How Can We Legally Avoid PF and ESI Deductions for Freelancers? Seeking Advice

Please be informed that we are using more freelancers, who account for 40% of our permanent staff in the company. My management has requested a solution to avoid paying PF and ESI for these freelancers.

Could someone please provide me with an answer? If salaries are to be paid to freelancers without PF and ESI deductions, the same should be recorded and accounted for.

Regards,
Deepa HR

Understanding Freelancer Contracts and Tax Obligations

Freelancers are mostly not employees. In most cases, they are independent contractors. Being independent contractors, they will not receive a salary but will raise an invoice for their work and will be paid based on the invoice. Therefore, PF and ESIC do not apply. However, you will be required to deduct TDS (income tax) from all payments exceeding ₹30,000 per year.

Ensure that separate contracts are entered with each freelancer, and PO/work orders are issued. Attendance records should not be kept, and they should not work similarly to employees. They should have the freedom regarding their work hours and should not be under active supervision.

Regards

I still need more clarification on the concept of freelancers. How do we define freelancers versus permanent employees? My company is associated with an American company, and they require us to include freelancers in the payroll. Can PF & ESI be deducted for freelancers, or is there a solution to avoid PF & ESI deductions?

Regards,
Deepa HR

Understanding Freelancers and Permanent Employees

Freelancers are those who are not permanent employees of the company. They work for a fixed period, sometimes for part of the day or week, and are free to work for other organizations or conduct their own business.

In many cases, for tax and labor law purposes, some individuals are shown as freelancers even though they are not working for anyone else or are doing full-time work at the premises. Some lawyers working for companies opt for a freelance/retainer pattern on paper so that they do not have to give up their membership of the bar council.

Attaching freelancers to a payroll sheet creates a problem in the Indian scenario. However, in the cases you described above, it is not a serious matter as they are actually Fixed-Term Employees, not freelancers.

The distinction I was making was more on the Consultant vs. employee pattern, where the person gives a bill for his services and does not draw a salary; he is paid professional fees.

Thank you for your valuable input. I understand that freelancers should not be included in the main payroll. If they are included, we would need to deduct PF, ESI, or TDS. I will discuss this with my management. Thank you for your valuable responses.

Regards,
Deepa

Freelancers and Payroll Considerations

If you show freelancers in the main payroll, they will be eligible for all benefits, including PF, ESIC, and paid annual leave. TDS on salary will be applicable if their salary exceeds the taxable limit.

If you show them as independent contractors or professionals, then they will not be eligible for PF or ESIC. However, you will deduct TDS from the invoices they raise if it exceeds ₹30,000 per year. This TDS will be at a flat 10% of the invoice value.

Understanding ESI and EPF Liabilities for Freelancers

Try to understand, Deepa, two things:

1. If your company does not want the burden of ESI and EPF liability, you can keep such positions on a professional/freelancer basis. But as already discussed herein before, you need to maintain their records separately and not treat them as employees. Furthermore, you need to deduct 10% TDS from their payments. If their professional fees (package) are more than 8 lakhs, everyone has to obtain a Service Tax registration, and you need to pay an additional 12.36% as Service Tax. Additionally, depending on the structure of your organization, if it is a "Co.," then you need to follow the "Reverse Method" under Service Tax.

2. Furthermore, the nature of work assigned to the so-called freelancers should be justifiable. Your organization has to consider all angles, not just ESI & EPF. If you try to avoid or save here, you will lose something or face legal complications under other acts.

There are other legal ways out, but ultimately, it depends on a case-by-case basis. Forums have certain limitations.

I suggest you seek further clarification on this issue from a proper labor consultant and your C.A. because decisions like these can have ripple effects.

If you require any further assistance, please contact us.

Regards,
Pramod Thakar

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Shashwat Ji,

Organization (for which I am working as a freelancer) does not agree with your reply about ESI not being applicable to freelancers. The finance department is asking me to provide the section where it is written. I humbly request, could you please let me know about it.

Regards,
Vinod Kumar Saini

Legal Status of Freelancers in India

As far as I know, there is no legal definition of 'freelancer' under any Indian Acts. Freelancers or consultants like lawyers, tax consultants, CAs, CSs, etc., are treated as consultants and are not employees of the company. They do not come under the purview of statutory compliance mainly because:

1. Freelancers/consultants are independent and possess some special skills.
2. They do not have any specific working hours.
3. They charge based on the amount of work done.
4. They can work for more than one company at a time.
5. They do not receive a fixed salary, but payment is made to them based on the invoice raised by them.
6. They do not need to sign an attendance register, nor do they have to apply for leave.

@Vinod Kumar Saini - Regarding ESI, it is not applicable to consultants/freelancers provided that the above-mentioned conditions are fulfilled. Check www.labourlawhub.com for more information.