ESI CHINTA SE MUKTI” ONLY TILL YOU RECEIVE NOTICE U/S 45A OF ESI ACT, 1948

The preamble to the Employees’ State Insurance Act, 1948, reads, “An Act to provide for certain benefits to employees in case of sickness, maternity and ‘employment injury’ and to make provision for certain other matters in relation thereto.”

Therefore the legislative intent of promulgating the ESI Act, 1948 was to enact a social welfare and beneficent legislation with the object of providing benefits to employees in case of sickness, maternity and employment injury and as such, the official tagline of the Employees State Insurance Corporation (ESIC), “Chinta se Mukti”, sounds impressive and convincing.

However, the present sorry state of affairs of ESI hospitals is not hidden from anyone.  In addition, the present day tendency of the concerned ESIC authorities has become to put undue pressure on Factories, Shops & Establishments for ESI collections for meeting out their budgetary targets for improving service records.

The vigor, aggressiveness and willingness as shown by the ESIC authorities in collecting the ESI contributions from factories and establishments, in order to fulfill their budgetary kitty, must also be reflected in their efforts in making available the medical and other benefits, to the ultimate beneficiaries of such ESI contributions. 

Unfortunately, the raising of exorbitant and blatant ESI demands u/s 45A of ESI Act, 1948, under the disguise of non-co-operation from the factory or establishment, has become a routine and regular feature, now a days. As per provisions of section 45A of ESI Act, the ESIC authorities are empowered to determine the ESI Contributions, payable in respect of employees of any factory or establishment, based on the records available with them.

Interestingly, presently, many establishments are receiving notices u/s 45A of ESI Act, wherein they are being required to deposit ESI contributions on each and every expenditure incurred by them, be it in the nature of wages or not, and including expenditure incurred on purchase or acquisition of fixed assets including furniture, fixtures and even buildings, on the presumption of presence of labour component, irrespective of whether the recipients/beneficiaries are identifiable or not.

Since ESI Act is a piece of employees’ welfare legislation, and as such the definition of an “employee” as per ESI Act, assumes prime significance and infact, it forms the crux of the applicability or otherwise of ESI on any expenditure incurred.

As per section 2(9) of ESI Act, an “employee” means,

“any person employed for wages in or in connection with the work of a factory or establishment to which this Act applies and, 

(i) who is directly employed by the principal employer, on any work of, or incidental or preliminary to or connected with the work of, the factory or establishment, whether such work is done by the employee in the factory or establishment or elsewhere; or 

(ii) who is employed by or through an immediate employer, on the premises of the factory or establishment or under the supervision of the principal employer or his agent on work which is ordinari­ly part of the work of the factory or establishment or which is preliminary to the work carried on in or incidental to the pur­pose of the factory or establishment; or 

(iii) 

……” 

The definition of an “employee” as per provisions of section 2(9) of ESI Act, 1948, is being interpreted to have very wide coverage to include even contractual employees, within its purview. Further, the usage of the expression “any person employed in connection with the work of a factory or establishment to which this Act applies”, has also broadened the coverage of ESI legislation, manifolds.

However, the stated broad definition of “employee” in ESI Act, can’t be considered as lawful justification for ESIC authorities’ blatant and blanket levy of ESI on each and every expenditure being incurred by an establishment.

For the sake of ready reference and clear understanding, it will be worthwhile to consider the well-established & settled legal & factual propositions in relation to the applicability or otherwise of the ESI on different heads of expenditures of an establishment, as under: 

(I) Any expenditure incurred in-house by an establishment, can be made subject to the levy of ESI only if it qualifies the definition of “wages” within the meaning of section 2(22) read with section 2(9) of the ESI Act. 

(II) Any expenditure which comes within the purview of “wages” but which exceeds the stipulated threshold limit of Rs. 15,000/-, can’t be made subject to the levy of ESI. 

(III) Any contractual expenditure incurred by an establishment, can be made subject to the levy of ESI only if that establishment assumes the capacity of the “Principal Employer” in relation to the contractual workmen/labour. 

(IV) An establishment assumes the capacity of the Principal Employer of the contractual workmen/labour only if it is in a position to supervise & control the work performance of the contractual workmen/staff. 

(V) The Independent Contractors having separate registration under the ESI Act must be considered themselves as the Principal Employer of the workmen/labour employed by them in the execution of respective work contracts. 

(VI) The ESI legislation is a beneficent piece of social welfare legislation aimed at promoting and securing the well-being of the employees. Thus, the blanket & blind application of ESI provisions on each and every class of contractual payments, where even the beneficiaries/employees are not identifiable or known by the establishment, will defeat the very basis legislative intent of ESI Act.   

The application of the aforesaid well settled, legal & factual propositions, to the different expenditure heads of the establishment, will definitely ensure and enable the levy of ESI only on those expenditure heads, on which it is leviable as per provisions of ESI Act.

Further, it will also be appropriate to analyse and discuss the applicability or otherwise of ESI on one very significant and crucial expenditure head, having a direct bearing and relevance on almost all the establishments, viz., expenditure incurred by an establishment on Construction of its Factory/Office Building. 

Under this head, a blanket presumption of incurrence of atleast 25% of the total expenditure as wages, is being made by the ESIC authorities, for levying the corresponding ESI on such expenditure.

However, not many know, that the construction site workers were altogether outside the ambit of ESI Scheme, uptill 31.7.2015, by virtue of ESIC Notification No. 4/99 vide Circular No. P-12(11)-11/27/99-Ins. IV dated 14.6.1999.

The relevant operating para of the aforesaid ESIC Notification is reproduced below for ready reference.

“The matter was examined at Hqrs.Office and it is informed that it has been the policy of the ESI Corporation not to cover the workers engaged by the construction agency who belong to unorganized sector due to the peculiar characteristics of the construction industry and the peculiar nature of employment of workers engaged in it. In construction industry the work is carried out through construction workers at the construction sites where the projects are situated. The workers engaged in it are mobile and migratory in nature. The criteria & duration of employment also varies from work to work. Due to the nature of employment and the nature of work place involving the construction workers, enforcement of ESI Act in respect of such workers and organizing medical and other facilities for them which are normally available under the ESI scheme will be difficult. Therefore the existing scheme under the ESI Act is neither applicable nor suitable for workers engaged in construction sites.”

Therefore, the aforesaid ESIC Circular had itself acknowledged that in view of the practical difficulties of organizing medical and other facilities for construction site workers, the ESI scheme is neither applicable nor suitable for such workers.

However, the payments to construction site workers have been brought in the ESI net w.e.f. 1.8.2015 vide ESIC Notification No. P-12/11/11/60/2010-Rev.II, dated 31.7.2015.  

It will be interesting to know that now, how it has become possible for the ESIC authorities, to ensure availability of medical and other facilities for construction site workers, in unorganized sector, which previously they were unable to provide.  

This itself shows the present mindset of ESIC authorities, of merely acting as collectors of ESI contributions, irrespective of the fact that whether or not the workers, to whom such ESI contributions pertain, will actually benefit, in terms of medical and other facilities.

Otherwise also, the construction works are generally awarded by establishments to big & renowned developers/independent contractors, having independent & separate registration under the ESI Act. Therefore, the respective developers/vendors should be considered as the immediate as well as the principal employer of the workmen/labour employed by them in the execution of the civil works of the establishments and it will not be desirable and justifiable to treat the establishments as their principal employer, for the purpose of levy of ESI.

Reliance in this regards is placed upon the judgment of the Hon’ble Madras High Court in the case of Dy. Director, Insurance No. V, Employees State Insurance Corporation, Chennai vs. India Pistons Repco Ltd, 2014 LLR (SN) 893:2014(141) FLR (885), wherein the Hon’ble Court has categorically held that, the employees of independent contractors could not be held to be the employees of the principal employer for the purpose of payment of contribution under the Employees State Insurance Act, 1948.

Similar reliance is placed upon the judgment of the jurisdictional Hon’ble Delhi High Court in the case of “Group 4 Securitas Guarding Ltd vs Employees Provident Fund Appellate Tribunal & Ors. WPC No. 4433/2000 & M/s Whirlpool of India Ltd vs Employees Provident Fund Appellate Tribunal & Ors. WPC No. 4408/2000 & 4433/2000”.  

Similarly the Hon’ble Madras High Court in its judgment in the case of M/S Brakes India Ltd vs Employees Provident Fund Organisation W.P. No. 391 of 2014, have categorically held that, “……with respect to the contractors, who are registered with the Provident Fund Department, having independent code number, they are to be treated as independent employer. The petitioner therefore, cannot be treated as “principal employer” for the purposes of these contractors.”  

It is pertinent to mention here that the definition of the term “principal employer” as provided in the Employees Provident Fund Act is PARI MATERIA” with that of the “principal employer” in ESI Act & as such the principle ratio that emerges from the aforesaid judgment is clearly applicable on the ESI payments also.

Further, it is a well-established & settled principle of Law that any establishment confers the status of the principal employer in relation to the contractual workmen/ labour only & only if it is in a position to supervise & control the work performance of the said workmen/labour. 

Reliance in this regards is placed upon the judgment of the Hon’ble Supreme Court in the case of C.E.S.C. Limited vs Subhash Chandra Bose, 1992 Lab IC 332: AIR 1992 SC 573”, and in the case of “Managing Director, Hassan Co-operative Milk Producers Society Union Ltd vs Asst. Regional Director, Employees State Corporation Ltd, 2010 LLR 561; AIR 2010 SC”, wherein the Hon’ble Supreme Court has clearly held that in order to determine the relationship of employer & employee between the principal employer & the employees engaged by the contractor (immediate employer), the supervision or control by the principal employer, over the work performed by the contractual workmen/labour is a sine qua non & a mandatory pre-requisite. The Hon’ble Supreme Court has interpreted the expression “to supervise” to mean as “to direct or oversee the performance of operation of any activity & to control its execution. 

The Hon’ble Punjab and Haryana High Court in Employees State Insurance Corporation v. Malhotra and Co., Chandigarh, (1981 Lab I.C. 475), has made a distinction between persons employed and persons engaged and the latter are persons engaged for a particular service on whom the employer has no control of supervision or right to take disciplinary action and as such they shall be excluded from ESI.

Similarly, the Hon’ble Kerala High Court in the case of Regional Director, E.S.I. Corporation v. P. R. Narahari Rao, (1986 Lab I.C. 1981), has also held that there exists clear distinction between persons engaged and person employed and the former being persons on whom no specific rules of the company is applicable, is not coming under the ESI of the company.

SO FRIENDS NEXT TIME YOU ARE IN RECEIPT OF NOTICE U/S 45A OF ESI ACT, 1948, ASKING TO DEPOSIT ESI CONTRIBUTION ON EACH AND EVERY EXPENDITURE INCURRED BY YOU IN FURTHERANCE OF YOUR BUSINESS, DON’T SUCCUMB TO THEIR UNLAWFUL PRESSURE TACTICS AND CONFRONT THEM WITH THE ABOVE STATED LEGAL AND FACTUAL PROPOSITIONS….. 

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Company: Sushil Jeetpuria & Co.
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Member Since: 28 Jan 2018 | Total Posts: 11
Hi there!! I am Mayank Mohanka, FCA, a Tax Practitioner based at New Delhi. Philosophy of Life: There is one thing which is more powerful than your Nav Grahas & that is Your Will Power.. I can be reached at mayankmohanka@gmail.com or at 9999981515. View Full Profile

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4 responses to “ESI-Chinta Se Mukti Only Till You Receive Notice u/s 45A of ESI Act, 1948”

  1. Y K Tyagi says:

    Very good article

  2. Neelima Valsan says:

    Nice

  3. Azim Charania says:

    Dear Mayank,
    You may be aware that the Circular under reference ESIC Notification No. P-12/11/11/60/2010-Rev.II, dated 31.7.2015. is stayed by Karnataka High Court @ Begaluru as well as Madurai bench of Madras High Court.Kindly.
    Request to use your good office to ascertain the latest development of the court proceeding in both the matters.

    A word in reply is appreciated.

  4. Anilkumar Jain says:

    ESIC confers hospital and other benefits to those salary/wage earners whose contributions are deducted and paid alongwith that of the employer’s.
    Hence blanket levy of is ESIC on every head of expenditure, which is the normal practice of the inspectors, should be considered ultra vires the ESI Act.
    Statutory audit of a concern should be considered as adequate for the purpose of determining the amounts shown under the heads Salaries/Wages.
    Also the benefit of ESI reimbursement is claimed only by those who are on the payroll and not by anyone else.
    Besides the wide powers given to ESI inspectors in respect of the above are a breeding ground of corruption. Hence there is need to eliminate the subjective element from the ambit of the Act.
    The above anomaly needs to corrected.

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