How it widens social security net, why unions are claiming it is ‘too little and too late’

Why in the News

The Ministry of Labour and Employment has notified a rise in the wage ceiling of the Employees’ Provident Fund Organisation (EPFO) from Rs 15,000 to Rs 25,000 a month, the first revision in 12 years. The notification follows approval of the increase by the Union Cabinet. Over 8 crore subscribers must now contribute mandatorily up to the new limit under the Employees’ Provident Fund (EPF) scheme, the Employees’ Pension Scheme (EPS) and the Employees’ Deposit Linked Insurance (EDLI) scheme, and about 51 lakh more workers come under mandatory coverage. The tension is over what a ceiling fixed in rupees can do. Trade unions have called the new figure “too little and too late” and want the threshold tied to wages and inflation rather than revised once a decade.

What is the EPFO wage ceiling and what does it trigger?

1. What the ceiling is: It is the monthly wage level up to which membership of the EPFO’s three schemes is compulsory in a covered establishment, and beyond which a worker may choose not to contribute.
2. What it applies to: The same figure governs mandatory coverage under all three schemes at once, the provident fund, the pension scheme and the deposit linked insurance scheme.
3. What it does not cap: A worker already contributing on basic pay above the old limit is unaffected in the provident fund, since the ceiling bounds the compulsory floor of coverage rather than the amount that may be saved.

What changes in the contribution arithmetic?

1. Who pays what: The employee and the employer each contribute 12% of basic salary, dearness allowance and retaining allowance, with the employee’s entire share going to the EPF.
2. How the employer’s share splits: Of the employer’s 12%, 3.67% goes to the EPF and 8.33% to the EPS, and the pension share is calculated on the wage ceiling for most subscribers.
3. The pension effect: The monthly pension contribution rises to Rs 2,083 from Rs 1,250, because 8.33% is now computed on Rs 25,000 instead of Rs 15,000.
4. The state’s own share: The government contributes 1.16% towards an employee’s pension up to the wage ceiling to cover any shortfall from low wages, and employees make no contribution of their own to the pension scheme.
5. The insurance leg: Under the EDLI scheme the employer contributes 0.5% of wages with no deduction from the employee, and the scheme pays life insurance cover of Rs 2.5 lakh to Rs 7 lakh on death during service.
6. Who gains most: Workers earning between Rs 15,000 and Rs 25,000 see the largest change, since their social security contributions rise from voluntary or low levels to the full mandatory rate.

Where does this revision sit in the scheme’s own history?

1. Frequency of revision: This is the ninth revision of the EPF scheme’s wage ceiling since the scheme began in 1952.
2. The pattern of long gaps: It is only the third occasion on which the gap between two revisions exceeded a decade, so a frozen ceiling is a recurring feature rather than a one off lapse.
3. The two previous steps: The ceiling was raised to Rs 15,000 from Rs 6,500 in September 2014, and to Rs 6,500 from Rs 5,000 in June 2001.
4. Where the demand was raised: The revision had been discussed in several meetings of the Central Board of Trustees of the EPFO over the last decade before it was acted on.

What does the new ceiling signal to the wider labour market?

1. Statutory minimum wages had overtaken the old ceiling: At least seven major States and Union Territories set statutory minimum wages for unskilled workers above the old Rs 15,000 limit.
2. The specific figures: Monthly minimum wages stand at Rs 17,800 in Delhi, Rs 17,000 in Maharashtra and Rs 16,800 in Karnataka.
3. What the gap meant in practice: A ceiling below the legal minimum wage in a State excluded the lowest paid formal workers there from compulsory coverage, which inverts the purpose of a floor.
4. The signalling effect: A higher central threshold indicates a higher expected wage scale to States and to employers, beyond its direct effect on contributions.

Why do trade unions call the revision inadequate?

1. The stated objection to the frozen figure: The All India Trade Union Congress (AITUC) has said a social security ceiling held at Rs 15,000 for 12 years was already out of step with prevailing wages.
2. The demand on the number: Its General Secretary has asked for the ceiling to be raised to Rs 30,000 so that more deserving sections of employees are covered.
3. The demand on the method: The union position is that the threshold must move in step with minimum wages, actual wages, inflation and the cost of living, rather than being reset by discretion.
4. The take home pay concern: Employers are expected to absorb the higher contribution inside the existing cost to company structure, so a worker’s monthly take home pay falls even as the savings balance rises.

Challenges to the EPFO wage ceiling framework

1. A nominal ceiling loses value every year it is not revised: A threshold fixed in rupees falls in real terms with inflation, so coverage narrows automatically between revisions. Eg. The previous limit stood unchanged from 2014 while several States raised statutory minimum wages past it.
   The Fix: Link the ceiling to a published wage or price index with automatic annual revision, so coverage does not depend on a discretionary decision.
2. Coverage is tied to the establishment, not the worker: Compulsory membership runs through establishments covered by the scheme, so gig, platform and informal workers stay outside it whatever the ceiling is. Eg. The Code on Social Security, 2020 provides for schemes for gig and platform workers, which remain outside the EPFO’s mandatory contribution structure.
   The Fix: Operationalise the aggregator contribution route for gig and platform workers so coverage follows the worker across employers.
3. A higher mandatory contribution can push employment off the books: Where an employer treats the contribution as a cost to be avoided, the response is under reporting of wages or headcount rather than compliance. Eg. Splitting pay into allowances outside basic wages was contested up to the Supreme Court in the 2019 Regional Provident Fund Commissioner v. Vivekananda Vidyamandir line of cases on what counts as basic wages.
   The Fix: Audit wage structures of covered establishments against declared basic wages and publish sector wise compliance data.
4. Pension outcomes remain weak despite higher contributions: The pension share is computed on the ceiling rather than on actual pay, so the pension of a worker earning well above the ceiling stays low. Eg. Pensionable salary for most subscribers is capped at the ceiling even where actual wages are several times higher.
   The Fix: Publish the actuarial position of the pension scheme at each revision, so the pension a given contribution buys is visible before the ceiling is set.
5. Take home pay falls for the workers the change is meant to protect: A low wage worker gains a deferred benefit and loses current income, which is the trade off least affordable at that wage level. Eg. Employers absorb the higher contribution within the existing cost to company package.
   The Fix: Phase the increased employee share over two or three years for workers in the newly covered band, while the employer share applies at once.

Conclusion

The revision settles the level of the ceiling and leaves open the method of setting it. A threshold fixed in rupees and revised at intervals of a decade will drift below statutory minimum wages again, which is what produced the present anomaly of a social security floor lower than the legal wage floor in several States. The stated union demand is not merely a higher number but an indexation rule that removes the need for a political decision each time. The thing to watch is whether the Central Board of Trustees takes up a standing revision formula, since that is what decides whether this correction has to be repeated in another twelve years.

Back2Basics: Employees’ Provident Fund Organisation (EPFO)

1. Statutory basis: It administers schemes framed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and functions under the Ministry of Labour and Employment.
2. Who governs it: It is steered by the Central Board of Trustees, a tripartite body of government, employer and employee representatives, chaired by the Union Labour Minister.
3. The three schemes: It runs the EPF scheme for retirement savings, the EPS for pension, and the EDLI scheme for life insurance cover linked to provident fund membership.
4. Scope of application: The parent Act applies to establishments employing 20 or more persons in notified industries, and coverage continues even if employment later falls below that number.

Matching Previous Year Question

“[2021] With reference to casual workers employed in India, consider the following statements: 1.All casual workers are entitled to Employees Provident Fund coverage. 2.All casual workers are entitled to regular working hours and overtime payment. 3.The government can, by notification, specify that an establishment or industry shall pay wages only through its bank account. Which of the above statements are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2, and 3 Answer: (b)”