Is PF/ESI Registration Mandatory for Our IT Team? Understanding Legal Obligations and Penalties

We have a team of 28 working in the IT domain, wherein 19 are permanent employees, and 9 are on probation or training. All employees have a basic salary of more than 6500/- and a gross of more than 15000/-. My question is whether it is an absolute must to apply for PF/ESI registration in such a situation and is the company legally liable for deducting PF/ESI? Also, what are the penalties/fines in case the company does not register/deduct PF/ESI?

Please let me know if you need more information. Assistance and guidance will be highly appreciated.

For ESI & PF registration, a minimum of 20 staff should be present, and you have to register them accordingly.

ESI Registration

1) If an employee's gross salary is more than 15,000, they are eligible for medical benefits.

PF Registration

2) If a staff member's basic salary exceeds 6,500, you can only deduct PF contributions based on the 6,500 limit. For example, if XYZ's basic salary is 6,500, deduct PF contributions on that amount.

For more information, please visit the following sites:
ESI: :: Welcome to ESIC ::
PF: EPFO

Thank you.

Even though the gross salaries of all the employees exceed Rs. 6500 p.m. and Rs. 15000 p.m., if you are covered by ESI and EPF Acts, you need to register under the relevant Acts.

Regards,
B. Saikumar
HR and Labour Law Advisor
Mumbai

Even though they are crossing the limit, some employees may receive a lower basic salary of Rs. 6500. For those employees, your organization must be covered under the EPF.

None of the employees has a basic salary of less than 6500/-, other than the peon whose payout happens in cash. Thus, it's quite confusing as I'm getting different feedback/opinions from different PF/ESI consultants. I request all you experts to provide your best thoughts on the same.

Implications of Not Registering for PF/ESI

Also, please share what can be the implications if we do not register for PF/ESI. What are the penalties, etc.?

Regards,
Yogesh

We have newly started a milk company in Coimbatore district, Tamil Nadu. Currently, our staff strength is 12. Could you please clarify if we should begin with ESI registration now or only after reaching a staff count of 20?

Thank you.

Regards

For peon categories, you have to be covered under EPF and ESI. If not, the enforcement officer or social security officer (ESI inspector) may accidentally come for an inspection. At that time, you will have to face problems, and your liabilities will be high.

Regards,
V. Subbarao

You have a total of 28 employees on your payroll, and all are drawing a basic salary of more than Rs. 6500 per month and a gross salary of more than Rs. 15000 per month. In this case, the PF Act is applicable to you, but the ESI Act is not.

PF and ESI Applicability

To be subject to PF regulations, the count of employees matters, regardless of their salary. However, for ESI, only employees with a gross salary of up to Rs. 15000 per month are considered.

Even if all 28 employees choose not to contribute to PF and are categorized as "excluded employees" as per the Act, you are still required to obtain a PF code and make a monthly remittance of a total of Rs. 7. Your liability begins from the month you reach a headcount of 20 employees.

ESI Coverage Threshold

The threshold for ESI coverage has been reduced to 10 employees in most states, except for Maharashtra, where it remains at 20.

Your peons and other indirect employees, if you have any, pose a gray area of concern for you.

Applicability of ESI Act

Even the ESI Act is applicable when the number of persons employed in the establishment is 20 or more, irrespective of their wages exceeding Rs. 15,000 per month.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Supreme Court Judgment on ESI Coverage

With due respect, I wish to draw your kind attention to the fact that, based on the Supreme Court Judgment in the case of ESIC Vs MM Suri Associates, New Delhi (1998), the Corporation decided to consider only coverable employees under section 2(9) for the coverage of a factory or establishment under ESI. This decision was made applicable in 1998. Furthermore, there was an amendment in section 2(9) in 2010.

Regards,

Dear Yogesh,

It is compulsory for you to get registered with the ESI Authority if you are employing 10 employees (direct and indirect). You are also required to be registered under the provisions of Section 1(3) of the EPF and MP Act if you are employing 20 or more employees (direct and indirect). In accordance with the provisions stipulated in the ESI as well as in the EPF Act, you are required to get registered with the concerned office of your area if the provisions of the act are applicable to your establishment.

In case of non-registration, at a later stage, if the concerned authority conducts a survey and finds that you are not covered under the ESI and EPF Act, you will be covered with retrospective effect from the date when you had the minimum number of employees as per the requirement of the ESI and EPF and MP Act. Therefore, proceed with the registration of your establishment to the SRO/RO of your area.

Thanks & Regards,
R B Yadav
Advocate

Interpretation of ESI Act Applicability

Greetings. My view is based on the following interpretation.

Sec. 1(4) of the ESI Act states that the ESI Act, in the first instance, is applicable to all factories other than seasonal factories. Now, Sec. 2(12) defines a factory as follows:

“Factory” means any premises including the precincts thereof whereon ten or more persons are employed or were employed on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on or is ordinarily so carried on, but does not include a mine subject to the operation of the Mines Act, 1952 (35 of 1952), or a railway running shed.

Thus, Sec. 1(4) read with Sec. 2(12) unfolds that the ESI Act is applicable to factories where ten or more persons are merely employed, and it does not say that they shall be employed 'for wages'. It is enough if ten or more persons are merely working in a manufacturing process; it attracts the ESI Act. Since the definition does not refer to employment on wages, there is no need to link the definition of a factory to the definition of an employee under Sec. 2(9), which prescribes a wage limit. Accordingly, all persons employed in a factory, irrespective of whether they are drawing a coverable wage or not, need to be counted for computing ten or more persons employed in a factory.

You are right. M.M Suri's case was governing the field on the issue of the number of persons employed in a factory being restricted to only those drawing a coverable wage. But after the amendment of the definition of Factory in 2010, it no longer does.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

You should register your establishment under the EPF Act 1952 and need to submit the contribution of Rs. 7/-, i.e., Rs. 5 for A/c 2 and Rs. 2 for A/c 22 on a monthly basis. If any employee falls into this category, then you should implement the rules as per the act. For ESI, you should do voluntary registration, and there is no need to submit any challan. If even a single employee falls into the ESIC category, then you should provide the benefits to the employee or employees. This way, nobody can challenge for statutory compliance purposes on behalf of EPF and ESIC.

Regards,
Sunil Sharma

Dear Sunil ji, can you please tell me the provision under ESI for voluntary registration? To my knowledge, under ESI, there is no provision for voluntary registration. It is mandatory when you reach 10/20 coverable employees.

You are absolutely right that there is no provision for voluntary coverage under ESIC. However, whenever an inspection occurs, the concerned E.O. will consider your exempted employees to cover your establishment under ESIC as per the new definition, which is mentioned below with an example:

NEW DEFINITION:

Sec 2 (12) "factory" means any premises including the precincts thereof where ten or more persons are employed or were employed on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on or is ordinarily so carried on, but does not include a mine subject to the operation of the Mines Act, 1952 or a railway running shed.

On comparing both, the following implications of the amendment emerge:

• Now the units where manufacturing activities are performed by 10 or more persons have been brought under the ambit of the Act, irrespective of the use of power and irrespective of whether 10 or more coverable employees are engaged or not.

• The definition of the "Factory" has been amended to bring small units within the ambit of the Act. Earlier, the ESI Act was applicable to units employing 10 or more persons manufacturing with the aid of "POWER." Now, the word POWER has been omitted. Thus, every unit manufacturing and employing 10 or more persons has been brought under the ambit of the ESI Act.

• Secondly, one hidden amendment has been made in the Act. The uncovered employees would also be counted for the purpose of applicability of the ESI Act. Earlier, a unit employing 10 or more workers and doing a manufacturing process would still be out of the purview of the Act if there were persons drawing a salary above the prescribed limit. Let me explain with an example:

Suppose in a unit there were 12 employees using power to manufacture. Out of the said 12 employees, 3 employees were drawing a salary above the prescribed limit of Rs. 10,000/- (or 15,000/-). The ESI Act would not be applicable to the said unit since the strength of the coverable employees is less than 10. But now, the ESI Corporation has very smartly omitted the words "for wages" in the new definition of the "Factory," bringing all the units employing 10 or more persons and engaged in the manufacturing process within its ambit.

Regards.

Dear Keshav Sir, If the company is facing a situation similar to the one explained by Mr. Yogesh and is utilizing contract labor, what would be the course of action? If the contractor fails to deposit the ESIC contribution, who is responsible for making the deposit, and where should it be made?

Regards, Sunil Sharma

As rightly said by Saikumar ji and by some other members also, effective from 01.06.2010, factories within the purview of section 2(12) would get covered under ESI where 10 or more persons are employed without any reference to the quantum of wages. According to section 1(5), the coverage of establishments to which the appropriate Government is the State, 20 coverable employees are taken into account irrespective of whether they are regular, temporary, casual, contract, daily rated, piece-rated, etc.

For the coverage of establishments to which the appropriate Government is Central, 20 coverable employees belonging to the category "casual & contract" only are to be taken into account. In the case of contractors, there must be 20 coverable employees. The question of having the requisite number of employees on the premises does not arise since the establishment need not have any premises.

The threshold limit of coverage of 20 is reduced to 10 by many States.

Dear Keshav Ji, even while extending the applicability of the ESI Act to establishments by virtue of notification under Sec. 1(5), the appropriate governments in some cases have followed the language of the amended definition of a factory under Sec. 2(12) in the notifications. For example, the Central Government, via its notification dated 23rd March 2011, covered all the shops, hotels, and transport services located in the National Capital Territory if they merely employ ten or more persons. Here also, the notification does not specify that the persons shall be employed for wages. Thus, in this case also, establishments are covered, in my view, if the number of employees is ten or more, irrespective of whether they draw wages of Rs. 15,000/- or less per month. A similar notification was issued by the Gujarat State as well. It implies that some states have followed the example of the central amendment while issuing notifications under Sec 1(5). However, the State of Maharashtra has not amended the notification, and therefore, as per the existing notification, establishments are covered provided the number of coverable employees is 20 or more. However, members can verify with ESIC.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Hi,

We are a private Ltd company involved in stockbroking in Mumbai. We have more than 20 employees who are drawing a basic salary of less than 15,000, and we have registered them under PF. My query is whether we need to register them under ESIC as well. The ESIC act does not specify that commercial establishments like us must enroll. Can anyone please provide the relevant clause or notification from the Maharashtra government if we are covered?

We have multiple companies operating under one roof, and all the businesses are different. Salaries of all employees are paid from the different companies, with none of them having more than twenty employees at any point in time. However, the attendance of all employees was maintained in a single register without specifying the name of any company. Only for a couple of months a few years back did the count in the attendance register reach twenty, including one personal driver. The ESIC officer is telling us that we now fall under the ambit of the act because we maintained a single register for all twenty employees.

Is he correct, or can we contest his order?

Yogesh,

I was facing the same problem a few days back. Then, I spoke to an ESI representative who explained that ESI is mandatory for employees with a gross salary of less than 15,000. However, if the salary exceeds this amount, the employee is eligible for PF. Companies need to file for EPF if they have more than 20 employees, but it is not always mandatory; exemptions can be granted.

As you are deploying with 28 employees, I have reviewed all the posts and would like to draw the attention of all readers to the following provisions separately for ESI as well as for Provident Fund.

Applicability of the ESI Act, 1948

Pursuant to the Employees' State Insurance Act, 1948, there are two sections stipulated in the Act. Section 1(3) concerns the applicability of the Act upon factories where any type of manufacturing activity is carried out.

The other section is Section 1(5), which empowers the Central Government to extend all or any of the provisions of the Act to any other establishment or class of establishments, industrial, commercial, agricultural, or otherwise in the said State, after giving one month's notice of its intention to do so by notification in the Official Gazette. Commercial establishments are also covered under this section, including schools, colleges, hospitals, and contractors.

Nowadays, it has been made mandatory for the employer to cover his establishment if deploying with 10 or more employees, whether they are directly employed or employed through a third party, including contractors. Hence, it is clear that the provisions of the Act will be applicable to all such establishments where 10 or more employees are employed, irrespective of their wages or designation. Therefore, your company is legally bound to comply under the ESI Act and further bound to deduct ESI contributions pursuant to being a contributory scheme on the part of employees as well as the employer.

Applicability of EPF and MP Act, 1952

Section 1(3) of the EPF and MP Act, 1952 makes it compulsory for all employers to cover their establishment if they are deploying/employing 20 or more employees, irrespective of wage and other employment conditions. All employees, including regular, casual, temporary, badli, probationers, permanent, as well as contractual employees, will be counted for the applicability of the Act.

Similarly, Section 1(4) of the Act makes provisions for the voluntary coverage of the establishment even in the case of fewer employees than prescribed in Section 1(3) of the Act, subject to the condition that there should be consent from both parties, employees as well as the employer. On their consent, the Act shall be applicable to a lesser number of employees.

If any employer is employing a number of persons exceeding or equivalent to the limit as prescribed under the respective Acts, they shall be prosecuted in accordance with the provisions made out in the Acts.

Regards,
R B Rao
Advocate