Section 6 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (PF Act) requires the employer to make contributions to the provident fund accounts of each of its employees. An employee under the PF Act is defined to include persons employed through a contractor in or in connection with the work of the establishment. Also Section 8A of the PF Act allows the principal employer to recover from the contractor, the amount contributed with respect to the contractor's employees. Hence, pursuant to the provisions of the PF Act, the widely accepted view is that the principal employers are legally required to make contributions towards the provident fund of workers employed through contractors as well. Recently however, the Delhi High Court has made certain observations in the case of Group 4 Securitas Guarding Ltd v Employees Provident Fund Appellate Tribunal & Ors and held that when the contractor is an independent legal entity with a large workforce and engaged in providing services to various clients, the onus to make provident fund is not on the principal employer nor will a principal employer be held liable in case of non-compliance.
Group 4 Securitas Guarding Ltd v Employees Provident Fund Appellate Tribunal & Ors
Group 4 Securitas Guarding Ltd (GSGL), which was into the business of providing security guard services, received a notice from the Regional Provident Fund Commissioner directing them to pay additional provident fund contributions on allowances such as HRA, conveyance allowance and washing allowance. GSGL contended that since the security guards were deputed to the client's establishment, the client (principal employer) was liable to pay the PF contributions for those employees and not GSGL. The issue before the court therefore was "whether security guards provided by GSGL to its clients would be its employees or employees of the establishment to whom they are provided"
The Delhi High Court relied on the definition of employer under section 2(e) of the PF Act wherein employer is defined as a person having 'ultimate control over the affairs of the establishment'. In this instance, the courts observed that since GSGL:
operates as an independent entity and is engaged in the activity of providing security services to various clients,
issues employment contracts to the security guards,
pays wages and other allowances to the guards after obtaining their signatures on the register maintained by the contractor,
deputes the guards to the client's establishment on rotation and transfer basis,
is responsible to take disciplinary actions against delinquent guards,
has control rooms in the client's establishment to supervise and regulate the work of the deputed guards; and
has an independent registration under the PF Act
it will be regarded as the employer as per section 2(e) having ultimate control over its personnel and its own establishment. The Delhi High Court also relied on the case of Tata Engineering and Locomotive Company Ltd v Union of India and Ors where it was held that "contractor contemplated under section 8A is one who is a mere front or headman of the principal employer" which is not true for an establishment like GSGL that operates as an independent entity providing services to various establishments across India.
While this issue came up during an audit of the contractor's establishment, we often see instances where an audit in conducted on the principal employer's establishment and the PF authorities raise questions when contributions are not made regularly on behalf of the contract workers working in the establishment. In such instances, though the principal employer would be responsible for the ultimate affairs of its own establishment (where the contract workers are deployed), we believe that this judgment by the Delhi High Court can be relied upon. Accordingly, if the contractor is a large independent entity, registered under the PF Act and meets the tests discussed above, the principal employer has an argument to make that the contractor that has ultimate control over its personnel and therefore the responsibility to make the PF contributions in not on the principal employer.
The findings of this judgement (though not binding on other states) may be used by companies to argue that they are not responsible for PF contributions with respect to contract workers engaged through various contractors. To strengthen the argument it would also be useful to ensure that the agreements with the contractors are on a principal to principal basis where the contractors retain all control over its personnel and the company has no more than a secondary control.