Employee State Insurance – FAQs
The Employees State Insurance Act has been amended extensively since 2010, altering the criteria of applicability of the Act to factories and employees that is critical in deciding coverage, contributions and compliances. The Act also incorporates some interesting provisions which are not paid much attention but nevertheless critical for employers to know. This post incorporates some such inputs culled out from the provisions of the ESI Act and the case laws to serve as a guide and ready reference for the readers to attract their attention to them but not to serve as binding precedent on the issue.
A. Coverage of establishments
The ESI Act 1948 has been amended in 2010 with effect from 1st June 2010 to broad base the coverage of factories and establishments by amending the definition of factory under Sec.2(12). Prior to the amendment, factories running without power were covered only if they employ 20 or more persons and factories with less than 20 employees (but not below 10 employees)were covered if they run with power. The amendment in 2010 removed this distinction and a factory employing ten or more persons in the preceding 12 months, irrespective whether it runs with power or without power, is now covered.
As regards establishments other than factories, the appropriate government in terms of Sec.1(5) of the Act, can by notification, extend the applicability of the Act to such establishments. Thus the State governments extended the applicability of the Act to establishments like hotels, restaurants, shops, news paper establishments and road motor transport establishments employing 20 or more persons in line with the limit prescribed by the Act prior to the amendment. Accordingly the State Governments may be issuing appropriate notifications in accordance with the new amendment.
Thus the Government of Gujarat has issued a notification No.GHR-2012-04-ESI-18-2011-688529-M(3) dated 3rd January 2012 extending the applicability of the Act to the above named establishments employing ten or more persons.
1. Whether the Act provides for voluntary coverage by employees and employer.
No. Unlike the P.F & M.P Act 1952, the ESI Act does not provide for voluntary coverage at the request of employees and employer.
B. Counting number of employees for coverage
1. How to count the ten or more or 20 or more number of employees?
Prior to the amendment of the Act, only the employees who are drawing wages up to Rs.15000/-p.m were included in counting ten or twenty employees to determine coverage and others whose wages exceed Rs15000/- p.m were excluded. However after amendment in 2010, all employees irrespective of the wage limit are to be included counted to decide whether the factory or establishment is employing ten or twenty persons. It means that the employees who are not covered are also to be included now for counting the minimum number of employees. Thus the criterion for coverage has been broad based.
2. Whether contractor’s workers shall also be counted ?
Sec.2(9) of the ESI Act defines ‘employee’ as including not only employees directly recruited by the employer but also employees of the contractor (immediate employer) employed to do the work of the factory or establishment or to do any work connected with that of the establishment or factory. Therefore a contractor worker too shall also be included in counting the ten or twenty employees.
C. Coverage of employees
It is now well known that contractor workers who are working on the premises of the factory or establishment are covered by virtue of definition of ‘employee’ under Sec.2(9) of the Act . However there is confusion as to the fact whether such employees should work under the supervision and control of the principal employer in order to be ‘employee’ under the Act so as to be covered.
1. Whether supervision and control are necessary over the work of the contractor workers in order to make them employees for the purpose of coverage under the Act.
Sec.2(9) which defines ‘employee’ includes a person who is employed through a contractor, if such contractor worker is employed on the premises of the principal employer and Sec.2(9) does not make it necessary that such worker shall work under the supervision and control of the principal employer. It is enough if the contractor worker undertakes the work of the establishment or any work connected there with on the premises of the principal employer .Please refer to the case of All India Reporter Ltd V. ESIC 1985 LIC 1181 (Bom.HC).
2. In such case, whether a contractor’s worker doing a work connected with that of the establishment outside the premises of the principal employer is not to be covered
Such contractor worker too will be an employee within the meaning of Sec.2 (9) of the Act and will be covered even though he is working outside the premises of the principal employer subject to the following conditions —
1) He should do the work of or any work incidental or part of the work of the establishment;
2) He should work under the supervision and control of the principal employer or his agent .
Reference can be had to the case of Regional Director ESIC V. Kerala Kaumudi 1987 II LLJ 508(Ker DB).
3. Whether casual labour too are covered
The definition of employee under Sec.2(9) is too wide to include casual workers who are employed to do the work of or any work connected with that of the establishment. However, it will be difficult to stick liability to principal employer in case of every kind of casual work. For example, a casual loader who merely enters the premises of the principal employer and unloads some material like a gas cylinder and leaves the premises thereafter and it is not known when his next turn comes or whether he ever turns up again for the same job, may not be covered. A mere casual presence on the premises of employer to do some sporadic work cannot make a person as an employee under the Act. Please refer to the case of BOC India Ltd .V. Asst. Regional Director, ESIC 2005 I LLJ 224 ( AP.HC).
4. Whether apprentices are covered.
Sec.2(9) which defines ‘employee’ has been amended in 2010. The pre-amended section excluded apprentices employed both under Apprentices Act 1961 and under Standing Orders from coverage of Act. However the section 2(9) after the amendment includes the apprentices appointed under Standing Orders under the definition of ‘employee’ and therefore covers them under the Act.
5. Whether a contractor who provides labour to the establishment shall also be covered?
No. A contractor cannot be covered since he Is not doing any work of or connected with establishment and hence not an employee within the meaning of Sec.2(9) of the Act.
6. Whether an employee ceases to be an employee for the purpose of coverage under the Act if his wages exceed Rs.15000/-p.m on account of wage revision
No. Not on all occasions, he becomes excluded from being an employee on account of his wages exceeding Rs.15000/-p.m .It depends up on the time at which the increase in wages took place. For example, if his wages have been revised upwards from Rs.15000/-p.m to Rs.18000/-p.m in the midst of the contribution period –say- in the month of May in the contribution period of April to September-
he continues to be employee till the end of the contribution period i.e September and thereafter be ceases to be an employee for the purpose of coverage. Please refer to ESIC V. S.S.R.S. Brothers 2000 I LLJ893 (Mad.s HC)
D. Computation of Wages for coverage of employees
The Act under Sec.2(9) read with Rule 50 of ESI Rules covers an employee whose wages do not exceed Rs 15000/- p.m. However there are doubts about wage limits and computation of wages for coverage of employee etc. Some of the clarifications are—
1. If the maximum limit is Rs.15000/- and is there any minimum wage limit under the Act?
No. The Act does not prescribe any minimum wage limit for coverage of employees.
2. Whether over-time wages are to be included for computation of Wages for the purpose of coverage of an employee
Sec.2(9) itself provides answer to this question. It excludes over-time wages while computing the wage limit of Rs.15000/-p.m.
3. If so, whether over-time wages too are to be excluded for the purpose of contribution?
The definition of wages under Sec.2(22) includes all remuneration paid or payable to an employee if the terms of contract of employment express or implied is fulfilled. Thus doing work of the establishment beyond the stipulated working hours forms part of the contract of employment and therefore remuneration paid for over- time work is wages within the meaning of first part of the definition. This part over-time wages are not specifically excluded from the definition of wages.Therefore contribution is payable on over-time wages. Please refer to Indian Drugs and Pharmaceuticals Ltd. V.ESIC 1997 I LLJ 700 (Supreme Court)
1. Is contribution payable on conveyance allowance?
Sec.2(22) which defines wages excludes travelling allowance or the value of any travelling concession and thus obviate the need to pay contribution on it. However some companies are paying conveyance allowance to their employees. Thus questions arose whether such conveyance allowance is synonymous with travelling allowance and whether contribution is payable on such conveyance allowance. There are conflicting views by the courts on this issue till date. However the ESIC in 2001 has issued the following guidelines .
i) If the conveyance allowance is paid as per the terms of any settlement or as per the terms and conditions of employment, it shall be treated as wage
ii) If the same is paid by way of reimbursement against production of evidence or bills of having incurred the said expense or paid at intervals exceeding two months, it shall not form part of the wage.
2. Is contribution payable on subsistence allowance during suspension of an employee?
Yes. Contribution is payable on the subsistence allowance paid to an employee during his suspension since it was held as part of wages in ESIC V. Popular Automobiles 1998 ILLJ621 (Supreme Court).
3. Is contribution payable on amounts or incentives paid at employer’s discretion?
Sometimes employers pay certain amounts in their discretion out of good will or as a generous gesture to employees either in appreciation of their work or on account of some special occasion. Such amounts cannot form part of the wages since they are neither paid under a settlement or as part of contract of employment or at regular intervals of two months and hence no contribution is payable on them. Please refer to Braithwaite &CO v.(India) Ltd V. ESIC 1968 ILLJ550 (SC) and ESIC V.Bata Shoe Co. Pvt.Ltd. 1986 ILLJ 138 (Supreme Court) .
4. Is contribution payable on encashment of un-availed leave?
Yes. It is payable since such payment is construed as part of wages under Sec.2(22) of the Act. Please refer to Dy. Regional Director, Employees State Insurance Corporation V. Mizar Govind Annappa pai & Sons,Mangalore 2004 I CLR 472 (Karn HC)
5. Is the employee responsible to pay his share of contribution ?
Sec.40 lays down that it is the principal employer’s responsibility to pay employee’s contribution whether such employee is directly employed by him or through an immediate employer (contractor) and then recover employee’s contribution from the wages payable to him. Reference can be had to ESIC V.kerala State Drugs & Pharmaceuticals Ltd. 1996 III LLJ 47(Supreme Court).
6. Is there any situation wherein an employee is exempted from paying contribution?
As per Rule 52 of the ESI (Central) Rules 1950, an employee whose average daily wage is Rs 100 or less (Rs.2600/-p.m or less) is exempted from payment of his share of contribution.
7. Is contribution payable on wages paid to an employee in lieu of notice of termination?
No. Notice pay is not a wage within the meaning of Sec. 2(22) of the Act since he is not deemed to have earned those wages for having done any work of the establishment
8. Is contribution payable when an employee whose wages exceed Rs.15000/- ?
If the wages exceed Rs.15000/- during currency of the contribution period- say in the month of May during the contribution period of April –September- the employer is liable to pay contribution till the end of the contribution period i.e September. However no contribution is payable from the following contribution period. This made clear by the proviso to Sec. 2(9) of the Act
9. Can the principal employer deduct the expenses incurred by him for remitting the contribution to ESIC from the wages of the employee?
No. In terms of sec.40(5) of the ESI Act, the principal employer shall bear the expenses of remitting the contributions to the ESI corporation.
F. Critical information on benefits.
1. Whether an accident met with by an employee while coming to this place of work can be treated as an accident arising out of employment to enable the employee to claim appropriate benefit under the Act?
The ESI act was amended in 2010. The amendment has introduced a new section 51-E which states that an accident occurring to an employee while commuting from his residence to the place of employment for duty or from the place of employment to his residence after performing duty, shall be deemed to have arisen in the course of employment, if nexus between the circumstances, time and place in which the accident occurred and employment is established such as that he has taken the regular route for the office at the same time and did not deviate from it etc.
2. How conviction of an employee affects his benefits?
In terms of the provisions of the Act and the Rules there under, an employee who is convicted of making a false statement under Sec.84 of the Act to get a payment or benefit to which he is not entitled or to get an increase in such a payment or benefit or to avoid any payment which he is required to make under the ESI Act, is not entitled to any cash benefit admissible under the Act for a period of three months for the first conviction and six months for each subsequent conviction.
3. How strike affects an employee’s benefits?
In terms of the provisions of the Act, an employee who remains on strike is not entitled to sickness benefits or disablement benefit on any day on which he remains on strike.
G. Critical time limits to be noted by the employer.
The Act stipulates time limits for the employers to take action on issues which are critical from the employer’s rights and obligations point of view.
1)Contributions are to be paid by employer within 21 days of the last day of the calendar month in which the contribution falls due.(Regulation 31).
2)Return of contributions in Form 5 shall be submitted (Regulation 26)-
a) within 42 days of termination of contribution period ;
b) within 21 days of permanent closure of the factory or establishment
c) Within 7 days of receipt of requisition from the ESIC.
3)If an employer seeks to dispute any claim of the ESIC with reference to any matter connected with contributions, he has to make an application before the Insurance Court under Sec.77 of the Act within three years from the date on which the cause of action arose.
4) In terms of sec.77, the ESIC has to make it’s claim to dues relating to a particular period within five years of the said period. For example, if the claim relates to the period April 2007, the claim shall be made within April 2012.
H. Critical information about obligations of the employer.
The above points clarify the common obligations of employers under the Act such as registration, payment of contributions and submissions of returns. However there are some critical obligations which do not frequently figure in discussions. They are –
1) Bar on dismissal or discharge or punishing an employee during receipt of certain benefits
An employer is prohibited from dismissing or discharging or reducing benefits or otherwise punishing an employee except as provided under regulations during the period in which the employee is in receipt of sickness benefit or maternity benefit or disablement benefit for temporary disablement or during the period in which he is under treatment for sickness or is absent on account of illness arising out of pregnancy or confinement duly certified as per regulations. (Sec.73 )
2) A factory or establishment can be held liable to pay excessive sickness benefits, if the ESIC finds that the incidence of sickness of it’s employees is due to lack of sanitary conditions or improper maintenance of sanitary conditions.(Sec.69)
These points should help clarify the common questions that arise in minds of Employers.