New Delhi: The Central government has finally taken away the mandatory status of the Employees’ Provident Fund Organization (EPFO), without amending the EPF Act.

Perhaps nobody noticed it, but the Union cabinet on Wednesday changed EPFO’s status and communicated it, not through the labour ministry, as one would expect, but through a cabinet release on textiles sector.

“The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given its approval to the reforms to boost employment generation and exports in the Made-ups Sector (a sub sector of textiles and apparel)... Simplification of labour laws: Making employees’ contribution to EPF optional for employees earning less than Rs15,000 per month," the cabinet statement said.

This means, employees earning less than Rs15,000 per month in the ‘Made-ups’ sector are no more required to pay the mandatory EPF (Employees’ Provident Fund) contributions from their salary.

To be sure, employers will continue to have to do so for each eligible employee on the rolls.

Why is this important?

Thus far, EPF has been mandatory for organized sector employees earning up to Rs15,000. Making it optional strikes at the very root of EPFO, which was set up as a retirement fund body more than 60 years back primarily to manage the retirement savings of organized sector workers who earn low wages.

To be sure, the decision comes some 21 months after finance minister Arun Jaitley indicated a possible change in his 2015-16 budget speech. “...for employees below a certain threshold of monthly income, contribution to EPF should be optional, without affecting or reducing the employer’s contribution," Jaitley had said in his budget speech in February 2015. However, he had not specified what is the threshold or which are the sectors to benefit from this.

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The labour ministry has been looking to amend the EPF Act and insert a provision to allow less than the mandatory 12% PF deductions each by employers and employees mainly in small- and medium-scale industries. But for the last two and half years, it has refrained from taking this to Parliament fearing political opposition.

The fresh cabinet decision changed the EPFO’s mandatory status through executive order and opens up the possibility of further changes, including reduced contributions for other sectors , a labour ministry official said, on the condition of anonymity.

The government believes that making EPF optional for employees with low salaries will enhance their take-home pay. That could encourage more employees to seek jobs in the formal sector. It also allows employees the right to decide what to do with their retirement savings (some say this is a step in the right direction, away from a nanny-state that believes people have to be protected from themselves).

But in practice in sectors including textiles and apparel, there is huge informality of the workforce largely on account of supply-demand mismatches. For example, in Tirupur, the heart of India’s apparel export industry, around 75% of the over 500,000 workers base are paid weekly in cash, Mint reported on 25 November. Weekly wage structure negates social security benefits to employees and underlines the informality in some of the formal sectors.

Every month, employees pay 12% of their basic salary to the EPFO as retirement savings and a matching contribution is made by the employer. But in many cases, both components are part of the workers salaries’ and they lose out 24% of the monthly wage for PF deductions. Making the employee contribution optional means 12% more take-home pay.

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