How to Handle ESIC and PF Compliance for 12 Employees Under 4 Contractors?

Dear All, One of my friend's company has 4 contractors, and each contractor has 3 employees under them. They don't have ESIC, PF numbers, and no license. There are a total of 12 employees working under the 4 contractors.

Opting for ESIC and PF

If we opt for ESIC and PF, how can we deduct the PF, and how should it be submitted to PF & ESIC authorities? This is on a need basis. Seniors, please provide your valuable inputs.

Each contractor has several employees in their roles, providing similar services to different organizations. Automatically, they would have more than 20 employees.

They don't have any other contract and have only 3 employees on the payroll for each. Then what should be done, sir?

Deducting PF and ESIC for Contractors

You are required to deduct the PF and ESIC from the payment to contractors and pay the same to the department using your own PF code/ESIC code. There is a procedure for this under PF and ESIC rules. You can do it without making them your employees. You need to fill out the correct form, naturally.

Regards

Principal Employer's Liability for Social Security Benefits

It is the Principal Employer's liability to ensure all Social Security benefits are available to the employees even when engaged through contractors, regardless of the individual contractor's numerical strength. This responsibility must be fulfilled either by the contractor if they are independently covered or through the Principal Employer.

Contractor Registration and Compliance

Each contractor must get themselves registered with the concerned authorities. In your case, they should obtain Code Numbers under the ESI & PF Acts if they are eligible for coverage under these statutes.

If each contractor has only three employees on their rolls, they are not liable for coverage under both Acts - ESI & PF. Therefore, there is no question of any deduction under ESI & PF.

However, whenever you engage employees through a contractor, you MUST ensure that the following stipulations are incorporated in your contract with them:

- Every month, they will provide you with copies of the following documents along with the originals, which shall be returned after verification by you:
1. Attendance sheet for the month, including employees working for you.
2. Payroll, with names and wage details of employees working for you.
3. ESI & PF Challans. In your case, obtain a declaration by the contractors on their letterheads stating that they have ONLY three employees on the rolls of their firm and are NOT liable for coverage under the two statutes.

These basic documents should be submitted by the contractors along with their bills each month. Pay them their due money after verifying the relevant facts.

In case you have any further clarifications, please feel free to contact me at [Phone Number Removed For Privacy Reasons] or at my email [Email Removed For Privacy Reasons].

Regards,
Vasant Nair

Dear Ravi, they don't have any other contract and have only 3 employees on the roll for each. Then what should be, sir...?

Dear Vasanth, do you suggest that if the contractor is not covered under the relevant acts, they need not be covered under PF and ESI? If so, what happens if the employee is injured or meets with a fatal accident while working in the company?

In this context, I agree with Saswata Banerjee's view that PF and ESI have to be deducted from the contractor's bill and remitted to the respective authorities by way of a separate challan and explained to the respective inspectors when being audited. This suggestion is given considering the practical problems that might arise while we deal with certain eventualities.

Regards,
M.V. Kannan

Dear Kannan, you are 100% right. Please go through Section 2(f) of the EPF Act 1952. It shows that the employees engaged through contractors are also your employees for all practical purposes as far as statutory benefits and protections are concerned. The ESIC provides insurance protection against the huge liability in case of accidents under the Workmen's Compensation Act. Besides non-payment of contributions on both accounts of ESIC and EPF, the liability may extend to 400-500% of the statutory liability, besides disallowance from Income Tax. I totally disagree with the views expressed by Mr. Vasant Nair. These are contrary to the legal position.

Each contractor should obtain an ESI Code and PF Code No. This requirement is a MUST when you consider engaging a contractor. If one is NOT eligible for coverage, the concerned party will not be given a Code No. by the relevant authorities.

If the contractor does NOT have an ESI & PF Code No., where will he deposit the money deducted from his employees' wages against ESI & PF? As the Principal, please appreciate the practicality of the issue.

The employees under a contractor are his employees. Therefore, the contractor will be responsible for preparing their payroll and ensuring compliance with all applicable labor laws. If you, as the Principal Employer, decide to handle all this, you might as well put such employees on your own company's payroll instead of engaging them through a contractor.

Under the current circumstances, the employees engaged through each respective contractor are NOT eligible for coverage under the ESI & PF since the concerned contractor is NOT eligible for coverage under the said statutes.

In the event of an employment injury or death, the concerned worker will be entitled to benefits under the Workmen's Compensation Act. As a precautionary measure, you may request the contractor to acquire a Personal Accident & Mediclaim Policy for his employees to address any such unfortunate mishaps.

Your suggestion, I am sure, is well-intentioned, but not quite the right one.

Best Wishes,

Vasant Nair

Dear Satish,

Your views are well appreciated, but such an approach will defeat the very purpose of engaging employees through a contractor. Yes, if the contractor fails to comply with the applicable laws, then the liability automatically shifts to the company being the principal employer. Also, you seem to be a little confused about the ESI Scheme and the Workmen's Compensation Act. Please understand that both are independent of each other.

Regards,
Vasant Nair

In case of a fatal accident or even disablement caused by an injury arising out of an accident, the concerned worker will be entitled to benefits under the Workmen's Compensation Act.

Regards,
Vasant Nair

Dear Vasant Sir, we can have employees on the payroll without any doubt, but the main issue is that they are paid based on piece rates. For example, if we offer them ₹200 per day today and another company hires them the next day for more than ₹200, that becomes a major problem.

Considering Contractors for Daily Wage Workers

To address this concern, we are considering having someone work as a contractor who will then hire workers under him on a daily wage basis. In this setup, how can we deduct PF, ESIC, etc.?

We are in need of the right information on this matter.

Thank you.

Dear Vasant,

To my knowledge, many companies engage contractors who do not have a PF or ESI code due to various factors. These employees are covered for PF and ESI by the Principal Employer. Merely covering them does not mean they are taken on the rolls of the Principal Employer, as you have stated.

The statutory deductions are remitted by the Principal Employer via a separate challan, and statutory inspectors do conduct audits and agree with this fact.

You have stated that in the event of an accident, the workmen will get paid under the Workmen Compensation Act, but who will pay the compensation? Obviously, the Principal Employer has the right to recover it from the contractor. However, the real fact is that invariably the contractor either absconds or the compensation amount awarded is beyond the financial capacity of the contractor.

Our principal aim is to safeguard the interests of the organization. Please note that you will be questioned by the statutory inspectors when they come for inspection if you engage employees without PF & ESI coverage, and your statement that the contractor does not have a PF or ESI code will not hold good.

Regards,
M.V. KANNAN

Contractors and PF/ESI Compliance

To my knowledge, there are many companies engaging contractors who do not have a PF or ESI code due to various factors. These employees are covered for PF and ESI by the principal employer. Merely covering them does not mean they are taken on the rolls of the principal employer, as you have stated.

This is a very weak and avoidable practice. It defeats the very objective of engaging employees through a contractor. Such a practice will put the principal employer in a very vulnerable position in case of an industrial dispute.

The statutory deductions are remitted by the principal employer by way of a separate challan, and statutory inspectors do conduct audits and agree with this fact. If the documentation is proper, statutory inspections can also be handled very satisfactorily.

You have stated that in the event of an accident, the workmen will get paid under the Workmen Compensation Act, but who will pay the compensation? Obviously, the principal employer has the right to recover it from the contractor. However, the real fact is, invariably, the contractor either absconds or the compensation amount awarded is beyond the financial capacity of the contractor.

Ideally, the contractor, being the immediate employer of his employees, is liable to pay the compensation. You are very right in your observation that in such situations, the contractor just vanishes, and the principal employer is left saddled with the burden.

Our principal aim is to safeguard the interests of the organization. Please note that you will be questioned by the statutory inspectors when they come for inspection if you engage employees without PF & ESI coverage, and your statement that the contractor does not have a PF or ESI code will not hold good. I will repeat, if you have your documentation done properly, you can very easily satisfy the inspectors.

You are also very right that we, as HR practitioners, have to protect the company's interests. For this, we should be very correct and proper in our documentation and records.

I have good practical experience in handling contract labor, and in case you wish to understand the finer points involved, you are welcome to chat with me on my mobile... [Phone Number Removed For Privacy Reasons].

Best Wishes,

Vasant Nair

Regards,
M.V. Kannan

Dear Vasant,

I appreciate the effort you have taken in replying to the queries raised by me, point by point in bold-faced font. I also recognize that you have wide experience in handling contract labor.

Guidance on ESI Deductions for Contract Labor

I require your guidance on how to deal with ESI deductions for employees engaged in carrying out civil work in an organization where the mason, who is invariably the contractor, does not have an ESI code. I trust that this will also be treated as contractual labor. Am I right?

Every time an ESI inspector comes, he asks the company to provide the General Ledger and points out that ESI has to be deducted for engaging contract labor for repairs and maintenance. If the ESI is not recovered, they advise us to consider 25% of the total contractual amount as labor charges and remit ESI for the same.

Have you come across such instances? If you have managed to avoid remitting ESI contributions, could you please send copies of such correspondences or references to enable HR professionals to deal with such situations?

Thank you in anticipation.

Regards,
M.V. Kannan

Dear Kannan, I appreciate the effort you took in replying to the queries raised by me point by point in bold-faced font. Thank you. I also recognize that you have wide experience in handling contract labor. Yes, I have.

Guidance on ESI Deductions for Contract Labor

I require your guidance on how to deal with ESI deductions for employees engaged in carrying out civil work in an organization where the mason, who is invariably the contractor, does not have an ESI code. I trust that this will also be treated as contractual labor. Am I right?

This is a common practice and it continues. The correct procedure would be to hire workers through an established contractor who has the necessary Code No. under ESI & PF. You should also have a properly worded agreement with the contractor and comply with the necessary formalities stipulated in the Contract Labor (Regulation & Abolition Act) before engaging labor through him.

Every time an ESI inspector comes, he asks the company to provide the General Ledger and points out that ESI has to be deducted for engaging contract labor for repairs and maintenance. If the ESI is not recovered, then they advise us to consider 25% of the total contractual amount as labor charges and remit ESI for the same.

Provisions of ESI & PF must be complied with. There is no escaping this necessary legal formality. All I am trying to emphasize is that if, as the Principal Employer, you deposit the contributions under these statutes under your Co. Code No., you are in a vulnerable position if there happens to be an industrial dispute and the contract workers claim that they are your employees.

Have you come across such instances? If you have managed without remitting ESI contributions, could you please send copies of such correspondences or references to enable HR professionals to deal with such situations?

The language you have used is not very welcoming and tends to be rude. I cannot appreciate it. For your information, I know of several organizations that actually get away with blatant violations of labor laws. However, that does not make it a healthy practice. How would you react if I tell you for a fact that there are factories running without a Factory License?

By adopting shortcuts, sooner or later one is bound to get into trouble.

There are several aspects to engaging labor through a contractor that cannot be discussed in an open forum like CITE.

As I advised you, if you wish to continue this discussion, please call me on my mobile, and I will clarify any doubts you have.

Regards, Vasant Nair

Thanking you in anticipation.

M.V. Kannan

If one follows Mr. Vasant Nair's opinion, then it will be safer for every company to engage "n" number of contractors with only 9 employees to save on liability for ESI and PF. However, this is not in line with the statute. Every employee has to be covered if the employee strength, including those engaged through contractors, exceeds 9 for ESI or 19 for PF. There is no escape. The only exceptions are non-covered areas for ESI and non-schedule industries for EPF. In the given case, since the factory is already covered under ESI and PF, there is no escape.

Furthermore, by evading the payment of Rs 1, the employer is incurring a liability of Rs 4-5, as they will be required to pay both the share of contribution, interest, and damages. Such payments will also attract income tax. This poses the question: which option is better for the employer?

Dear Mr. Vasanth,

It is not my intention to advise forum members to violate any law of the land. As quoted in my earlier thread, we are one of the guardians of the company's interest.

Please note that your suggestion of engaging contractors with PF or ESI codes is feasible. However, I doubt whether such contractors will be interested in hiring a workman to carry out work for just one day. I also doubt that many civil contractors have PF and ESI codes. Hence, it has been the practice in many companies to hire employees, have them fill up the ESI nomination form as they enter the establishment, and then permit them to work. Recovery of ESI is made from the wages payable to him, and the employer's share is remitted by the company. These deductions are remitted by way of a separate challan to ESIC under the employer's code. There have been instances wherein the employee meets with a fatal accident on the first day of his employment. In such a case, if the company has been a regular contributor of ESI payments when hiring contract workmen, then the ESI authorities will certainly consider the claim made by the employer. Please note that merely remitting ESI contributions for the employee does not mean he is on the company's payroll.

If you can recall the content of the thread raised by Karamvir, the question was how to deduct PF and ESI and remit the same to statutory authorities when the contractor does not have PF or ESI code. To answer this query, I have suggested the above remedy. If the contractor had a PF & ESI code, then why should Karamvir raise this thread at all.

"One of my friend's company, they have 4 contractors and each contractor has 3 employees under them. They don't have ESIC, PF numbers, and no license. In total, 12 employees are working under 4 contractors. If we go through ESIC and PF, how can we deduct the PF and how should it be submitted to PF & ESIC authorities? This is on a needly basis, seniors, please give your valuable inputs."

It was not my intention to hurt you in any manner. If I have done so, I apologize for the same.

Regards,
M.V. Kannan

Dear Kannan, Please read the contents of my response carefully. I have only advised that certain formalities are obligatory on the part of the Employer and the Contractor under the relevant law. I have only stated that in case of an Industrial Dispute, the Principal Employer will be on the defensive. It is, therefore, necessary to complete the required documentation properly (this is not done most often).

Best Wishes,

Vasant Nair

Please read my posts carefully. I have nowhere made any suggestions as inferred by you. I am also not offering any advice to escape statutory obligations. I am only trying to highlight some basic facts:

Complying with the Contract Labour (Abolition & Regulation) Act

Complying with the requirements of the Contract Labour (Abolition & Regulation) Act is the first necessary step. All employees hired through the contractor are HIS employees. The Contractor, as the immediate employer, is obliged to maintain all required records under various applicable Labour Laws in respect of all his employees. Therefore, all applicable statutory obligations have to be complied with by him (the Contractor).

Likewise, the Company, as the Principal Employer, also has certain obligations to ensure that the Contractor actually complies with all applicable statutory obligations from which there is no escape. In case of any default/violation, the Principal Employer is held responsible. It is for the Company's management to decide upon the course of action they would like to adopt.

Best Wishes,

Vasant Nair

If one follows Mr. Vasant Nair's opinion, then it will be safer for every company to engage "n" number of contractors with the limited nine employees only to save the liability on account of ESI & PF. But this is not the design of the Statute. Every employee has to be covered if the Employee Strength, including those engaged through contractors, exceeds 9/19 under ESI/PF. There is no escape. The only escape in the case of ESI is a non-covered Area and for EPF non-schedule Industry. In the given case, since the Factory is already covered under ESI & PF, there is no escape. Furthermore, by evading the payment of Rs. 1, the employer is incurring liability of Rs. 4-5 as he will be required to pay both the share of contribution + Interest + Damages. Such payments will also attract Income Tax. This is the choice of the Employer, which part is better.

Friends,

We are an architectural/interior designing firm based in Mumbai, executing interior projects on a turnkey basis. Our technical staff strength is 6, along with 2 partners.

Eligibility for ESIC Deductions

Are we eligible for ESIC deductions by our clients, especially when we subcontract the work to different vendors/subcontractors and do not have any labor under our payroll? Can we forward our subcontractor's PF number to avail exemption from the deductions?

Our subcontractor is eligible for PF but not ESIC, as they have less than 20 employees under their payroll too. Your feedback here will be highly appreciated.

Kind regards,

Rohan Kowli
Managing Partner
K+A Urban Fourth