Is It Legal for Companies to Calculate ESIC Based on Basic Salary? Seeking Advice

Dear Friends,

One of my friends is working as an HR Executive in a LIMITED firm. He wants to know if his company has made some changes in salary processing and its contributions. They are calculating ESIC contributions (Employer and Employee) based on the BASIC salary. Is this correct? If not, how can he take legal action against the company?

Please provide the details in depth.

Regards,

ESI Contributions and Salary Components

ESI is to be contributed based on the total salary. Only traveling expense reimbursements and washing allowances do not form part of the salary for the purpose of ESI. Therefore, the new practice adopted by the company is wrong. As an HR person, you have to advise the employer on what is correct.

I don't think that you need to take any legal action against the employer. You may just advise the management that during an ESI audit, the ESI will object to this new practice. In such an instance that may occur in the future, we will have to contribute on the omitted wages together with interest. In such a scenario, we will not be able to recover whatever we could collect from the employees.

Regards,
Madhu.T.K

In addition, you could also get the notification which states that ESIC is to be calculated on the total (gross) salary and ask your management to provide any such notification that mentions that ESIC can be calculated on Basic+DA (which could justify their action). It is always better to have written proof that supports your words and actions. Explain to the management that now the employees are becoming aware and conscious, especially when it is about their compensation or any benefit they are entitled to. At times, employees could even ask for a written statement about the deductions. So it's better to be prepared.

ESIC Calculation on Gross Wages

ESIC has to be calculated only on the Gross (Total Wages Paid). This includes the OT wages too. However, the ESIC payable excludes the washing allowance. Please document this and present it to the management. Make the management aware of Sections 84, 85, 85-A, and 86-A of The ESIC Act, 1948 to ensure they understand their obligations.

Regards,
Yashwanth R

The term "wages" has been defined in many statutes in various ways. Section 2(22) of the ESIC defines wages in an entirely different manner for contribution purposes.

"Wages mean all remuneration paid or payable in cash to an employee if the terms of the contract of employment, express or implied, are fulfilled. This includes any payment to an employee for any period of authorized leave, lock-out, strike (which is not illegal), or layoff, and other additional remuneration, if any, paid at intervals not exceeding two months. However, it does not include PF contribution by the employer, any traveling allowance, gratuity payable on discharge, or any sum paid to the employee to defray special expenses entailed by the nature of employment."

An analysis of the definition of wages under section 2(22) of the Act reveals that it consists of four parts.

Parts of the Definition of Wages

The first part refers to all remuneration paid or payable in cash to an employee if the terms of the contract of employment, express or implied, are fulfilled. The second part includes any payment to an employee for any period of authorized leave, lockout, or strike which is not illegal, or lay-off. The third part includes other additional remuneration, if any, paid at intervals not exceeding two months. The fourth part excludes any contribution paid by the employer to any pension fund, traveling allowance, or any sum paid to defray special expenses entailed by the nature of employment, or any gratuity payable on discharge.

It will be seen that the above definition starts with the words "all remuneration," which has been attracting controversy, particularly when it does not clarify which allowances or perks will form part of the wage. Although the definition is both inclusive and exclusive, this issue has repeatedly gone to courts for interpretation in numerous cases. The ESI Corporation has clarified the term from time to time, including in Memorandum No 11/13/94 - INS IV dated 201-11-2000. Still, it cannot be said to be exhaustive. With the passage of time and fast changes in the industrial relations scenario, many allowances have been introduced to employees as welfare measures.

This means the remittance for ESIC needs to be done on the gross salary by excluding certain components exempted by the ESIC, i.e.,

- Washing Allowance
- Incentive bonus
- Annual bonus
- Annual Commission
- Production bonus - when paid at intervals not exceeding 2 months as distinguished from being payable
- Canteen subsidies
- Service charges
- Newspaper allowance - where the cost of newspapers is reimbursed to the employees
- Saving scheme
- Payment made to labor consultants, lawyers, engineers, counsels, chartered accountants.

This practice is not acceptable as it involves saving on expenses through illegal procedures. However, the company may try to justify it during an ESIC audit.