ARTICLE
1 October 2024

Bombay High Court: Classification Of Employees Under The Employees' State Insurance Act, 1948

AP
Argus Partners

Contributor

Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
The Hon'ble Bombay High Court ("Bombay HC") in the recent judgment of Bharat Box and Bobbin Industries v. Employees State Insurance Corporation ("ESIC") has highlighted important aspects of factories / establishments...
India Employment and HR

The Hon'ble Bombay High Court ("Bombay HC") in the recent judgment of Bharat Box and Bobbin Industries v. Employees State Insurance Corporation ("ESIC") has highlighted important aspects of factories / establishments being covered under the Employees' State Insurance Act, 1948 ("ESI Act") and the complexities in determining whether a particular person would be considered an 'employee' or not. This judgment provides a significant precedent for businesses dealing with compliance issues under the ESI Act.

Facts:

The present case pertains to the appellant-establishment's ESI contributions for the period between November 1977 and December 1985, wherein they alleged that since they did not engage more than 10 employees during this period, they were not liable to be covered under the ESI Act. The ESI Act requires contributions from establishments with 10 or more employees. Their contention was that 2 specific persons, namely, Mr. Sampat and Mr. Joshi were not 'employees' of their establishment, but only "part-time professionals" who were hired for maintenance of accounts and for statutory compliance of the establishment. Whereas, the ESI authorities, by an order dated April 17, 1990 held that these two persons were included in the 'employee' category, and the appellant-establishment was employing more than 10 employees during this period; thus, directing them to pay ESI contributions, along with interest. Further, on appeal by the appellant-establishment, the ESI Court also upheld the decision of the ESI authorities. It found that the names of these two persons did not reflect in the 'wage register' but in the cash book entries, and that this was done for deliberately avoiding ESI compliance.

Issue:

The key issue in the case was whether Mr. Joshi and Mr. Sampat should be classified as 'employees' under the ESI Act. If classified as 'employees', then the appellant-establishment would have been considered to be employing more than 10 employees, thus being liable for ESI contributions during the period in question.

Submissions of the appellant-establishment:

The appellant-establishment submitted that the findings rendered by the ESI Court in relation to Mr. Joshi and Mr. Sampat being 'employees' was perverse as it was based on assumption and inferences without any supportive evidence.

Decision by the Court:

The Bombay HC ruled in favor of the appellant-establishment, by holding that Mr. Joshi and Mr. Sampat were part-time professionals and not 'employees'. To come to this decision, the Bombay HC took into consideration:

  1. Evidence given by the ESIC Inspector – The ESIC Inspector admitted that the names of the two concerned persons was not shown in the muster-cum-wage-register, however, a particular cash book entry mentioned that payments were made to them; and more importantly, he stated that during his visit he did not remember seeing Mr. Joshi working in the premises of the appellant-establishment.
  2. Evidence given by Mr. Joshi (one of the two concerned persons) – Mr. Joshi (who also deposed for late Mr. Sampat) confirmed that he used to visit the appellant-establishment once a month to ensure their compliance with the Shops and Establishments Act, and that Mr. Sampat also only rendered accountancy services on a monthly basis, for INR 100 per month. He also confirmed that both of them provided their services to multiple establishments situated in the area.

On the basis of the above, the Bombay HC held that the inference made by the ESI Court that the two persons were 'employees' was drawn on the basis of cash book entries of the appellant-establishment only; and that the inference that their names were deliberately not entered in the wage register to avoid compliance with the ESI Act is perverse, and cannot be sustained in law.

Author's views:

Obligation on ESIC and ESI Court: Sections 45-A to 45-I of the ESI Act contemplate a summary method for the ESIC to determine and recover ESI contributions in case of deliberate default on part of an employer / establishment. Such determination by the ESIC is final, unless such employer/ establishment disputes the correctness of the order made under Section 45-A before the ESI Court. This puts a high obligation on the ESIC and the ESI Court to carry out a detailed analysis of facts and documents before delivering their verdict. The facts of the instant case make it appear that all necessary documents / inquiries which were available from the initial stages of the matter may not have been reviewed / looked into in sufficient detail, thereby burdening the higher courts with matters which could otherwise have been speedily resolved at lower levels.

Importance of robust documentation: The instant case also highlights the importance of maintaining robust documentation by establishments / companies, especially in matters relating to labor laws and employee related compliances. If individuals are engaged by companies on contractual, retainer or any other basis which distinguishes them from being 'employees' on the rolls, care must be taken to pre-empt potential employment issues, and to execute appropriate documentation which clearly spells out the relationship between parties, and the obligations which exist between them.

Please find attached a copy of the judgement.

Download Pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More