remittance of social security contribution in the host countries, are not entitled to any social security benefits and according to said amendment, an international worker from an SSA country is entitled to withdraw his provident fund accumulation on ceasing to be an employee in an establishment covered under the EPF Act.

The Respondents submitted that the said amendment to the EPF Scheme is not violative of Article 14 of the Constitution of India as it only applies to Indian citizens and not for foreigners in general and by the process of classification, the State has the power to determine who should be regarded as a class for the purpose of legislation and in relation to law enacted on a particular subject. It was also submitted by the Respondents that the said amendment has resulted in creation of international workers as a special class which is distinct from other employees under the EPF Act. The said classification is rational and not arbitrary, and has been made on the basis of certain qualities and characteristics found in persons grouped together and not in others who are let out. Additionally, there is a nexus between the differentia which is the basis of classification and the object of the EPF Act.

Observations of the Karnataka HC

The Karnataka HC observed that the EPF Act is a social welfare legislation meant for the protection of industrial workers to enable them to have an alternative to the pension. EPF Act was enacted with a view to see that those in lower salary brackets get retirement benefits and by no stretch of imagination, could it be said that the employees who draw lakhs of rupees per month should be given the benefit under it. The Karnataka HC also highlighted the object of introducing paragraph 83 of the EPF Scheme which is to protect the Indian employees, going abroad to work, from being subjected to the social security and the retirement clause of their host-country which are prejudicial to their interest and to motivate these countries for entering into such agreements with India and to provide for reciprocal treatment to the nationals of these countries while they work in India.

The Karnataka HC noted that the EPF Scheme is a subordinate legislation which cannot run beyond the scope and object of the mother Act. Therefore, paragraph 83 of the EPF Scheme cannot transcend the parameters of the principal legislation, that is, EPF Act which sets forth the wage limit for the Indian employees to be INR 15,000 per month. Therefore paragraph 83 of the EPF Scheme ought not to have an unlimited threshold for international workers while denying the same benefit to Indian workers.

The Karnataka HC noted that an Indian employee working in a foreign country with a SSA who is a member of EPF Act continues to contribute on lower amount of money, that is, INR 15,000 and on the other hand, a foreign worker from SSA country, without having a certificate of coverage, is required to contribute provident fund on his entire salary although both are international workers as per the definition of international workers. Therefore, the distinction in the contribution amount between 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 Constitution of India. The Karnataka HC also observed that the demand for contribution on global salary (that is, salary earned by an international worker or remuneration received by an international worker from some other country or in home country) to also be computed for the purpose of the contribution is on the face of it, arbitrary and hit by Article 14 of the Constitution of India.

The Karnataka HC observed that an international worker from a non-SSA country is not allowed to withdraw accumulation until he reaches the age of 58 years, that is, until he retires. Therefore, it is evident that paragraph 83 of the EPF Scheme even applies to international workers from countries with which the Government of India does not have SSA, and therefore, the claim that paragraph 83 of EPF Scheme was enacted by the Government of India as the obligation of reciprocity is unsustainable.

The Karnataka HC observed that as of the date of the present order, only 20 countries have entered into a SSA agreement with India and there exists no material which depicts what is the social security scheme which is available for such international workers whose country of origin has not entered into a bilateral agreement with the Government of India. It was also observed by the Karnataka HC that paragraph 83 of the EPF Scheme and paragraph 43A of the Pension Scheme has been enacted by the legislation arbitrarily and unreasonably and defeats the very intent of the EPF Act.

It was also observed by the Karnataka HC that there exists no commonality of interest of the aims and objectives of the EPF Act and paragraph 83 of the EPF Scheme. Further, in the absence of parity and reciprocity, there is no justification to demand a contribution on the entire pay of a foreign employee from a non-SSA country.

Decision of the Karnataka HC

In line of the abovementioned observations, the Karnataka HC allowed the writ petition and struck down the introduction of paragraph 83 of EPF Scheme and paragraph 43A of Pension Scheme on the grounds of being unconstitutional and arbitrary and consequently all the orders passed under the said provisions of the schemes would be unenforceable.

VA View:

The present case is a landmark judgment wherein the High Court of a State has stuck down the provisions of a legislation enacted by the Central Government and removed the discrimination which existed between an Indian employee working in a foreign country and a foreign worker working in India. Additionally, the order of the Karnataka HC would have a retrospective effect as the Karnataka HC has held that all the orders passed under the impugned provisions of the EPF Scheme and the Pension Scheme would be unenforceable, as a result of which the international workers may now have a discretion to seek refund of the provident fund so contributed as per the provisions of the EPF Act. India presently has SSAs with multiple countries which ensures continued social security coverage for employees from different nations which are a party to the said SSA on a mutually reciprocal basis, so in a situation wherein the workers/employees from one of the countries with which India has an SSA take up employment in each other’s territories, their social security coverage remains uninterrupted.

As per the Ministry of Labour & Employment, vide its press release dated May 7, 2024, the Employees’ Provident Fund Organisation (EPFO), being the operational agency in India for SSAs, has acknowledged the present order of the Karnataka HC and it is actively evaluating the course of action in response to the present judgement which may include challenging the said judgement before the Supreme Court of India.

Further, since the order of one High Court is generally persuasive for the other High Courts, it would be interesting to witness the impact of the present case with the passage of time on the future implications of payment of provident funds to international workers and how the treatment of the international workers would unfold in India.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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