Applicability of the Employee Provident Fund Act to appointment of 'Consultants'

Growing Companies, especially start-ups, are after a point faced with a sudden host of statutory compliances, one  being registration with the Employment Provident Fund Organisation.

A lot of growing organizations tend to appoint ‘consultants’ or ‘retainers’ who may not be termed ‘full time employees’ in their contracts. Law firms, CA firms and other professional practices across the city of Bombay have adopted the practice to appoint ‘retainers’ who are not technically on their employee payroll, and are therefore outside the scope of Provident Fund. This practice ought to be reconsidered in the light of the judgments discussed below.

The Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“the Act”) applies to every establishment which is a ‘factory’ engaged in any industry specified in Schedule I of the Act and in which twenty or more persons are employed. However, in order to arrive at the figure of 20, which employees are to be taken into the headcount is a question that needs to be examined. The Act has no specific provisions or guidelines to determine this question.

Section 2 (f) of the Act defines who is an ‘employee’ under the Act. It provides :

“employee” means any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer, and includes any person,- (i) employed by or through a contractor in or in connection with the work of the establishment; (ii) engaged as an apprentice, not being an apprentice engaged under the Apprentices Act, 1961 (52 of 1961) or under the standing orders of the establishment

In Gain Financial Consultants Pvt. Ltd. Vs. The Regional Provident Fund Commissioner, Maharashtra and Goa and ors. 2001(4) ALLMR55 the Bombay High Court has, following the Judgment of the Division Bench of Gujarat High Court in the case of M/s. Satish Plastics v. R. P. F. Commissioner, held that appointment of ‘retainers’ would be included in the definition of ‘employee’ for the purposes of applicability of the Act. The Gujrat High court in the said judgment has laid down certain tests to be applied to answer the question whether the person employed was an employee or not as follows :

"(i) Was he doing the work for monetary payment?

(ii) Was the work done by him the work of the establishment or had a nexus with such work?

(iii) Was the payment made wages, in the sense of being remuneration for the physical or mental effort in connection with such work?

(iv) Was the work such that it had to be done as directed by the establishment or under its supervision and control to the extent that supervision and control are possible having regard to the specialized nature of the work or the skill needed for its performance?

(v) Was the work of such a nature and character that ordinarily a master-servant relationship could exist and but for the agreement styling it as a contract common practice and common sense would suggest a master-servant bond?

(vi) Was the relation Indicative of master-servant status in substance having regard to the economic realities irrespective of the nomenclature devised by the parties?

(vii) Was he required to do the work personally without the liberty to get it done through someone else?"

This case has been relied upon in another case of Hindustan Lever Limited Vs. The Assistant Provident Fund Commissioner 2015(4) BomCR 75, and therefore stands to be good law.

However, in another case the Kerala High Court, has held that “consultants” or “retainers” would not be included in the definition of employee. Interestingly, this case had been distinguished by the Bombay High Court in Gain Financial Consultants (supra) on the premise that in the Kerala High Court case “The persons who were engaged by the establishment for their consultancy services were not roaming around for their work but the employers were approaching them in their office to get their consultation. Those consultants have their own independent establishment.”  

The tests laid down by the Bombay High Court may be kept in mind by growing businesses while drafting their employment contracts. It is seen that if these consultants have an ‘independent establishment’ of their own, as indicated by the Bombay High Court, they may not be considered within the definition of employee. However what then, constitutes an 'independent establishment' for this purpose, is yet unclear.

It is understood that the Bombay High Court has given a rather wide interpretation to ‘employees’ for the purposes of applicability of the EPF Act. Although the position may differs in various states, may be the Supreme Court, or an amendment to the Act, can provide some clarity on the issue.