Are ESI and PF Required for Contract-Based Workers Like Painters and Fabricators?

Hello,

Please inform if some workmen visit the factory and work on a job basis or contract basis, and not on a daily hour basis. For example, a painter working on a square foot basis or a fabricator making a shed on a weight basis. In this scenario, is ESI or PF applicable to the company where they perform this work? Since workmen are employed by a painting contractor or fabrication contractor, the personnel changes, and there are no fixed workmen under whose name ESI and PF can be paid.

Best regards, S. Desai

ESI and EPF are applicable to all casual and temporary workers who are engaged to work within the premises of the factory/establishment covered by ESI or PF, as the case may be. However, there are certain judgments which say that when a workman is engaged for any work not connected with the activity of the establishment, he need not be covered by ESI.

The Kerala High Court in Regional Director ESI Corporation Vs P R Narahari Rao (1986 Lab I C 1981) has observed that there is a distinction between "employment" and "engagement" and if a person is casually engaged for a process unconnected with the operations of the establishment, or some work which does not form the integral part of such operations, he may not be an employee since there would be no employer-employee relationship between them. On the other hand, if a person is employed for a very short period of time but in connection with the processes or operations which are integral and connected with the business of the establishment, he is an employee entitled to coverage under the Act.

The Punjab and Haryana High Court in ESI Corporation Vs. Malhotra & Co, Chandigarh (1981 Lab I.C 475) has also given a similar verdict.

Therefore, if the painting work is not the main business of the establishment, you may not contribute to ESI/EPF, saying that the work to which he is 'engaged' is not the integral process of your business.

Regards,

Madhu.T.K

Thanks for your reply. My query is also for persons who come to our factory to do polishing of our machines, which we produce and sell. So they contribute towards our line of production or final product that we produce. These people work on a contract basis and charge us a fixed amount, XYZ, per machine, not on a per day or per hour basis. They come with their own polishing machines, welding machines, and carry out work at our premises as they don't have their own workspace to do the job. Additionally, the individuals who conduct the work vary each time and are not consistent.

Will this situation fall under ESIC and PF calculations?

Since the polishing or painting work is directly connected to your business and as the work is carried out within your factory premises, any amount paid shall be treated as wages. Therefore, it will attract ESI and PF. The payment, whether lump sum or rate per hour or day, has no relevance. If the contractors have hired the polishing machine or compressor for spray painting, the hire charges included in the lump sum amount paid per piece of machine painted or polished, as the case may be, will be allowed to be deducted provided he has sufficient proof of it.

Regards,
Madhu.T.K

Hi, Mr. Madhu,

I am a person working for a hotel that is under construction. During the progress of construction, we engage some contractors like civil and electrical, etc., who bring their personnel to work on the site to complete the entrusted contract. They keep changing the labor whenever they need to. In this scenario:

a) What is the liability for our company?
b) Is the contractor supposed to pay PF and ESI to the labor he brings?
c) If he does not pay, how will our company be liable for that?
d) When labor is changing almost every day, how should we pay the amount?

We also directly employ some people who are not put on the payroll but are treated as NMRs. Are there any specific rules for this NMR system? If so, what are those?

I hope the above is clear, and I request you to kindly clarify in-depth, for which I will be very thankful to you.

Thanks,
Murthy
Andhra Pradesh

You are liable to pay contributions only after coverage, and the coverage takes place only after the commencement of production or rendering of service. That means, during the construction period when there is no operation, your establishment will not be covered, and as such, the contractor(s) are not liable for contributions towards ESI or EPF.

Though I did not understand what NMRs are, I can comprehend that it is an engagement before actual production/service has taken place. As stated above, ESI and EPF will be applicable only after the commencement of business, and the raising of the first invoice is taken as the date of commencement of production/service. Till then, no contribution is payable.

Regards,
Madhu.T.K

Dear Mr. Madhu,

Thank you for your reply.

What is the amount of contribution I have to make for the polisher who works on our premises? Is it 12% for PF and 4.75% for ESIC? What about the contractor's contribution? What happens if the contractor is not ready to part with his contribution? If I deduct 12% of his share of PF from his bills, he will refuse to work and leave. What can be done if the contractor doesn't want to pay their share?

Regards,
S. Desai

Dear Mr. Madhu,

Thank you for the clarification on contractors' PF and ESI. NMR stands for Non Muster Roll, where employees are not included in the regular payroll. Instead, their attendance is noted in a notebook, and they are paid a consolidated or daily wage. This means they are not regularized employees and do not have the right to claim benefits such as bonuses or leaves.

I have a question regarding the number of employees that can be hired under this arrangement, how long they can be employed in this manner, and the applicability of labor laws in this context. If a labor department official questions the legality of this setup, what should our response be? Additionally, how does the Minimum Wages Act apply in this scenario?

I hope my concerns are clear, and I kindly request clarification if you have any insights.

Thank you,
Murthy
Andhra Pradesh

Dear Desai,

The contribution to ESI/EPF is primarily the responsibility of the principal employer for whom the contract employees work. The principal employer can recover the amount paid by him through deduction from the bill amount payable to the contractor. If he refuses to deduct the amount, the contract can be terminated, leaving no other option than for the principal employer to bear the cost themselves. The choice is yours; if you wish to retain the contractor by keeping them content, you may bear the cost of ESI and EPF.

Dear Murthy,

Non-roll engagement is permitted as long as the work is not continual or regular in nature and is not directly associated with the primary operations of the establishment. However, you cannot avoid paying the minimum rates of wages set for that category of employees, along with contributions towards ESI and EPF. While non-payroll employees do not need to be regularized, they should still receive statutory minimum wages, ESI, and EPF. Additionally, they should be entitled to bonuses at the same level as regular employees.

As mentioned earlier, if you hire casual workers for non-operative areas, there are no legal complications. However, it is not advisable to engage casual workers in tasks of a regular nature. If you do, there is a high likelihood that the Labor Department will step in and request the regularization of their services.

Regards,

Madhu T.K

Dear Mr. Madhu,

Many thanks for your info. Please inform what is the amount above which PF, ESIC, and Bonus are not applicable? For example, if I pay a polisher to polish our machines and if I pay him Rs. 7000 in one month and 9000 in the 2nd month, will PF be applicable? Will ESIC be applicable? If for such persons who are not employed but work in our premises on a contract basis, that is if they charge us per job, will bonus be applicable? Is there any ceiling or slab over which I don't have to deposit my own share or their share for PF and ESIC?

Best regards,
S. Desai

I am working in a public sector bank. The PF funds are managed by our trust. For the financial years 2008-09 & 2009-10, the trust has provided interest at 8% & 8.25% annually. This is less than the interest rate of 8.5% declared by the Central Govt for the corresponding years.

My questions are:

1. Does the trust have to provide a minimum interest rate declared by the C.G.?
2. Is the employer mandated to cover the shortfall if the returns from PF investments do not meet the interest rate declared by the C.G.?
3. What is the frequency at which the interest is to be credited to members' accounts; annually or half-yearly?
4. Are any returns filed by the trust regarding this disclosure to the Regional PF Commissioner or any other Government Authority?

Validity of Labor Contractor Documents for PF Contribution

I am working in a construction firm that takes government civil maintenance contracts (tenders). We are using temporary labor for various civil-related works and make payments as per their policy, i.e., in square feet, running feet, lump-sum, job bases, item numbers, etc. However, the labor contractor/labor denies and refuses to deduct their PF contribution and is ready to provide in writing the same with the rate list/quotation.

So, my concern is whether the document given by the labor contractor/labor is valid or not. If yes, what should be the right format, and if no, then what is the solution? We have contacted many laborers, and the answer is the same (not to deduct PF).

Regards,
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It is obvious that subcontractors or workers may not let their revenue be reduced by means of a statutory deduction. Therefore, the rate quoted by you to the government should be such that includes these kinds of contributions payable by you. It is okay if you do not have PF and ESI coverage, but in case you are covered, it becomes your responsibility to take care of these and pay the contributions from your revenue.

Madhu.T.K