Understanding ESI and PF Liabilities for Jobwork with Materials Inside the Factory: How Do You Determine the Labor Component?

Dear All,

My question is related to the attraction of ESI and PF on the jobwork with material done by a contractor inside the factory. For the contractor which supply manpower It is very much clear that he has to comply with the ESI and PF liability on the total wages paid by him, but suppose a Contractor has done some job work which includes the material also, inside the factory premises, say for 4 / 5 days and then the bill has been raised by him.

Now what will be the ESI & PF liability on the total bill, as per some understanding with the ESI & PF people we have been assuming that of the total bill involves 75% being the Material Cost and the rest 25% being the Labour Cost, so we have been depositing the ESI and PF on the 25% of the total bill amount under the particular contractor's name.

My questions about the same is that :

Ø On what basis it is assumed that Labour component is 25% and we have to pay ESI & PF on that.

Ø Is there any ruling to support this type of contribution of ESI & PF.

Dear Mr. Verma,

Under E.S.I., there is a circular to this effect. Wherein, any job work which involves labor and where the amount is paid in lump sum (i.e., the rate and total labor charges are not mentioned), in such cases, Insurance Inspectors are empowered by the aforementioned circular of E.S.I. H.O. to charge E.S.I. at 6.5% on 25% of the total payment made to a particular job work. This circular is applicable on an all-India basis. I can provide you with the number and date of the circular.

Secondly, I have not seen any ruling/circular under the EPF Act. It is applicable to Basic Wages. The P.F. Enforcement officer cannot calculate it at 25%; rather, they will ask the employer to assign a fixed amount of wages from the job work bill. P.F. Enforcement officers normally do this to create pressure on employers, but in the report, they cannot show that they have taken 25%; they manipulate the figures when writing the report.

Please let me know if you need any clarification.

Mohd. Arif Khan
9891497178

Mr. Arif,

First of all, thank you very much for such a prompt response. Kindly provide me with the circular number and date of the circular issued by the ESI authorities.

As far as PF is concerned, what I have understood from the PF people is that they are also adopting the same method, but there must be some valid logic in this support.

Also, I came to know from one of my friends that there is a ruling, but I am not able to get the copy of the same. Because that copy of the same will be of great help during the time of the inspection by ESI & PF authorities.

Dear,

There is an ESI Circular covering your query, and when you make a search in downloads on CITEHR, you will find it.

With Regards,
V. Sounder Rajan

E-mail: rajanassociates@eth.net

I have not come across any ruling stating that 25% shall be considered as labor cost. However, I believe it is the contractor's responsibility to demonstrate that a certain portion of the total bill pertains to labor while the rest is for materials. Therefore, it is advisable to maintain a separate record of labor involved in the contract work so that it can be presented to ESI/EPF authorities in case of any inquiries. This can be achieved by keeping a wages register or maintaining payment slips separately for work carried out in the factory. Additionally, there should be a record of materials brought in by the contractor at the factory gate and documented in a material inward register.

In the absence of this information, ESI/EPF contributions may be calculated based on the total bill because any work undertaken would be assumed to involve labor.

Regards,
Madhu.T.K

Mr. Arif,

First of all, thank you very much for such a prompt response. Kindly provide me with the circular number and date of the circular issued by the ESI authorities.

Dear All,

Can you please provide the circular copy in which it is clearly mentioned about the percentage of the amount considered for ESI & PF liability of the total bill amount.

Regards,
Darshan Kumar