Ruling on PF deductions from leave encashment

Provident fund contributions need not be deducted from the payment made towards annual leave encashment, the Madurai Bench of the Madras High Court has ruled.

Allowing a batch of writ petitions filed by various factories, Justice K. Chandru said leave encashment could not be considered part of the basic wage for deducting provident fund contributions. Employees usually did not exhaust their earned leave; they chose to encash them at the time of retirement, or the sum was paid to their heirs in case of contingency such as the death of an employee. Hence, they would not be benefited at all by provident fund deduction from the encashment of annual leave.

Though employers made provisions for annual leave encashment, it was seldom paid unless a contingency arose. The payment need not be made at all if an employee availed himself of the entire earned leave. Therefore, contribution towards provident fund could not be based upon contingencies and uncertainties, the judge said.

Furthermore, the term ‘basic wage’ defined under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, included all emoluments earned by an employee while on duty or on leave or on holidays with wages. The holidays mentioned in the definition could only mean weekly holidays, national and festival holidays and so on.

Disagreeing with a contrary view taken by the Bombay and Karnataka High Courts while dealing with a similar issue, he said the Employees Provident Fund Appellate Tribunal in New Delhi held in 2000 that deducting provident fund contributions from leave encashment would create unnecessary confusions. The decision on an appeal filed by the Tamil Nadu State Transport Corporation had not been challenged before any High Court.