How to Legally Implement a Piece-Rate Payment System for Contract Workers in ITES?

Dear Seniors,

I have recently joined an ITES company. The company's main focus area of business is the digitization of E-Governance projects for various Government bodies in India.

Piece-Rate Payment System

Now, our CFO wants us to develop a system where ground-level employees can be paid based on a piece-rate system. This means they will receive payment according to the production of various segments such as scanning documents, etc.

Legal Implications and Statutory Matters

I am requesting all my seniors to kindly enlighten me on the legal implications of this process, especially regarding statutory matters like the payment of ESI and PF to the employees.

I must add that all personnel engaged by the company are through a vendor who works as a manpower support provider. How can we develop a proper letter to acknowledge the appointment of ground personnel?

Thanks & Warm Regards,

Alin Ganguly

Dear Alin,

Your CFO has expressed a desire to implement the contract labor system for completing assignments. This system is widely practiced for the profiles of manpower being discussed.

Main Guidelines for Implementing the Contract Labor System

The main guidelines for implementing this system shall be as per the clauses of "The Contract Labor Act (R&A), 1970," wherein there shall be three parties as participants: The Company (Principal Employer), the Contractor undertaking the assignment on behalf of the company, and the employees whom the contractor deploys at the company's premises to carry out the work.

The Contractor is responsible for completing the assignments in a timely manner as assigned by the company, and all statutory compliance matters for the contractor's employees are to be borne by the Contractor. If, at any point, the Contractor fails to adhere to the statutory clauses, the Principal Employer (client company) must ensure compliance.

All statutory provisions shall be governed as per the applicable enactments and should be on par with those for permanent employees.

I hope this information is helpful to you.

Thanks & Regards,

Alin Ganguly

First of all, I would like to thank you for the reply. However, some points, if clarified, would be appreciated. The following are the points:

1. The payments that are going to be made to the employees will only be through the piece-rate system.
2. How should we manage the Basic and Gross for the payment of PF and ESIC?

Thanks in advance.

Regards,
Alin Ganguly

Dear Mr. Dasgupta,

First of all, I would like to thank you for the reply. However, some points, if clarified, would be appreciated. Following are the points:

1. The payment that is going to be made to the employees will be made only through the piece-rate system.
2. For that, how to manage the Basic and Gross for the payment of PF and ESIC.

Thanks in advance.

Alin Ganguly

Dear Alin,

In this case, as the employees will be on the payroll of the contractor, the contractor needs to ensure that he pays his workmen as per the latest notified rate of minimum wages applicable for the state against the scheduled employment (Commercial Establishment - "Skilled" category).

Even if it is on a piece-rate basis, the contractor has to ensure that his workmen get sufficient assignments to be done so that the total piece rate value becomes equal to or more than the prevailing wage rate. However, your billing with the contractor shall be based on the agreed rate and the total piecework completed by the contractor for the month.

The contractor has to ensure that he also takes care of statutory requirements like PF, ESIC, PT, bonus, etc., even if the payment model is based on a piece-rate system.

Please call me at my number [Phone Number Removed For Privacy Reasons] for a more insightful and detailed discussion on this matter, as the situation demands, and I will be able to clarify all of your concerns.

Regards,
[Your Name]

Mr. Dasgupta,

Thanks for enlightening us on the above-mentioned topic. The contractor is not aware of how to calculate the statutory items. We aim to provide him with an idea in this regard. Is there a common practice to divide the payment in such a way for calculation purposes? As per the ESI Act, the payment shall be made based on the minimum wage, and one whole day's payment can be treated as Gross. Is there a similar rule for the PF, PT, and Bonus Acts? Kindly let me know.

Thanks & Regards,
Alin Ganguly

There is no fixed amount in the piece-rate system to arrive at a monthly fixed rate, and it has always been an issue of debate over the years. Every government officer (PF, ESI, or P.Tax) would apply their logic at the time of inspection, mostly averaging out the earned wages in the last 12 months.

Suggestions for Statutory Deductions

PF - Ensure your contractor deducts PF at ₹6,500 if the earned wages are more than ₹6,500 and on actuals if it's less.

ESI - Ensure your contractor deducts ESI on actual earned wages up to ₹15,000. If the employee continues to earn above ₹15,000 for a period of 6 months, you may discontinue ESIC deduction, and thereafter, even if it reduces, you may consider him exempt.

P.Tax - As per slabs of your state on earned wages.

We are a staffing agency and have contracts with such piece-rate arrangements. We have been successful to date in using the above method and have also satisfactorily cleared inspections of PF and ESI without any challenge.

Regards,
Mehul Joshi
Serve HR Corp. Services

There is nothing in the law to stop you from using a piece-rate system for payment of salary. However, you need to pay minimum wages as applicable to your industry and state.

Both ESIC and PF Acts provide for piece-rate wages. There will be no basic DA and other components in a piece-rate system. So you will need to pay PF and ESIC on the total amount paid. Of course, PF is payable on 6500 even if the actual amount is higher than that.

For computing the ESIC eligibility, you need to check the average of the previous 6 months. If the average is less than 15k per month, they need to be covered.