Navigating ESI Rules: Can We Include Annual Performance Pay in Monthly Salary to Avoid ESI?

Dear All,

I work in the HR department for a software development organization with an employee strength of 75 employees. We do not want to have ESI for our organization. However, with 4-5 recent hires, we are giving them a fixed compensation of Rs 8,500 per month (which is Rs 1,02,000 per annum) plus a performance pay of Rs 20,000 per year, payable annually.

According to ESI rules, any amount above Rs 10,000 is exempted from ESI. I wanted to find out if we can show the performance pay in the monthly salary, but it is paid at the end of the year. Is that the right thing to do? Alternatively, what is another option to avoid ESI hassle?

Please help.

Regards,
Shilpi

Give that amount (performance salary) monthly. So, per month, it is 1666. Then you add this amount to 8500, it goes to 10166. So, his gross salary per month is 10166. Therefore, there is no need to pay ESI amount. However, management does not accept paying the performance amount monthly; it is only paid after assessing his performance. Hence, it is better to pay ESI on the 8500 gross.

If you give this performance pay on a fixed basis every month of 1666/-, then the total salary will be 10166/-. Therefore, the employee is not covered under the act. However, if you give that performance pay in various means based on his performance (not every month), then whether his salary exceeds 10000/-, hence he is coverable under the act.

Thank you both for your inputs!!

Also, is there a rule that if there are fewer than 10 employees earning less than Rs 10,000 per month, then ESI is not applicable?

Look forward to your response.

Regards,
Shilpi

Dear Shilpi,

Your organization has 75 employees less than what is the threshold for not being covered under ESIC. We have discussed this point earlier in the forum as well. For factories, it is compulsory to have an ESI CODE, which means if you are a factory, then you have to obtain an ESI code. In establishments, the minimum number is 20 to become eligible for ESI. There is no count of eligible employees less than 10k; it is the total number of employees.

So, take an ESI CODE to avoid further interest and penalties.

Thanks,
J S Malik

Yes, there is a rule regarding the minimum number of employees below which ESIC (Employee State Insurance Corporation) is not applicable. Just check whether it is 10 or 20. According to me, it's 10.

Regards,
Harshad

Hi Shilpi,

Performance pay is dependent on the individual's performance, which technically cannot be clubbed with the individual's salary for the whole period during his/her stay in the company. Since their salary is less than 10k and your company's strength is more than 20, there is no other option but to register their names with the ESIC to avoid further interest and penalties as advised by Mr. J.S. Malik.

Regards,
Sunit Saha

Shilpi,

Your company's strength is more than 20, so you have to register in ESIC. The employees paying the amount on a performance basis depends on performance. Therefore, the salary paying is less than Rs. 10,000/- per month.

Regards,
K V Satish Kumar

Dear Shilpi,

A person getting more wages than the limit prescribed by the Central Government (i.e. 10000/- Gross / Month) under S.2 (9) (b) would not be an employee within the meaning of S 2(9).

[M.M. Suri & Associates Pvt. Ltd. Vs. ESI Corporation 1997 II CLR Pg. 106 (Del HC)]

So this can be interpreted that if your new 4-5 recruits are the only employees who are covered, then you do not need to take the ESIC Code. But, be sure to seek professional help as well.

Regards,
Sandeep Kulkarni

Dear, to cover any establishment under the ESI Act, there should be 10 or more COVERABLE EMPLOYEES required for those establishments using POWER for any manufacturing process OR 20 COVERABLE EMPLOYEES for those establishments not using POWER in their manufacturing process. In your case, you have 75 employees, all of whom are exempted under the ESI Act, so you are not required to register under the act. However, all employees are subject to the PROVIDENT FUND ACT, where 20 employees are required for registration, regardless of whether they are coverable or not. You must register.

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Please clarify whether they are "employees" or "trainees on stipend" (who, in my opinion, are not employees).

S. Krishnamoorthy

To avoid ESI Registration, it's better to hire employees on a contractual basis. The contractor will handle the necessary procedures, and after a year, you can assess their performance before deciding whether to retain them within your organization or terminate their contract.

Regards, Gowrishankar.G

Dear all,

As regards coverage under the ESI Act, in the case of a factory employing 10 or more employees with power being used for the manufacturing process or 20 without the aid of power; and 20 or more employees in respect of a shop/establishment, such entity will be deemed to be covered under the ESI Act from the day the number of employees reaches 10 or more / 20 or more, as the case may be. The burden of coverage and compliance is on the employer and not on ESIC. Even the non-allocation of a Code number by ESIC is not an excuse for non-compliance.

In the instant case, notwithstanding the number of coverable employees being 4 (whose wages are less than Rs.10,000/-), the manufacturing unit/establishment is deemed to be covered under ESI from the date on which the company employed 10 or more employees (in the case of manufacturing with the aid of power) / 20 or more otherwise. Though the unit/entity will be covered under ESI from the aforementioned date, compliance of ESI contribution, both employer's component as well as the employees' component, will be warranted only in respect of employees who have received / are receiving less than Rs.10,000/- (wef 1-10-2006). In case of non-compliance so far, it is the sole responsibility to pay the entire contribution (employers + employees) plus damages and penalties as may be determined by ESIC.

As for distributing the annual bonus of Rs.20,000/- as a monthly payment to avoid coverage, if the nomenclature of the payment is not bonus but fixed minimum performance incentive, say Rs. 1600 per month, and is actually paid in the monthly payslip, the total pay will exceed Rs.10,000/- and hence would not require ESI contribution. However, it must be the actual payment shown in the payslip and preferably not a varied amount.

The employer is advised to immediately register with ESIC to obtain the Code number without delay based on the total number of employees, even if no contribution is payable or contribution is payable only in the case of very few employees, say 3 or 4.

Mr. JS. Malik has given good advice.

A. Irudayam, M.A., M.B.A., LL.B.
Advocate and HR Consultant
+919940686632
irudayam@transeed.org