ESI and PF on Director's Pay: Should Companies Pay Yearly or All at Once?

ESI & PF Liability on Company Director's Remuneration - Payment Yearly or All at Once?

It is crucial to understand the implications of paying ESI and PF liabilities on a company director's remuneration. The question arises whether these liabilities should be paid yearly or in a lump sum. This decision can have financial and compliance implications for the company and the director. Proper planning and understanding of the relevant regulations are essential to make an informed decision.

What I understood is, you want to ask whether PF and ESI apply to directors' remuneration? My answer to you is as follows:

As regards to PF:

Directors on salary should also be counted for computation of employees for coverage. Deduction towards PF can be made if he is not opted for excluded employees within the meaning of the Act.

Directors receiving remuneration shall be excluded.

Partners shall be excluded.

Self-employed (proprietor) if receiving a salary, should be counted for computation of employees for coverage. Deduction towards PF can be made if he is not opted as an excluded employee within the meaning of the Act.

As regards to ESI:

In case the MD or any director is paid a monthly remuneration to carry out extra duties, he is treated as an employee. He is counted in the number of persons for coverage (SC in ESI v Apex Engineering 1997(77) FLR 878 and also Hq letter T-11/13/232/20/75-Ins IV dated 04.03.1998).

A partner is an owner of the business. If a partner is paid some remuneration for any special attention for which he devoted, there is no change in his status i.e. ownership, and it brings him within the definition of an employee (SC in ESI Trichurav Ramanuja Match Industry 1985(i) LLJ 69, 1985(66), FLR 108, AIR 1985 SC 278).

A partner looking after business for remuneration of a certain percentage from net profit cannot be treated as an employee (Mad HC in ESI v Ananda Silks Paradise 2008(119) 577, 2008 LLR 1243, 2008(4) LLN580, 2008(i) LLJ 275).

A partner of a firm is not an employee (Ker HC in ESI v Arun Granites 2008(i) LLJ 211).

Self-employed (proprietor) is excluded and should not be counted in the number of persons employed (ESI Hyderabad v Maharaja Bar & Rest. 56, FJR 279).

I request other members to share their comments.

Director's Remuneration and ESI Contributions

A Director of the company is also an employee. If the remuneration paid is within the wage ceiling limit prescribed by the ESI Act, contributions are definitely payable in respect of him. Now that you know the rule position, you have to make the remittance of the contributions on or before the 21st day of the ensuing month, as is the case with other employees. I, as a Social Security Officer of the Corporation, had pointed out such omissions in cases where the Director's remuneration was within the Wage Ceiling Limit prescribed. You should register your director immediately and make the remittances of contributions so that he can also avail all the benefits available under the Act.

Regards,
MURTHY PSVSN
S.S.O (RETIRED)
HYDERABAD
MOB. NO: [Phone Number Removed For Privacy Reasons]

Sir,

Please tell me if PF deduction is compulsory for a private limited company. We have a total of 10 employees, including 2 directors. A large company is requesting a PF deduction sheet from us as we have worked with them. Could you please clarify if this is necessary? Your prompt response is greatly appreciated.

Thank you.

EPF Act Criteria and Provisions

The criteria and provisions under the EPF Act apply to both public and private firms. Registration under the EPF Act is necessary for any unit having ten employees on the payroll or twenty employees (without the use of electric power) on any day during the year. Once registration is complete, you must check who is covered as per the salary/wage ceiling, i.e., Rs. 15,000/- per month. For those earning above Rs. 15,000 per month, this is optional.

If the directors are drawing a salary and are also working and treated as employees, they will also be covered under EPF subject to the ceiling. Your client company will naturally insist on details regarding PF deductions.

We've fixed a salary for one of our directors. It's a private limited company. We need a breakup for Rs. 40,000 per month without the PF and ESI components. Please clarify which breakup components are needed.

Thank you.

Regards, Prakasam

Hi Prakasam, please indicate the following:

1. Is it a partnership firm or a private limited company?
2. Is he an employee?
3. Does he possess any shares of your firm, and if yes, what type? Does he have a share in the firm's profits?
4. Is he entitled to any other perks such as free use of an office car, quarters, health insurance, mobile Wi-Fi net, and other benefits?

If he is considered an employee drawing a salary, leaving other perks as mentioned above aside, he can be fixed as follows:

1. Basic pay at 40% of 40k
2. Dearness allowance at 35% of 40k (if fixed DA commensurate with basic pay and not linked to CPI or WPI as applicable for VDA)
3. City compensatory allowance at 10% of 40k
4. Entertainment allowance at 10% of 40k
5. Other allowances at 5% of 40k

Assumptions: Conveyance and quarters, health insurance, children's education - office account.

Dear Kumar, thank you for the response. Here is the answer to the questions asked by you:

1. It's a private Ltd company.
2. No, supporting the administration and development of the company.
3. Yes, he possesses the shares of the company and the firm's profit.
4. No.

Thank you.

Regards, Prakasam

So, he is not an employee, and hence there need not be any bifurcation of emoluments. You may pay him consolidated remuneration (at Rs. 40k). You should further note the following in this regard.

Directorship vs. Employment

A directorship is an office, not necessarily an employment. If, however, the company enters into a service contract with the director, the terms of which make the Director an employee under the usual common law, then the Director becomes an "employee." Many companies' Directors are in this position.

Exclusion from EPF/ESI

Since you mentioned excluding EPF/ESI, he's anyway outside the limits. But it's only optional. As regards PF:

Directors on salary should also be counted for the computation of employees for coverage. Deduction towards PF can be made if he is not opted for excluded employee within the meaning under the Act. Directors getting remuneration shall be excluded.

Understanding Salary and Remuneration

'Salary' consists of yearly gross wages. An employer can be paid on an hourly rate or a fixed amount on a regular basis, monthly also. Remuneration can include salary, commission, and compensation. Hence, salary and remuneration are one and the same thing, with remuneration being a wider term that includes salary also.

Since Rs. 40k earmarked seems to be within the limits of remuneration provided under the Companies Act, there's no difficulty.

Remuneration Limits Under the Companies Act

The Act provides ceiling limits for remuneration in the case of Public Companies. Here, total remuneration shall not exceed 11% of the net profit of the company. Total returns and remuneration paid to Managing Director, Whole-time Director, and Manager shall not exceed the limits as described under the act.

Maximum Remuneration for a Director

Capital (Rupees) Highest limit for Remuneration to a Director

- Less than 5 crores: 30 lakhs
- 5 crore or more but less than 100 crores: 42 lakhs
- 100 crores or more but less than 250 crores: 60 lakhs
- 250 crores and above: 60 lakhs along with 9.99% of the capital in excess of Rs. 250 crores

These are subject to Adv. Tax/TDS as the case may be.

Also, please go through the attached write-up on the subject, which gives you overall knowledge for better administration.

Dear Sir, our Managing Director has decided to take a salary from January 2021. I would like to know whether PF should be deducted, as he is already receiving a salary from another company. Our company is a private limited company. Our MD is already a member and is receiving payment from that company. Please advise.

Regards, Uma

If he is already a member of EPF in one company, there is no need to deduct PF contribution again in another company. Please avoid it to prevent any confusion.

Thank you.