Dear All,
It has been noticed that to avoid high rate of service charge and service tax paid to the manpower vendor the Principal employer is recruiting employees on direct contract basis and giving them a consolidated salary and not giving EPF & ESI.
Is it legally correct?
21st July 2016 From India, Jamshedpur
Dear Nikhil Kujur You need provide PF and ESI direct contract also if your organsation is cover under the PF and ESI Act . Regards hekarthik
21st July 2016 From India, Coimbatore
What is wrong in recruiting directly by the company when there is an HR person employed mainly to do this activity? In such cases why should we engage any Recruitment Agency and pay them the service charges? There is no need to give this function of finding the candidates to somebody else when we have an HR person to do this.

Now if your query is about outsourcing, then also I would say that there is no need to engage people through a contractor (man power agency) but we can directly employ people and save service charges.

Regarding consolidated pay, nowhere in the law it is stated that you should not pay a lump sum amount as remuneration but your total remuneration should contain components like basic salary, HRA, Conveyance etc. There can be exception that when we fix minimum wages there can be an element called variable dearness allowance. The purpose of this component in the salary is to adjust the wages according to cost of living indices. In the absence of this element we will be refixing the salary only after, say,12 months, but if you have DA as a component you will be able to increase the wages periodically (in some states it is done in every 6 months whereas in Kerala it is done every month) based on increase in the consumer prices. At the same time, if the total of basic and VDA is equal to the sum paid as consolidated salary, there will noot be any illegality.

Not giving PF and ESI is a different story. If, in order to avoid ESI and PF, the employer fixes the salary above Rs 15000, say, Rs 15100, then also you cannot question it because legally the employer is correct. But at the same time, the amount of gratuity which is normally calculated based on basic and DA components of salary would be available to the employee on a higher amount, Rs 15100, ie, the consolidated sum. Similarly he will get leave encashment, other terminal benefits based on consolidated sum.

Suppose the PF and ESI increase the salary ceiling from the present Rs 15000 to Rs 16000 or 25000, then what will the employer do? Will he increase the salary and make it above 16000 or 25000? We cannt say what amendment can happen to law tomorrow.

Madhu.T.K
22nd July 2016 From India, Kannur
Dear Mr. Nikhil,

Mr. Madhu has well explained the matter in terms of company cost optimization and employee benefits duly stating the legal terms.

So far I m getting your point, company recruiting on "Contract Basis" coz they want to avoid statutory benefits like PF, ESI, Bonus, Gratuity, Leave Encashment etc.

There are two important points:-

1 If they recruit on contract basis, there should be some agreement in which the service period, nature of job, fixed remuneration, payment terms etc must be given and also acknowledged by both parties. Moreover such recruitment falls under category of "Professional Services". The candidate ("Employee" in general term) is supposed to raised invoice for the professional services which company has to pay after making TDS deduction @ 10% (10% TDS rate for Professional Services).

2 The above scenario is from company point of view (to save statutory & other benefits) which can be useful for short term. But if we go legally in long term, it can be more costly.

Company allow such professional to pay other regular benefits (Phone allowance, Conveyance, flexi working hours, W/off, Holidays, Leaves etc.). If after working approx. 10 years any "Professional" put any complaint in Labour Office and claim all regular employee benefits. The company than can be in trouble and could have to pay more claim. Than all saving will be reversed and paying benefits from back period will lead to more cost. In an earlier post Mr. Madhu has stated all related laws and court judgement.

Merely signing any contract or making false procedures can't avoid any statutory liability.

Although I have given detailed summary agst your short query, but this will be useful for other fellow members as well.
22nd July 2016 From India, Delhi
Thankyou all for the valuable inputs
3rd October 2018 From India, Jamshedpur
It is surprising that anyone who is interested in HR can just walk out of the discussion and remain absent for more than 2 years!!! Here Nikhil has asked for a clarification in July 2016 and a few of us including myself had given our advise within a day but Nikhil took more than two years to notice it or if noticed to realise that he had failed to say thanks!!!!!
5th October 2018 From India, Kannur
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