Navigating ESI Coverage: How to Handle Contractor Insurance Dilemmas in Manufacturing?

I am working in a Manufacturing Industry (PSU) in West Bengal. My company is covered under the ESI Act. However, as all our permanent employees' gross salary is above Rs. 15,000, and our company provides better medical benefits, our permanent employees are not entitled to ESI for the last few years. However, for contract workers, we ensure that all have ESI coverage. In recent times, I have faced two issues with two different contractors for which I require guidance:

Issue 1: Contractor for Plumbing and Electrical Work

A contractor is to be engaged in plumbing and electrical work. That company/firm is not covered by ESI (they are from Goa); rather, they are covered under the Employee's Compensation Act. In this case, as getting ESI registration will take time, they requested to accept the coverage of their workers under the Employee's Compensation Act instead of or as a substitute for ESI.

Issue 2: Vendor Providing Cars and Drivers

Another vendor/contractor is providing 4-5 cars along with drivers to our company. In this case, does this contractor need to register for ESI (number of workers is below 10), or may they cover those drivers under the Employee Compensation Act or insure the drivers under the Motor Vehicles Act as a substitute for ESI.

Regards,
DG

Answer to your question 1:

Liability of Principal Employer (PE) for Contractor's Employees

The PE is liable to cover all coverable employees entering his premises/establishment. Therefore, it is his duty and responsibility to ensure proper compliance with the law. If a contractor does not have a code, then the PE should cover the employees of such a contractor under his code and comply accordingly. Provisions of the Employee's Compensation (EC) Act will not operate in such a case since the Employees' State Insurance (ESI) Act is applicable.

Answer to your question 2:

Coverage of Drivers under ESI

It is your duty and responsibility to cover the drivers under ESI. You should ensure proper compliance. Provisions of the EC Act will not operate as mentioned above. Motor Vehicle insurance is third-party insurance, and the drivers are not covered. Since the ESI Act is applicable to you, no other insurance will substitute your coverable employees.

Regards,

Dear DG,

Answer for Question 1:
As per Sec.2 of the ESIC Act, as a Principal Employer, you have to cover all employees who come under ESIC. If the contractor doesn't have an ESIC Code, the Principal Employer should remit the contributions through your code, or you can approach the ESIC Sub Regional Director/Branch Manager to exempt ESIC for contract workmen if, in case, your contractor is ready to provide better benefits than ESIC.

Answer for Question 2:
The answer to question 1 is applicable to the second question also.

Regards

Dear K. Ramesh ji, Your above quote is in addition to my answer. Can you or anybody else tell me:

(i) How many contractors have been granted such exemption by ESI so far?; and/or

(ii) Can you name a single contractor who has been granted such exemption?

ESI Coverage Responsibility

In respect of persons engaged at our plant by your Goan-based contractor, you have to ensure ESI coverage. Coverage of the Employees' Compensation Act is not a substitute, but it should be understood that the application of the ESI Act is a substitute for workmen's compensation/employees' compensation. It is the responsibility of the employer to pay compensation as per the WC Act, whereas the ESI Corporation takes up the liability of paying the compensation for those insured employees. Therefore, it is primarily your responsibility to ensure that all those who earn below 15,000 are covered by ESI, irrespective of whether the employer (contractor) has taken a WC Policy or not.

Contract for Service vs. Contract of Service

The provision of taxi or cab service with drivers is not a contract of service but a contract FOR service, in which the service provider is like a vendor/seller who sells his service and bills. The relationship between the company and the travel agency is that of a buyer and seller, and no provision of the CLRA Act will be applicable. Hence, we need not take care of the drivers' ESI or Workmen's Compensation policy. If an incident occurs, it is the responsibility of the travel agency to handle it, whether under MACT or ESI. As an establishment, perhaps it may also come under the purview of the ESI Act, and the drivers may be covered employees. If so, let them receive the benefits from ESI; we don't have a say in it.

Regards,
Madhu.T.K

Understanding Contract for Service and Contract of Service

The concept of a Contract for Service and a Contract of Service is a bit confusing, and I need some guidance. Nowadays, most of the contracts issued by our company are job contracts/work contracts, and hardly any labor contracts are issued. Please advise if all such job contracts are contracts for service because they only mention the volume of work and do not specify the number of labor engagements.

Regards,
DG

Understanding Contracts for Service vs. Contracts of Service

If you give a contract for doing a particular work and the process involved is carried out outside your factory, then it may be a contract for service provided certain other conditions are satisfied. First, the person for whom the product is being processed does not have any control over the workers, the process involved, or the time schedule the workers should follow, etc. He can only inspect the final product or conduct quality checks whenever required. In some cases, the material will be purchased by the contractor, and the employer can only check whether the material conforms to his specifications or not.

At the same time, if job work is given with materials and the workers are doing the process within the factory premises as per directions given by the employer or his persons/supervisors, then it shall be deemed as a contract of service. Here, the workers engaged by the contractors are indirectly employed by the employer and are doing their job as per the factory timings fixed by the employer, taking weekly offs as per the weekly closure day fixed by the employer, using the infrastructure like restrooms, canteen, drinking water, etc., as provided by the employer, and they are carrying out their work using the power supplied by the employer. This is a contract of service, and the contractor is supplying the service of a human being which the employer can utilize as per his requirements. In depth, of course, there are other parameters, but all these are just to see whether the contract is a sham or not, and the underlying principle remains the same, i.e., what is the relationship between the two, whether agent-principal or servant-master.

Not mentioning the exact number of manpower required in the contract is just an attempt to say that the contract is genuine, but in practice, we should state how many are required and at what rate of wages they should be deployed. That will not make the contract a contract for service.

In the case of a tie-up with a travel agent for engaging drivers with a vehicle for the company's purpose, it will be a total service that is offered and not that we hire a vehicle and we fill fuel and just take the service of a driver from outside. In the latter case, certainly, the contract to supply human resources (driver) is a contract of service and will come under the purview of the Contract Labour Act.

Regards,
Madhu.T.K

Your response in this thread, I read it very carefully. I will not dare to differ with you, Sir. I am aware of your knowledge, your profile, and your contribution. However, I feel you should review your below-given quotes.

I agree with your following quote if the contract is a contract for service. Also, the outside work factor plays an important role in this.

I feel MACT will not operate for injury to drivers.

Overview of the Employees' Compensation Act

The Workmen's Compensation Act, renamed as the Employees' Compensation Act, was enacted in 1923, probably the first social security legislation. The principal Act provided for the payment of compensation to employees who suffer injuries during the course of employment. The Act also provided for compensation to workers contracted by certain occupational diseases. Initially, it was solely the employer's responsibility to pay compensation in cases of injuries, death while on duty, and occupational diseases.

With the passing of the Employees' State Insurance Act in 1948 and the formation of the ESI Corporation, the above liability of the employer has been taken over by the ESI Corporation in return for a regular contribution. Along with workmen's compensation, the ESIC absolved the liability of maternity benefits payable to female employees. All these are based on certain conditions, such as ESIC bearing the liabilities only for employees drawing a certain amount of wages, a ceiling on the compensation payable, and a minimum contribution paid to the Corporation on behalf of the employee. Due to this, for employees not covered by ESI, the responsibility of compensation payment remains with the employer. Also, for a woman employee covered by ESI but not qualifying for maternity benefits due to insufficient contribution days (70 days in two contribution periods), the employer is still liable to provide maternity benefits following the Maternity Benefits Act. This is akin to an insurer taking over another person's liability in return for a consideration called an insurance premium, subject to certain conditions regarding the number of premiums paid.

Since the ESI Act has been made mandatory, without which an establishment with a certain number of employees (10 as of now) cannot operate, we follow that Act for those required to be covered (those drawing a salary of not more than Rs 15,000 at present). To make funds available for expenses or compensation payable to others not under ESI cover, we will tie up with other agencies, like LIC, under different terms. Therefore, both these Acts will run simultaneously, but the ESI Act is enforced strictly, and every employer is expected to follow it without fail.

Since the cab service comes under a contract for service, I don't think we should delve into minute details of the applicability of ESI or other Acts. Regarding MACT, I am not sure if the driver is excluded. If so, we all will be in trouble because most of us are drivers too for our own cars!

Regards,
Madhu.T.K