Applicability of the Employees’ State Insurance Act, 1948 to Directors of Company

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.

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B. Chandrashekar Shetty - Advocate

Mr. Chandrashekar Shetty is a Senior Labour Law Compliance Auditor at BCP Associates and has audited multiple client companies across India. He is also a member of our senior legal advisory practice. Previously he has worked as Deputy Controller, Manager-Industrial Relations and Industrial Relations Officer in KPTCL, Bangalore for more than 30 years. Prior to this, he has dealt with Legal, Personnel and IR matters including Wage Settlements, Grievance Machinery, Manpower Study and Social Security Compliances for about 10 years. He is a Faculty member of Labour Law, HRD Centre, KPTCL Bangalore.

Mr. Shetty holds a B.Com. and L.L.B. degree, Post-Graduate Diploma in Business Administration, Diploma in Public Relations from Bangalore University and PG Diploma in Industrial Relations & Personnel Management from Bharatiya Vidya Bhawan. He is enrolled as Advocate in Karnataka Bar Council and is a Govt. Arbitrator of Chit Funds in Karnataka.

S Venugopal Rao

S Venugopal Rao is an experienced labour law and service matters expert and is a member of the senior advisory team at BCP Associates. Having joined the chambers of Mr. B C Prabhakar in 2012, he is knowledgeable and well versed in multiple employment and labour law topics. S Venugopal Rao holds a Bachelor’s degree in Science from Karnataka University, Dharwar and Bachelor of Law from Bangalore University. He enrolled as advocate in Karantaka State Bar Council in 1976. He joined the chamber of Sri. Kolachalam Srinivasa Rao a leading civil advocate. After practicing for 6 years at Ballari, he joined Orient Paper Mills, Orissa (of G P Birla Group). He was designated as Manager (Law) under the Factories Act in 1995. In 1999, he joined Andhra Pradesh Paper Mills Rajahmundry as Manager Legal and was subsequently elevated as Dy. General Manager (Legal). As Factory Manager & Legal Head, he oversaw compliance of Factories Act and Rules there under towards safety, health and welfare, including compliance under Pollutions and Environmental laws and Explosives Act, etc. Additionally, he is well acquainted with Environment Management System ISO 14001: 2004, Occupations, Health and Safety Series 18000:1999. As Legal head in APPM he has briefed and appeared along with Senior Advocate before Appellate Authority constituted under Water (Prevention & Control of Pollution) Act. He retired from the services of Andhra Pradesh Paper Mills in 2011. As legal head he has handled important cases both in Labour and Civil and has experience in drafting and vetting Contracts, Agreements, Lease Agreement, Conveyance Deeds, , Affidavits and scrutiny of several legal and other documents, Preparing and settling Petitions, Appeals, Plaints, Written Statements, Rejoinders, Affidavits and Written Arguments etc. for submission/pleadings for various legal proceedings.

C K Devappa Gowda - Advocate

C.K. Devappa Gowda (CKD) is an Advocate and Labour Law expert. He holds a Bachelor’s Degree in Science from the University of Mysore and a Degree in Bachelor of Law from Bengaluru respectively. He also holds a Diploma in Social Service Administration from the National Institute of Social Science, Bengaluru. After completing his studies, he had enrolled as a Advocate and initially practiced in the Civil Code attached to the office of BCP. He then worked as Personnel Officer in Chemicals and Textile Manufacturing Industries for 5 years. Thereafter took up employment in one of the largest Public Sector Bank. He has worked in different parts of the country and has extensive experience in the cross country IR domain. The significant part of his service was at corporate level overseeing and implementing HR policies and practices and management of IR. He has been a member of personnel committee of Indian Bank Association. After retirement from service, Mr. Gowda has been working with Mr. BC Prabhakar’s firm for the last 12 years. He has expertise in all areas of people management, drafting of documents relating to service matter including the settlements under the ID Act. He has dealt with all employment laws including appearance before the Courts, Tribunal and Authorities under the different Labour Laws. Mr. Gowda is one of the senior Labour Law experts at BCP Associates.

Srijatha Ghosh - POSH Specialist & Advocate

Srijata Ghosh serves as external member on the Internal Committee of several Companies across various sectors. She handles all kinds of POSH related matters including investigations and inquiries. She provides Training on Sexual Harassment across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members on the legislation (The Sexual Harassment of Women at Workplace Prevention, Prohibition and Redressal Act, 2013). She also formulates Policies for Prevention of Sexual Harassment at Workplace (“POSH”) and advises Companies on setting up of their Internal Committees. Srijata is involved in providing Legal Advisory services on POSH and other labour law matters for various clients.

In her previous experience, she has extensively dealt with End-to-End Contract Management, Due Diligence, POSH Compliances, Legal Advisory, etc. Srijata worked with Companies like Accenture India Private Limited, Quess Corp., Capgemini Business Services (India) Limited and Pramata Knowledge Solutions Private Limited. Srijata has handled varied legal issues including drafting, vetting and negotiation of contracts, drafting policies of various organizations. She has resolved issues relating to employment laws and has worked closely with the HR teams. She has provided legal advisory services to senior management. She was also associated with Kolkata High Court in counselling clients with legal matters such as Property, Due Diligence etc. Srijata has worked in an LPO Service Firm, Manthan Legal Services Private Limited for Legal Research, depositions, medical summaries, demand drafting etc.

Srijata completed her B.A.LL.B from M. S. Ramaiah College of Law, Bangalore University in 2009. Srijata is a member of the Karnataka Bar Council since 2010. She is also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Caroline Lobo - POSH Specialist & Advocate

Caroline Lobo has been with BCP Associates for the past 2+ years. She has been handling matters and Inquiries related to the POSH Act including conducting inquiries and trainings/awareness programmes for Senior Management, employees as well as members of the Internal Committee on the POSH Legislation (The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“Act”) to address Workplace Harassment of Women. She is a member of the Internal Committee for many varied companies and organisations and has reviewed and scrutinized numerous hearings and inquiries on matters relating to sexual harassment at workplace.

She has also handled matters relating to employer-employee related Enquiries, wherein she has reviewed and conducted hearings and enquired into the matters and has guided the Internal Committee and provided guidance in providing recommendations to the management. She is also a Member of the Gender Sensitivity Sub-committee of Karnataka Employer Association (KEA).

Prior to joining BCP Associates, Caroline has has a wide range of experience in corporate, commercial and contract law, mergers and acquisition and has undertaken drafting, vetting, negotiating and finalizing legal and commercial transactions. She started her career in litigation then moved onto the Corporate sector. In the span of 13 years, she has worked at Chambers of Advocate Jayashree Murali, Krishnamurthy and Co. Legal Consultants, Colt Technology Services and Oracle India Pvt. Ltd. She always had a keen interest in Women and Child related issues. She has worked with Child Welfare Committee and NGOS’s. In addition, she has worked with Swasthi Health Resource and Centre, where she was the External member to the Internal Committee (IC). She worked closely with the committee in strategizing, planning, reviewing and implementing the assigned tasks, which included building material to raise awareness against sexual harassment at workplace. Further, she has been involved in conducting inquiries into matters related to sexual harassment at workplace.

Caroline earned her Law degree from University Law College, Bangalore, from where she graduated in the year 2005.

Manoj Kumar – Senior Associate

At BCP Associates, Manoj Kumar is involved in managing and conducting labour law compliance audits of principal employer and contractors. He is also involved in client co-ordination and conducting labour law training programs for vendors. He has conducted on-ground labour law audit for factories. Manoj also provides support in advising vendor clients on labour law queries. He completed B.A., LL.B. from BMS College of Law, Bangalore in 2016

Rashmitha Venkatachalam Das - POSH Specialist & Advocate

Rashmitha Venkatachalam Das is the External Member of the Internal Committee of several reputed Organizations across various sectors. Handling complex inquiries has been her forte and she is extremely passionate about it. She is actively involved in providing Training on Sexual Harassment (Prevention, Prohibition and Redressal) Act, 2013 across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members. Rashmitha possesses capabilities in delivering sessions in Hindi and Kannada, in addition to English. She has formulated Policies for Prevention of Sexual Harassment at Workplace (“POSH”), advised companies on setting up of their Committee. Rashmitha is involved in providing Legal Advisory services on POSH for various clients spread across diverse sectors. She has also been handling domestic enquiries for various clients. 

Rashmitha possesses experience both at Law Firms and Corporates in various capacities. She started her career at Krishnamurthy and Co, Legal Consultants and then moved on to work as an In- House Legal Counsel with Companies such as Biocon Limited, Columbia Asia Hospitals Private Limited, Adecco India Private Limited. With a long stint in the Corporate side, Rashmitha decided to pursue further education in Law with a specialization in Labour and Employment Laws. She has rich experience in drafting, vetting and negotiation of various types of contracts, providing legal opinions and has driven the team in formulating process and procedures and their implementation. She has drafted several employment related policies in Corporates. Rashmitha has been a part of various key committees in Organizations and assisted committees in scrutiny of documents pertaining to human organ transplant as well as clinical trials.

Rashmitha holds an LL.M. in Labour and Employment Laws from University Law College, Bangalore, which she completed in the year 2018 with Two Gold Medals. She is also a Rank Holder at the University. She has completed BA, LL.B. from Bangalore Institute of Legal Studies, Bangalore University in the year 2009. Rashmitha is a member of the Karnataka Bar Council since 2009 and also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Manisha Vidyadhar – Senior Associate

At BCP Associates, Manisha Vidyadhar is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. Manisha also provides support in advising vendor clients on labour law queries.  She completed B.A., LL.B. from BMS College of Law, Bangalore in 2016.

Amrutha Ananth – Senior Associate

At BCP Associates, Amrutha Ananth is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. She also provides support in advising vendor clients on labour law queries.

Amrutha is also part of the labour law advisory and HR Policy practice and is actively involved in drafting opinions on various aspects of labour laws and formulate and review employment policies and procedure.

Amrutha completed B.A., LL.B. from Christ University, Bangalore in 2015. She is also a semi-qualified Company Secretary.

Sunil Arya – Principle Associate

At BCP Associates, Sunil Arya is part of the labour and employment law advisory and HR Policy practice and is actively involved in drafting and reviewing of employment contracts, opinions, HR policies, employee handbook, show cause notice, etc. for various clients spread across diverse sectors. He conducts training on labour and employment laws. Sunil is also involved in labour law compliance audits of principal employer and contractors and has conducted on-ground labour law audit for factories. In addition, he is engaged in knowledge creation and management of the firm and keenly writes on developments in labour and employment laws.

Prior to joining BCP Associates, Sunil has 10 years of post-qualification experience in diversified portfolios of advisory, drafting, policy analysis and dispute in the domains of contracts, general civil matters, employment law, competition law and construction arbitration matters. Sunil started his career as a Law Researcher in Delhi High Court. He moved on to be part of regulatory analysis team of CIRC, a unit of CUTS International. In addition, Sunil has been part of legal team of Jindal India Thermal Power Limited. He has also taught competition law, tax law and investment law at VIPS, Delhi.

Sunil holds LL.M. from The Indian Law Institute, Delhi. He is First Rank Holder in his thesis. He completed B.A, L.L.B. (Hons.) from I.P. University, Delhi. He also holds First Rank in P.G. Diploma in Competition Policy and Laws from The National Law University, Delhi.

Chandrakala K A – Principle Associate

At BCP Associates, Chandrakala has 12+ years of experience in conducting and managing labour law compliance audits of principal employer and contractors. She is also involved in co-ordination with many clients. She has conducted on-ground labour law audit for factories. She also provides support in advising vendors on labour law queries. Chandrakala is actively involved in research and providing valuable inputs to the firm pertaining to updation in labour law audit function.

Chandrakala started her career in litigation in chamber of Sri. Ashok where she was involved in drafting, pleading and appearance before Karnataka High Courts and lower courts on the criminal side.

Chandrakala completed B.A in Arts from Kuvempu University, Shimoga in 2003 and LL.B. from Mangalore University in 2006.

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