Understanding ESIC Liability for Contractors: How Is It Calculated for Short-Term Assignments?

Many times, contractors do in-house work based on Work Orders/Job Orders wherein they have to complete a given assignment as per negotiated rates. Since they bring their employees inside company premises, the company is liable to pay their ESIC (either through their own ESIC code or the contractor pays through his ESIC code, if he has one).

ESIC Liability Calculation

But my question is how will the ESIC liability be calculated:

1. Will it be calculated on the monthly salary of the employees, and what if they have been hired only for that assignment and paid for a few days only? OR

2. Will it be calculated as a percentage of the bill amount?

3. Is there any provision in the ESIC Act or any court ruling to calculate contributions in such cases?

The above question is important since the principal employer can easily calculate the ESIC liability in cases of manpower contractors depending upon the salary paid to them, but there is confusion for contractors working on a job/assignment basis.

Thanks in advance for your responses.

ESI Calculation for Contractors

ESI, in any case, shall be calculated based on the actual wages paid by the contractor to their employees engaged at your plant. In this scenario, the principal employer must obtain a wage sheet from the contractor and ensure that the deductions, as per the Act, are made and remitted. If the principal employer issues a job/service bill without specifying the wage component, contributions should be based on the total amount. If records of supervision costs are unavailable, 60% of the total bill will be considered as qualifying for ESI contribution.

This process determines the liability of a principal employer after the contract concludes and the contractor has left, making it challenging for the principal employer to ascertain the wage portion of the contract amount. It is essential to note that this assessment is one-time and not recurring. Therefore, before engaging a contractor, the principal employer must ensure that the contractor provides a statement of salaries paid or a bill with a clear labor cost breakdown.

Regards,
Madhu.T.K

Dear Madhu Sir,

You mentioned that 60% of bills should be considered for ESIC contribution. Is there any provision in the Act or any court ruling to support this?

I would greatly appreciate your response.

Thanks

Is the same method used for calculating PF contributions for work orders/job orders manpower? Thank you.

Understanding ESI Contributions for Contractors

ESI is a beneficial Act, and ESIC aims to provide benefits to employees of contractors as well. When an employer engages a contractor, the contractor should have their own ESI code and deduct ESI contributions to send them to ESIC. If not, they must submit their records of wages and general ledger for the satisfaction of the ESI Inspector. ESIC will then charge contributions based on the wages shown. If the records are not proper or acceptable, or if there are no records, ESIC will make an assumption about the amount of wages. This assumption cannot be challenged because the contractor does not have the records.

The principal employer should not pay the contractor in full. The principal employer should withhold an amount to pay ESIC. If ESIC claims a lesser amount, the balance can always be refunded to the contractor.

Regards, Vibhakar Ramtirthkar.

Provision for Wage Statement in Contractor Agreement

There shall be a provision in the agreement with the contractor that on a monthly basis, he should provide a wage statement of his employees working in the principal employer's premises. Otherwise, payment will not be released. Sixty percent of the bill amount shall be considered as wages, and 6.75% of it shall be deducted as a contribution. Other than ESIC's circular, there is no provision in the Act.

Regards,
Varghese Mathew

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