Understanding Subcontractor Provident Fund: Labor Laws and Taxation Implications

Dear All,

I have a subcontractor who does not have a PF code. Now, my question is how to deduct PF for their employees.

Can we deduct their PF in the account of the principal employer?

My concern is that the employee-employer relationship is not with the subcontractor, so how can we deduct PF?

Kindly help me.

Sudip Sahu
9227802836

As a principal employer, you are responsible for PF coverage. If they don't have a PF code, ask them to obtain the same. You have to provide Form V. Otherwise, you have to deduct the PF from their bills and deposit it with the PF authorities as you will be held responsible.

Regards,
R. Ponraj

Dear Sudip,

Now here's a tricky game you have to play. By the way, what type of organization is yours, PSU or Pvt.?

Well, whatever it is, the fact that you have to make them pay PF is true. But never ever try to get it paid through your organization's PF code, as that would be a blunder. It also depends on the IR and power of the Union at your place. The best thing you can do is to force them to pay through the PF code of the contractor. Don't issue Form V to the subcontractor; this will create problems in the future. What problems? We may discuss later. Issue Form V only to the contractor to avoid complications and IR issues. It also depends on the agreement with the Principal Employer and the contractor. However, PF is a very touchy issue. Think of every pro and con before you take any step in the field. You are there to save your organization, not for philanthropy. What seems good today may be bad tomorrow. Be harsh to your contractor and avoid dealings with subcontractors. Never give a gate pass to the workers of the subcontractor unless the Gate Pass application bears the declaration/certification of the main contractor. Force the contractor to take care of the subcontractor.

I hope you are getting me... You may call me at 9434139276 (West Bengal).

Regards,

Shafiq

Hi Shafiq,

Nice explanation. But in one case, suppose the contractor didn't have a PF number, and also, he did not deduct PF from his workers. When the Principal employer is strict, he then says that he has applied for the same. In the meantime, a PF inspection is held in the organization and it is found that you have not deducted the PF of your contract employees. What will be your reply?

Regards,
Avinash K.

I am working in a construction company. This is my first job with no practical experience in PF, etc., and my senior just resigned. My query is on the same line. We take labor from the contractors and we deduct and submit the PF for them on our PF code/account. Is it advisable to do so, or should we pay the PF for the labor through the PF code/account of the contractor from whom we are hiring the labor? Please let me know. I would also like to know what problems may arise due to the practice we are following.

Dear Akatrap/Pradyumna Kumar Atri,

When a contractor is engaged, he signs an agreement. Check whether they are allowed to employ subcontractors. Once the contractor is finalized, you may give FORM V to them. If they do not have a PF number, how did you allow them to fill the tender and compete in the bid? A contractor without a PF number should not be allowed to fill out the tender. Before placing an order, ensure that they have the PF code. If not, either urge them to obtain a code under another major vendor or get a new code, or exclude them. It's not as simple as I'm saying, but we must ensure that the contractor obtains a PF code. However, never be too good to deduct the PFs of the workers from the P. Employer's code. You may issue Form V to the 1st level subcontractor under the certification of the main contractor but never below that. Always involve the main contractor in all dealings.

Well, Akatrap,

In your case, it would be better to call that PF officer to a corner and offer him a pack of Wills Navy Cut, or you can take him to a high-end restaurant and order a good lunch.

Dear Pradyumna,

You work under any guidance. It's not easy to guide you online. Work under your boss; he will definitely assist you. After all, you are new, and your boss also knows that.

Ok, guys!

Regards,

Shafiq

Looking at your problem, I offer the following suggestions:

1. Since your subcontractor has no PF code, compliance has to be ensured by you, particularly if you are making payment directly to the subcontractor. If you are not making payment to him, a better way would be to insist on the contractor accounting for PF remittance of the subcontractor too. Do your contracts with the contractor allow the work to be offloaded to another party?

2. In the future, do not allow any contractor or subcontractor without a PF number.

3. Form V is needed for a Labor license. It has nothing to do with PF registration.

Regards, KK

Dear Shafiq,

My senior has been very secretive about all the stuff about ESI and PF, and recently, he has resigned. There is no other senior person in the HR department now. Myself and a lady who looks solely into recruitment are there, and she knows nothing about HR/labour laws; however, she has enough knowledge of recruitment to do her job. So, there is no one at my workplace to guide me.

Dear Mr. Sudeep Sahu,

I just want to sum up the replies of all the other senior members and would advise you to take the following steps:

1. Whenever you ask a question like this, please indicate the type of company you represent; it helps to guide clearly.

2. Please know that there is a principal employer (your company), contractor, and subcontractor in your business.

3. When you say subcontractor, it implies that you have engaged a contractor who is then engaging another contractor - is this the case?

4. If you are engaging a contractor, the contractor must have PF and ESI codes. Otherwise, do not engage such people and put yourself into a problem.

5. If you have already engaged a contractor long back and cannot get rid of him, you may do the following:

a) Instruct the contractor to obtain a PF code (if he has 20 persons under his roll; if it is less than 20, he can opt for it voluntarily).

b) Pay the contractor, including Employers' PF margin, and ask him to deduct from the employees' wages also and remit.

6. As one of our members said, Form V is issued to the contractor to obtain a License from the Labor Department.

7. In case there is no PF code with the contractor, it is not safe to keep such contractors with you. If you cannot get rid of him at this stage, there is no harm in deducting PF and paying it. But you have to allot a PF number through your PF code and maintain registers, settle PF if they leave, etc. It will be added work for you. Hence, it is better to ask the contractor to obtain a PF code.

8. If a contractor is engaging another contractor and allows them to work on your premises, then he is called the subcontractor. Here, be careful not to engage with them directly. It is the contractor's responsibility, and the subcontractor has no direct business with you. He has to come through the 1st contractor only. For PF and ESI purposes, he also has to come through the contractor only. It is not your responsibility. Ask the contractor to include all these people under his rolls only.

Ultimately, whether it is a contractor or your company, PF and ESI authorities will approach only you, i.e., the Principal Employer, and you have to comply. Hence, it is always advisable to engage a registered contractor who has ESI code, PF code.

Regards,

K. Ramachandra

Bangalore

Hi Shafiq,

Nice explanation, dear, but I have one question. Suppose our company has to hire a specialized contractor because they excel in that particular area and they do not have a PF code due to having fewer than 20 employees. However, we require some unskilled workers for our company's order, and the contractor is hesitant to obtain a PF code as it may impact their performance on our job. Nevertheless, the job is crucial for our company. In such a scenario, what procedure should we follow to ensure we can engage the specialized contractor for the job while also ensuring compliance with the PF Act?

Regards, Jawed Alam WEST BENGAL.

Dear all,

Mr. K. Ramachandra has summed up the matter superbly. Such exchange of ideas not only freshens up our knowledge but also encourages us to make a new foray in the field of contract labor/PF, making us bold and equipped. The forum undoubtedly gets enlightened when members like Jawed Alam enter the space. We are privileged to have him here.

By the way, Jawed bhai, your questions are definitely tricky but let me try.

Now, here is what we may do: as the skill set of the contractor is indispensable, we can require them to obtain the PF code through another vendor and get assigned numbers. Another approach we may consider is utilizing supply labor. These unskilled workers are generally under some contractor/labor cooperative, etc., that has a permanent PF number. They can be utilized for the purpose; they will work under the new contractor (who doesn't have PF) but will be paid by the contractor/labor cooperative under whose role they actually fall. However, during the issuance of gate passes, we need to be cautious. Form XIII and a pay register will be maintained by the actual contractor/labor cooperative.

I hope this may suffice the need. However, Jawed bhai, I know you may have some other tricky solutions. The forum will be enlightened if you share your ideas.

Regards,

Shafiq

Hi Shafiq,

Thank you for your reply. What you are saying is true in an ideal situation. However, in the case of a medium/small-sized company, there may not be bidding, and the contract is given to the person who has the muscle power/political power to help the management in case of any trouble. Since the approval is granted at the top level, middle-level management like us is helpless to create pressure on the contractor. Also, the PF inspector will definitely point out the breach and may ask for a favor. This is a practical problem in most industries.

Regards, Avinash K.

Dear Mr. Shafiq,

Thank you for noting the points and your compliments. If such right thoughts help many, it is a great return. Let us strive to share knowledge professionally.

Mr. Javed Alam

You may engage unskilled or skilled persons as "Fixed Term Employees" (say for 2 years, 3 years) with a fixed salary or as Trainees for a fixed term. Later, you may think of either closing their employment/training or regularizing them as permanent workers depending on your requirements. This should be clearly communicated to candidates at the time of the interview itself. However, if you have 10 persons, ESI is applicable, and if you engage 20, PF is applicable. As long as you are within this number, you need not have ESI and PF codes. Please note, the specified number includes the number of persons already working in your company, whether permanent or temporary, contract or otherwise, and the new persons whom you are going to engage.

Regards,

K. Ramachandra
Bangalore

Hi Shafiq,

It's always good to hear a good compliment, but not for those which you don't deserve. By the way, Shafiq, your suggestion is correct, I think, but what Avinash has pointed out is also true for some companies.

Regarding my query, I think it would be better if the process which Shafiq has suggested may be elaborated step-wise.

From the HR perspective, there are three things to look for in the engagement of a Contractor:

1) Job

2) Labour Laws compliance

3) Last but not least, Industrial Relations.

So, our first objective is to get the job done at any cost.

Secondly, we will also have to ensure that there may not be any gross violation of Labour laws as far as possible.

Thirdly, the Industrial Relations of the company may not be hampered (which Avinash has pointed to as Power & Politics) for the engagement of contractors.

Regarding the job:

1. If the job is very specialized or we cannot change contractors due to any reason and simultaneously the contractor does not have a PF Code, then:

a) We may estimate the labor cost involved in that job, including PF, Bonus, and other statutory liabilities.

b) Ask any labor co-operative/contractor who has a PF Code through your main contractor for labor supply at that cost with some profit margin. If agreed, then issue a work order for labor supply through your main contractor.

c) Issue Form V for obtaining a Labor License to the Labor Co-operative/2nd level contractor, but make sure that the Form IV, which is required to be submitted to ALC office, has to be forwarded by the Main Contractor and keep an office copy of the same with your office. The format of Form V must be for subcontractors.

d) Get an indemnity bond from the main contractor where your company has been indemnified through all statutory liabilities in case any dispute arises in the future due to the engagement of Labor Co-operative or 2nd level contractor.

When the Labor Co-operative/2nd level contractor obtains a labor license, your task regarding starting the job has been almost done. Now the task of the issuance of Gate Pass comes into play:

a) Always issue Gate Passes for the workers through the application of Labor Co-operative/contractor and make sure that the main contractor has forwarded that application. Never issue gate passes through an application made by your main contractor, and always the workers will be in the head of labor co-operative/2nd level contractor (Form XIII as per CL (R&A) RULES.

Now, the checking of documents towards the submission of PF and wages comes into the picture after an interval of 45 days:

a) Verify whether all PF contributions have been remitted in various accounts as per the Act through Labor Co-operative/2nd level contractors by asking for copies of PF Challans, Para-22, Wages Sheet, and Master Roll. But make sure that all the copies have to be signed by the main contractor, which are being submitted at your end for verification.

b) Verify whether PF Challans are being submitted within the stipulated time frame as per the PF Act.

If all the above tasks are done, then I guess there may not be any problem in the future regarding the PF Act (I hope).

Then also if there will be any dispute related to the submission of PF comes, you may keep a provision of Security Deposit amount which will be released after the expiration of 6 months to 12 months by and recommendation of HR Dept. regarding IR will tell you all in the next comment.

I hope these steps will work...

Regards,

Jawed Alam.

Dear Mr. Sudip Sahu,

Please obtain the Paysheet from the Sub-contractors by the 3rd of every month. Alternatively, prepare the Paysheet based on attendance, including in-time and out-time that you are maintaining.

Summarize all the workmen subcontractor-wise and consolidate in the PF Summary, detailing the Sub-contractor Name, Number of Workmen, Total Basic Wages, Total 12 PF Deducted, Number of individuals in Form 5, and Number of individuals in Form 10.

Prepare the PF challan with the aforementioned details, specifying the Number of workmen, Basic Amount, PF Amount (12%), EPS (8.33%), Employer PF (3.67%), Administration charges, Tax part (1.61%), and remit to the designated Bank. Submit the challan to the respective PF commissionerate office.

For employees who have left the service, submit Form 10 on their behalf.

Annually, submit the PF Details to the PF Commissionerate, including individual PF numbers with monthly subscription details.

Not all subcontractors may be capable of PF Registration due to limited knowledge about PF or ESI.

With warm regards,

S. Bhaskar

9099024667

Dear Pradyumna Kumar Atri,

Since you are new to this PF issue (as you've mentioned before), explanations and elaborations from Jawed bhai would be of great help. I think it's a very good step-by-step guide on the "dos" and "don'ts" that one may follow in tackling day-to-day PF issues.

The area highlighted by Mr. Avinash and Mr. Jawed Alam, i.e., power and politics, is a crucial issue that every HR officer has to take care of. This issue has spread its tentacles into every sector of life, affecting every decision taken or to be taken by the management. Whether the effect is congenial or adverse is a matter of debate, but the fact that it has influenced is known to us. That's why in my previous notes, I mentioned that these issues are not as simple as we may think. We always have to handle IR/union issues, and we must remember that we are not lawyers who have to follow the rules entirely. Instead, we have to find loopholes in the law to get the job done without breaking it. This is where HR managers have an edge over lawyers, as taught by my seniors.

Sometimes, we would like to start a forum discussing the effect of power and politics on management decisions. Keep going, friends.

Regards,

Shafiq