EPF compliance for international workers and common compliance pitfalls to avoid

With globalisation giving impetus to international trade and investments, cross-border labour movements are ubiquitous across modern businesses. However, employers must navigate complex regulations to ensure compliance with social security obligations for international workers (IWs). Especially, the Employees’ Provident Funds (EPF) Act presents unique challenges and possible grey areas when employers have foreign employees come to work in India as inbound employees or when Indian employees go to work abroad as outbound employees.

This blog highlights two common ‘compliance pitfalls’ to avoid that may arise during international employee mobility to and from India.

Background

Under the EPF Act, both the employer and employee should contribute 12% of an employee’s ‘basic wages’ to the EPF account. In the year 2008, the EPF Scheme was amended with the introduction of Para 83, creating another category of workforce called ‘International Workers’ (IW). This amendment extended the coverage of PF law to ‘International Workers’ (IW) requiring them to contribute to the EPF.

Before this amendment, the inbound foreign employees coming to work in India did not fall within the ambit of EPF and the employee pension scheme (EPS) as their salaries generally exceeded the wage ceiling (i.e. INR 6500) above which there was no requirement to contribute to pension and provident fund. In other words, this upper limit of INR 6,500 per month for mandatory EPF coverage was technically excluding all inbound foreign employees from the scope of EPF. That is why the Employees’ Provident Fund Organization (EPFO) removed this wage limit for inbound international employees.

This step made it mandatory for inbound IWs to contribute to the EPF unless they hold a valid ‘detachment or coverage certificate’ and enjoy the ‘exclusion’ or ‘detached’ status. A detached worker is an employee who is sent by an employer to carry out specific assignments in the host country on a short-term basis, and these employees would continue to pay their social security contributions in their home country, making them exempted from contributing to the social security system in the host country for a set period and terms specified in a social security agreement.

Moreover, there were other issues as well. In most cases, Indian outbound employees working in other countries were not entitled to any PF benefits upon returning to India despite making PF contributions in the host countries. This was primarily because these outbound overseas assignments were short-term. As a result, the employees did not meet the minimum required period to qualify for social security benefits.

Additionally, such contributions on the part of the employers were also an additional burden that employers needed to bear as they had to pay contributions to both countries, leading to double coverage. These scenarios were due to the absence of social security agreements between India and the host countries.

Defining International Workers

An International worker may be an Indian worker (outbound) or a foreign national (inbound).

An outbound International Worker is any Indian employee who is going to work or has worked abroad in a foreign country with which India has entered into a Social Security Agreement (SSA) and, this outbound Indian employee should be eligible to get the social security benefits in the said foreign country as per the provisions of the SSA.

Likewise, an inbound International Worker is any foreigner who is other than an Indian employee, holding a foreign passport, and working in India in an establishment to which the EPF Act applies.

Detached workers

Detached workers are basically inbound international employees enjoying the status of ‘exclusion’ on account of social security agreements. From the perspective of the receiving country or the host country, they are considered “excluded” employees as they are already covered for social security benefits in their home country, continuing to pay their social security contributions there.

To be qualified as a detached employee, they must hold a valid ‘detachment or coverage certificate’ issued by an appropriate agency in the home country. The certificate must be produced to the host country employer/agency to get the exemption status during the employment period in the host country. The certificate should mention the period of employment in the host country. This is the period that indicates the date up to which they remain excluded.

Upon the expiry of such detachment or coverage certificate, and if it is not extended further, the employee’s ‘exclusion’ status will come to an end.

Social Security Agreements (SSAs)

Social security agreements are bilateral agreements entered between two countries, providing a legal framework to coordinate their social security systems and protecting migrant workers’ rights by guaranteeing uninterrupted social security coverage for employees during their employment abroad. These agreements are crucial for India to enhance international mobility and capitalise on its demographic dividend.

SSAs are reciprocal agreements intended to achieve equality and benefit both employers and employees. They avoid instances of ‘no coverage’ or ‘double coverage’; facilitate ‘totalisation’ of contribution periods; allow ‘exportability of benefits’; and provide equality of treatment of inbound and outbound workers.

Here’s an explanation of the benefits that a social security agreement can provide:

1. Avoids instances of ‘no coverage,’ benefiting the employees. This means that a migrant employee will not be deprived of social security benefits in the host country and will continue to be covered in the home country (even though the employee is sent on a short-term assignment). For example, if an employer in India sends an employee on a short-term assignment to work in their offices, the employee will continue to be covered in India (home country), allowing the employee to be exempt from coverage in the host country.
2. Avoids instances of ‘double coverage,’ benefiting the employers. In the absence of a social security agreement, the employer would normally have to pay social security contributions in both countries. With the agreement in effect, this double coverage is consequently eliminated, and the contributions are paid only in one country, provided the assignment period in the other country meets certain conditions.
3. Facilitates ‘totalisation’ of contribution periods. If the SSA includes the totalisation clause, aggregation or addition of contribution periods of services rendered in the home country and the foreign country is possible. In other words, the period of PF contribution in one country will be included in the period of contribution in the other country to determine the eligibility for social security benefits, such as pension, under the Indian or host country’s social security system.
4. Allows ‘exportability of benefits.’ This clause in the social security agreement can allow the export of pensions under the legislation of one country to another country where the employee might choose to reside.
5. Provides ‘equality of treatment‘. This principle prevents the host country from treating foreign migrant employees less favorably than their own nationals, ensuring everyone enjoys the same rights and has the same social security obligations.

India currently has social security agreements with 21 countries, and the EPFO serves as the liaison or operational agency in India for implementing the provisions of social security agreements. For instance, EPFO issues the Certificate of Coverage (CoC) to eligible employees posted to the countries that have signed an SSA with India.

Understanding Significant Differences

It should be noted that the concept of wage ceiling does not apply to inbound international workers, making it mandatory for these employees to contribute to the EPF, unless they are “detached” employees (i.e. excluded employees).

There are also certain differences between EPF contributions by inbound IWs and by domestic employees. The inbound international employees are required to contribute to the EPF on their ‘entire salary’ and not merely on ‘basic wages’ as applicable to domestic employees. The entire salary would mean the basic wages plus most of the other allowances.

Recently, on April 25, 2024, the Hon’ble High Court of Karnataka ruled that the special provisions for the “International Workers” are unconstitutional and arbitrary. In its ruling, the court has observed that provisions for inbound international workers are not in alignment with the objectives of the provident fund law. For reference, please see AscentHR’s previous legal alert for a summary of the key issues and challenges of EPF compliance for international workers, along with AscentHR’s comments.

Two Common Compliance Pitfalls or Non-Compliance Scenarios to Avoid

The list below is not comprehensive, but it should give companies a strong sense of the types of compliance issues that can occur when employers have international workers.

1. With regard to the inbound IWs, the PF contributions are made only on the ‘basic wages’ instead of calculating the contribution on the entire monthly salary. It should be noted that HRA is the only excluded component apart from reimbursement against bills.
2. Failure to correctly identify foreign nationals of Indian origin or with Indian names, leading to failure to comply with the PF provisions pertaining to IWs. Passport checks are recommended to ensure compliance.

Non-compliance with PF provisions relating to international workers will attract penal interest and damages, as applicable, and increase the risk of prosecution.

Conclusion

When implementing PF compliances for international workers, employers should remain cautious of the pitfalls outlined above, recognising that non-compliance scenarios are by no means the only ones to be wary of. Penalties for non-compliance can be costly, and some of these penalties can fall upon the employee, which in turn can cause strains in employee relations, making it difficult for organisations to achieve retention goals.

AscentHR’s Lexcare is well-equipped to help organisations navigate these complex issues that may arise in inbound and outbound assignments.

Lexcare Global, an AscentHR entity, is a distinguished company specialising in legal compliance services. With a strong operational presence throughout India and an impressive reach extending to 39 countries, and counting, Lexcare Global stands ready to address and manage all your compliance worries with utmost care and expertise.

Have questions about how Lexcare Global can help you stay compliant? Contact us.