The Employees’ State Insurance Act, 1948 (‘the ESI Act’) is the first of its kind in India which introduced compulsory insurance of a specified class of wage earners against certain inevitable risks. The Act is a welfare measure meant to provide certain benefits to the employees in certain cases of sickness, maternity and employment injury. Section 38 of the Act requires all employees in factories or establishments be insured as per requirements of the law. Section 46 of the Act provides for the different benefits which are available to the insured persons i.e. the employees. Such benefits include sickness, maternity, disablement, injury and medical treatment for an attendance on insured persons.
Section 39 of the Act contemplates the contributions payable under the Act. Contribution is defined under the Act as the sum of money payable to the Employees State Insurance Corporation (ESIC) set up under the Act in respect of an employee and includes contribution payable by or on behalf of the employee. Section 2(9)(b) of the Act mandates that contributions are payable in respect of an employee whose wages, excluding remuneration for overtime work, do not exceed such wages as prescribed by the Central Government. Rule 50 of the Employees State Insurance (Central) Rules, 1950 stipulates the wage limit for coverage of an employee under the Act. The Ministry of Labour and Employment has amended the applicability of Employees’ State Insurance (Central) Rules, 1950, vide notification dated 22nd December 2016. According to the amendment, the wage ceiling for the applicability of the Employees’ State Insurance Act, 1948, has been increased to Rs. 21,000 from the existing ceiling of Rs. 15,000. Accordingly, employees earning wages up to Rs. 21,000 are now covered under the definition of an ‘Employee’ under the Act. The said amendment came into effective from 1st January 2017.
Hence, the applicability of the Act is primarily contingent upon three basic parameters: a) Whether the person is an ‘employee’ under the Act?; b) Whether payment made to such person amounts to ‘wages’ under the Act?; and c) Whether the wages exceed the limit as prescribed under the ESI Act read with the ESI (Central) Rules.?
In the context of first two parameters, an interesting question for determination which arose before the Hon’ble Supreme Court in the matter of the ESI Corporation vs Venus Alloy Private Ltd. decided on 5th February, 2019, was whether the Directors of the Respondent Company, who were receiving remuneration, come within the purview of ‘employee’ under sub-section (9) of Section 2 of the ESI Act, if such remuneration received by the Director constitutes wages under the Act?
As to the brief facts of the case, the Company had been covered under the ESI Act and had been depositing the amount of contribution with reference to the wages paid to some of its employees. However, in an inspection carried out by the ESI Corporation, it was observed that the Company had not made the contribution in respect of the remuneration paid to the Directors. Such a demand was questioned by the Company that was considered and decided by the ESI Court, which took the view that there was no illustration produced by the Company that that the provisions of the ESI Act were applicable on the amount received by the Directors or they fall under the category of the employees. In the appeal preferred by the ESI Corporation, the High Court of Madhya Pradesh (MP) concurred with the view taken by the ESI Court and concluded that the Directors of the respondent establishment do not come within the purview of the ‘employees’, as defined under Section 2(9) of the ESI Act and dismissed the appeal.
In the appeal preferred by the ESI Corporation before the Hon’ble Supreme Court, against the decision of the MP High Court, it was contended by the Corporation that if remuneration is paid to a person who satisfies the definition of ‘employee’ as per Section 2(9) of the ESI Act for discharge of the work assigned to him, such remuneration would be covered under the definition of ‘wages’ as per Section 2 (22) of the ESI Act and, therefore, necessary contribution in respect of that employee is to be paid. In contrast, the Company contested the submission made by the ESI Corporation and contended that in the present case, the Directors of the respondent-Company were not employed for wages in or in connection with the work of factory or establishment and hence, they do not fall within the essential ingredients of Section 2(9) of the ESI Act.
The Supreme Court, after taking into account the contentions of the ESI Corporation and the Company, examined the matter from the lens of the meaning of ‘employee’ and ‘wages,’ as defined under the ESI Act. ‘Employee’ is defined under sub-section (9) of Section 2 of the ESI Act, which stipulates that ‘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, irrespective of 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 (iii) whose services are temporarily lent or let on hire to the principal employer by the person with whom the person whose services are so lent or let on hire has entered into a contract of service.
It also includes any person employed for wages on any work connected with the administration of the factory or establishment or any part, department or branch thereof or with the purchase of raw materials for, or the distribution or sale of the products of, the factory or establishment, or any person engaged as apprentice. It does not include an apprentice engaged under the Apprentices Act, 1961 or any member of the Indian naval, military or air forces; or any person so employed whose wages exceed such wages as may be prescribed by the Central Government a month.
The expression “wages” is defined in sub-section (22) of Section 2 of the ESI Act as all remuneration paid or payable in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled and includes any payment to an employee in respect of any period of authorised leave, lock-out, strike which is not illegal or lay-off and other additional remuneration, if any, paid at intervals not exceeding two months. The term ‘’wages, however, does not include- (a) any contribution paid by the employer to any pension fund or provident fund (b) any travelling allowances or the value of any travelling concession (c) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment or (d) any gratuity payable on discharge.
The Hon’ble Supreme Court further examined strong reliance placed by the ESI Corporation on an important decision rendered by the Supreme Court in 1998, titled as Employees’ State Insurance Corporation vs. Apex Engineering Pvt. Ltd, (hereinafter Apex Engineering Case). In this case, the Board of Directors of Company resolved to elect one of its Directors as Managing Director of the Company and to grant him annual remuneration of Rs. 12,000/- for rendering his services as Managing Director of the Company. The question which arose for adjudication before the Court was whether the said Managing Director was an ‘employee’ within the meaning of Section 2(9) of the ESI Act? Though the High Court and the ESI Court had answered this question against the Corporation, but the Supreme Court allowed the appeal by the ESI Corporation and, inter alia, held that the Managing Director, even when treated as principal employer, could also be an employee and could carry such dual capacity. Basis decision rendered by the Court in the Apex Engineering Case in relation to the Managing Director of a Company, the Supreme Court in the present case held that the decision applies with greater force in relation to a Director of the Company, if he is paid the remuneration for discharge of the duties entrusted to him. In view of above, appeal by the ESI Corporation was allowed and the requisite contribution was held to be payable under the Act.
The decision holds significant importance, in as much as it clarifies that the Director of a Company, who had been receiving remuneration for discharge of duties assigned to him, would come within the purview of ‘employee’ under the ESI Act and the remuneration paid to the director would constitute ‘wages’ under the Act. Accordingly, in the above context, a director of the Company, drawing remuneration from the Company for discharge of his duties, would be covered under the Act and the Company would be statutorily liable to remit contribution in respect of such director under the law, provided the remuneration paid to him does not exceed the wage ceiling prescribed by the ESI (Central) Rules, which, at present is set at Rs. 21000/-. This is crucial from the standpoint of compliance as the Act also contains the power to prosecute which, includes punishment for failure to pay contributions as well as contraventions for non-compliance with any of the requirements of the Act.