Can two units be clubbed together so as to make the Provident Fund Act applicable?

Yes.  Certain factors, mentioned below, are considered for clubbing two units to cover the establishment under section 2A. The two units can be clubbed if the Provident Fund department is of the opinion that the two units though shown separately but are owned by the same management, they are located in the same geographical location  and there is a unity of management.

The following are the factors required to be considered while deciding clubbing of units under section 2A

1. Geographical proximity.

2. Financial dependence

3. Unity of Ownership/establishment

4. Interdependence i.e. survival of one unit without existence of another.

The issue of clubbing two or more units in the regular course of action needs a case by case consideration. Reference can be made to following case law –

The Supreme Court in Associated Cement Companies Ltd V/s Workmen  considered what would be necessary to determine the unity of an industrial establishment, especially when its segmented and consists of several parts and units . It observed as under –

The question of unity or oneness presents difficulties when the industrial establishment consists of parts, units departments, branches etc. If it is strictly unitary in the sense of having one location and one unit only, there is little difficulty in saying that it is one establishment. Where, however, the industrial undertaking has parts, branches, departments, units etc., with different locations, near or distant, the question arises what tests should be applied for determining what constitutes one establishment. Several tests were referred to in the course of arguments before us, such as, geographical proximity, unity of ownership, management and control, unity or employment and conditions of service, functional integrality, general unity of purpose etc……It is perhaps, impossible to lay down any one test as an absolute and invariable test for all cases. The real purpose of these tests is to find out the true relation between the parts, branches, units, etc., If in their true relation they constitute one integrated whole, we say that the establishment is one; if on the contrary they do not constitute one integrated whole, such unit is then a separate unit. How the relation between the units will be judged must depend on the facts proved, having regard to the scheme and object of the statute which gives the right of unemployment compensation and also prescribes a disqualification thereof.

In the year 2000, the Hon’ble Supreme Court in Noor Niwas Nursery Public School V/s Regional Provident Fund Commissioner & Ors held a similar view stating that two units can be considered as being part of the same establishment for the purposes of application of the Provident Fund Act if, among others, the working stuff belonging to both are the same.

In a more recent decision by the Hon’ble Supreme Court, namely LN Gadodia and Sons and Another V/s Regional Provident Fund Commissioner, 2011 in deciding whether two companies were part of the same business establishment, after examination of all documents, observed that Directors of both the companies came from the same family, the Companies had a common Managing Director, Commercial and Technical Managers, employees of the two companies were being swapped, both had the same registered address and common telephone numbers, the two companies were family concerns of the Gadodia family. In this light, the Hon’ble Court concluded that both companies had integrity of management, finances and workforce and therefore were part of the same establishment and should be therefore clubbed for the purposes of application of the Provident Fund Act.

Thus, while considering the functioning of two separate units, the court may administer several tests to determine so, at times it would consider the unity of ownership, management and control as important ; or the functional integrity or general unity ; or the unity of labour force/employment. In some circumstances several tests may fall for consideration at the same time. The difficulty of applying these tests arises because of the complexities of modern industrial organization. Many enterprises may have functional integrity between factories yet maybe separately owned; some may be integrated in part with units or factories having the same ownership and in part with factories or plants may be independently owned. The courts thus would base its rulings on the above mentioned tests to determine whether or not the Provident Fund Act, would be applicable.

Leave a Comment