Is Your Company Liable for ESI on Wage Arrears? Let's Discuss the Implications

I would like to invite comments on the query of whether the company is liable to pay ESI on arrears of wages. Sometimes, VDA notification is received late, and we are bound to pay arrears of VDA from a retrospective effect. Sometimes, we give increments from a back date and pay wages from a back date. Are we required to pay ESI on these arrears? Please comment.

Regards

As per the above statement, VDA is part of the gross salary. If VDA increases, the gross salary will automatically rise as well. Sometimes, companies provide arrears from April to July in August, so we have to pay arrears in ESIC as well.

Thank you.

Dear Nagar, why is there no deduction on the ESIC account? Please justify why PF is to be deducted and why not ESIC.

It all depends on the date on which the VDA is announced. All arrears payments relating to the periods prior to the date of announcement are not to be considered for the payment of contribution. All VDA payments made after the date of the announcement of VDA, whether in arrears or current, will attract ESI contribution.

The payment of ESI contributions is increasingly beneficial to employees as it allows them to avail themselves of the daily rate of benefits, sickness benefit, maternity benefit, disablement benefit, and cash benefit. There may be instances where the announcement of VDA points is delayed, and the employer's salary revision might take 3 or 4 months after it becomes due. Therefore, this provision should not be misconceived, and employers should not circumvent it to make a short payment on statutory obligations.

Purpose of the Act

The purpose of the Act is to extend social security benefits to the weaker section (employees). Therefore, as per the principles of natural justice, the benefit of the doubt always goes to the weaker section. Hence, the EPF contribution is a must on arrears payment, regardless of the reason.

Thank you.

There is no necessity for the employer to pay ESI contributions on arrears. Kindly refer to the information shared by one of our members in the ESIC Employer's Guide.

Thanks & Regards,
V R RAO PULIPAKA.

The contribution on arrear wages is applicable only under the EPF Act. There is no such provision under the ESIC regulations.

The contributions on arrears of wages paid to any employee are payable under the ESI Act, 1948, from the date the said enhancement of wages is announced by the employer.

Dear Harsh Kumar ji, This old discussion was brought back to life, but with the wrong answer. One of the contributing members, Amit_thkr86, has provided documentary evidence that ESI is not applicable on arrears. I kindly request you to review it. If you have any contradictory information, please share it so that members can rectify their understanding and update their knowledge.

Thank you.

I feel very sorry that a senior member like you has termed my remarks as wrong. While writing my remarks in these columns, I have added nothing from myself. Rather, I have tried to present the correct position regarding the payment of contributions under the ESI Act, 1948, on arrears of wages paid to employees.

The Employers' Guide of ESIC, to which one of the members has referred, states: "......the liability towards payment of contribution accrues only in the month in which the decision is announced and no contribution is payable on the arrears pertaining to the period prior to the month of declaration/announcement."

For example, if in any establishment covered under the ESI Act, the decision to enhance wages is announced/declared in the month of January 2014, but the arrears of wages are calculated and actually paid by the employer in the month of April 2014, then in my opinion, the contribution on such arrears of wages for the period from January 2014 to March 2014 will be payable.

I hope you will correct me if I am wrong in any way. I may, however, also add that the term "wages" as defined under Section 2(22) of the said Act defines "wages" as "all remuneration paid or payable."

Regards.

Thank you very much for your response to my comments. Your response compelled me to study the subject matter once again very carefully. Upon my fresh study, I am convinced that you are absolutely correct, and I made a mistake in reading and interpreting this subject.

Clarification on ESI Contributions for Back Period Wages

To bring more clarity to this subject, I am providing the text from the ESI Revenue Manual:

L 8.19 Contributions on wages paid for back periods (arrears of wages): The question of payment of wages for back periods arises in any one of the following contingencies:

1. Sanction and payment of increment from a previous period;
2. Any increase in wages/remuneration is declared from a retrospective date as a result of wage revision under mutual agreement with the employees’ association/union and the management;
3. Periodical increases in Dearness Allowance from a back date;
4. An award of a tribunal or a judgment of any Court; and
5. A unilateral decision by the Management effecting an increase in pay.

In all the above contingencies, the liability towards payment of contribution accrues only from the month in which the increment is sanctioned, the agreement is entered into, the increase is announced, the judgment is pronounced, or the decision is taken, as the case may be. There is no need to pay any contribution on the arrears pertaining to the period prior to the month of declaration/announcement/agreement as the case may be.

Regards