The question of wage restructuring, particularly in the context of section 124 of the Code on Social Security, was earlier examined in a broader context in an article by this author published in the March 2026 issue of Business Manager. In that article, it was discussed that section 124 does not create a blanket prohibition against wage restructuring. What it prohibits is the reduction of wages or the reduction of the total quantum of benefits by reason only of the employer’s liability to pay contribution under the Code.
However, the specific question of provident fund still appears to leave room for further enquiry, particularly because doubts continue to arise on how PF contribution should be treated when wages are restructured. This enquiry has now become more relevant in view of the Employees’ Provident Funds Scheme, 2026, which has come into force with effect from 29 June 2026, thereby superseding the earlier EPF Scheme, 1952, except as to things done or omitted before such supersession. The present article, therefore, seeks to examine this limited aspect of PF treatment in a wage restructuring scenario.
What Restricts the Reduction of PF Contribution?
The starting point was earlier section 12 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The section inter alia provided that no employer shall, by reason only of his liability for payment of contribution to the Fund or charges under the Act or the Scheme, reduce directly or indirectly the wages of any employee or the total quantum of benefits like provident fund and other retiral benefits to which the employee is entitled.
The words “by reason only” were critical. They prevented an employer from saying: “Because I now have to bear provident fund liability, I will reduce wages or benefits.” It was not a general freeze on the wage structure. A similar provision is now contained in section 124 of the Code on Social Security. Therefore, section 124 has to be understood in the same context. It restricts the reduction of wages or benefits merely because of contribution liability. It does not prohibit every form of wage restructuring.
The Statutory Ceiling and Higher PF Contribution
The earlier EPF Scheme, 1952, has now been superseded by the Employees’ Provident Funds Scheme, 2026. Therefore, PF contribution in a restructuring scenario has to be examined with reference to the new Scheme.
Paragraph 9(4) of the 2026 Scheme deals with contributions beyond the wage ceiling. It provides that an employee and employer may make a joint written request for enrolling such employee as a member or for allowing contributions on wages exceeding the wage ceiling. This is broadly similar to the earlier position under paragraph 26(6) of the EPF Scheme, 1952.
Paragraph 18 of the 2026 Scheme deals with contributions. It provides that the contribution payable in respect of a member shall be subject to the wage ceiling notified by the Central Government from time to time. It also clarifies that, subject to paragraph 9(4), where the monthly wage of a member exceeds the wage ceiling, the employer’s and employee’s contributions shall be limited to the contribution payable on the wage ceiling.
Thus, the position which earlier flowed from paragraphs 26(6), 26A(2) and 29 of the EPF Scheme, 1952 is now substantially reflected in paragraphs 9(4) and 18 of the Employees’ Provident Funds Scheme, 2026. Contribution up to the statutory requirement is mandatory. However, contribution beyond the wage ceiling is not an automatic statutory obligation in every case. It may arise from a joint request, undertaking, contract, settlement, service condition or any other enforceable arrangement. Therefore, where the employer is contributing above the statutory wage ceiling, the basis of such a higher contribution has to be examined.
Case law
The Supreme Court’s decision in Marathwada Gramin Bank Karamchari Sanghatana v. Management of Marathwada Gramin Bank (2011) 9 SCC 620 remains important. In that case, the employer had earlier made PF contributions in excess of the statutory requirement. The Court held that the employer was obliged to pay PF in accordance with the statutory scheme, but could not be compelled to pay an amount in excess of its statutory liability merely because it had earlier paid such a higher contribution for some time.
The Calcutta High Court, relying upon the aforesaid judgment in Nava Nalanda High School v. Employees’ Provident Fund Organisation, 2014 LLR 310, also held that the PF authority cannot compel an employer to pay
contributions above the prescribed statutory ceiling if the employer is otherwise complying with the statutory requirement.
These judgments were rendered in the context of the earlier legal framework. However, the broad principle still remains relevant because the 2026 Scheme also recognises the distinction between statutory contribution and
contribution beyond the wage ceiling. Hence, every past higher PF contribution does not automatically become irreversible. At the same time, if a higher contribution is protected by any settlement, contract, undertaking, service condition or enforceable arrangement, the matter may have to be examined differently.
Position under the Social Security Code and the 2026 Scheme
Two things need to be considered. First, the Employees’ Provident Funds Scheme, 2026 has now been notified in the Official Gazette and has superseded the earlier EPF Scheme, 1952, except in respect of things done or omitted before such supersession. Therefore, for the present and future treatment of PF contributions, the reference should now be to the 2026 Scheme.
Second, section 124 of the SS Code is substantially analogous to section 12 of the erstwhile EPF Act. It prevents the reduction of wages or benefits merely because of contribution liability. It does not say that wages can never be restructured. Nor does it say that contribution beyond the statutory PF requirement must always be continued, irrespective of the basis on which such a higher contribution was being made.
Therefore, the combined reading of section 124 and the 2026 Scheme indicates that wage restructuring is not prohibited per se. The real restriction is against reducing wages or benefits merely to absorb or neutralise the employer’s statutory contribution liability.
Scenarios that can emerge after restructuring
One possible scenario is that the gross salary of the employee may get reduced because of an increase in PF contribution, though the CTC remains the same. The employee may perceive it as a reduction in take-home pay, though technically the overall CTC has not been reduced.
Another scenario may arise because wages would mean all remuneration, except the statutory exclusions mentioned in clauses (a) to (i) of the definition of wages under section 2(88) of the Code on Social Security and section 2(y) of the Code on Wages. For allowance-heavy companies, some allowances may not fall within the statutory exclusions. Even where they fall within the exclusions, the fifty per cent add-back rule may increase the wage base and consequently PF liability and other statutory liabilities.
Hence, restructuring may become necessary. In the course of such restructuring, PF contribution may either increase or decrease depending upon the structure adopted. If the contribution decreases, it may appear at first sight that such a reduction is barred by the Code. However, that may not be the correct legal position in every case.
Way forward
First, employers are liable to pay PF contribution up to the statutory requirement, unless there is any contract, settlement, undertaking, or other enforceable obligation to the contrary. Therefore, any decrease in contribution beyond the statutory requirement may not be impermissible or illegal. However, where the wages are within the notified wage ceiling, there can be no reduction of statutory contribution.
Second, PF contribution may be restricted to the notified wage ceiling where there is no contrary contractual, statutory or settlement-based obligation. This is supported by the above-cited judgements and paragraph 18 of the 2026 Scheme, which limits contributions to the wage ceiling.
Third, the employer may decide not to change the existing basic wage. For bringing the wage component to fifty per cent and for keeping the exclusions within the permitted limit, apart from the basic wage, another allowance may be identified or created, such as a special allowance or any similar component. Basic wage plus such allowance may together constitute the wage component for compliance. This may ensure that the existing PF contribution is not disturbed and the gross salary also remains the same. Such an approach appears permissible.
However, one caution must be kept in mind. If, despite restructuring, the PF wages fall below the notified wage ceiling, a contribution has to be made on such actual wages in accordance with the law. Similarly, if a higher contribution is protected by any contract, settlement, undertaking, joint request or enforceable service condition, the employer should not reduce it without examining such an obligation.
Conclusion
Section 124 cannot be read as a complete bar on wage restructuring. It only prohibits the reduction of wages or total benefits by reason only of the employer’s liability to pay contributions.
As far as the provident fund is concerned, statutory contribution cannot be reduced or avoided. However, contribution beyond the statutory wage ceiling is not automatically compulsory as a matter of PF law, unless it is supported by contract, settlement, undertaking, joint request, service condition or any other enforceable obligation.
Hence, wages can be restructured, but it has to be done carefully. The restructuring should not defeat statutory PF liability. At the same time, it would not be correct to say that section 124 prohibits every restructuring merely because there is some impact on PF contribution.
