Seeking Advice on ESI Application for Cash Payments to Contractors in Karnataka

I have recently joined a manufacturing unit in Karnataka, established in 2008. For the material (glass) unloading, the company is paying in cash to the local contractor (No ESI Registration). The unloading of material requires 2–3 hours, 5–7 workers, and wages paid are Rs. 6000 per trip. (Minimum 1 trip and maximum 3 trips in a month depending on the requirement.)

ESI Application Advice Needed

So, kindly advise regarding the ESI Application.

Regards

ESIC shall be applicable to the loading and unloading nature of work, regardless of how many times you perform these tasks. It is applicable to the total billing at the standard rate. Furthermore, it is applicable even if you have the work done through the Mathadi Kamagar Union.

Regards,
Tushar Swar

You can advise your contractor to maintain an attendance and payment of wages register for the laborers doing loading and unloading work. Also, deduct and pay the ESI contribution as per the applicable rate. Otherwise, you will be required to pay the contribution on the total amounts at the rate applicable as per ESI Central Rules.

If Rs 6000 is paid for one trip for which 6 persons are normally engaged, then the daily rate shall be taken as Rs 1000. Following the notional wage concept adopted by the ESI Corporation to arrive at the monthly wages of daily-rated workers by multiplying the daily wages by 26 and deciding their coverage based on this notional wage per month, these unloading workers will become out of coverage because their notional wages will be Rs 26,000 for a month, which is above the ceiling fixed under the ESI Act/Regulations.

Regards, Madhu.T.K

Thank you for the quick reply. I understand that ESI is applicable for loading and unloading. My question is regarding the per day wages for Karnataka, which are Rs. 221.17, and the company is paying between 850 to 1200 per day. So, I am unsure whether ESI is applicable in this case or not.

ESI Applicability on Wages

Secondly, if ESI is applicable, should the company pay the 6.5% ESI from 2008 on the total unloading charges, or should they pay only for the current year? (There has been no ESI inspection since the date of enrollment.)

Thank you.

The contractor is appointed by the third party, i.e., the supplier, and the contractor is not willing to maintain any attendance and payment of wages register. This is because he has fewer than 10 workers, and all his workers are daily wage workers, not permanent workers. Our company is only responsible for unloading materials on our premises. Additionally, if necessary, my management has no issue with paying ESI on the contract part to avoid any penalties.

Thank you for your valuable suggestion.

Regards.

Dear Members,

Thank you all for sharing your views on the important issue concerning loading and unloading work and its coverage and compliance under the ESI Act. No doubt the company may be interested in getting the work done and also making compliance by depositing contributions at 6.5% on the total amounts of loading/unloading charges. However, Mr. T.K. Madhu, Super Moderator, has also raised a very important point regarding whether, considering the wage ceiling, such employees will be covered since they receive wages exceeding Rs. 1000 per day.

In this connection, it is submitted that the individuals performing loading/unloading work generally work in groups and are low-paid employees. Even presuming that such employees are paid highly, efforts should still be made to cover or uncover them under social security schemes based on the proper maintenance of records. Sometimes, serious accidents occur even when performing such loading/unloading work.

Even if you do not deduct ESI contributions (based on the fact that these employees receive wages exceeding the wage limit), it will be up to you or your company to prove during the verification of records that these employees were indeed paid wages exceeding the wage limit and were not coverable under the Act. My suggestion regarding the maintenance of the Attendance and Wages Register of such employees was with the idea that without proper maintenance of attendance and wage records of these loading/unloading casual workers, a covered factory/establishment may not be able to explain the correct position to the inspecting authority during record inspections. Furthermore, if any accidents occur during loading/unloading work, the interests of both the employer and the injured person should be protected, ensuring that the worker or their dependents receive due benefits in case of any serious accident.

The factory/establishment may already be maintaining some records of its employment and wage payments. In my opinion, it would be equally important for either the principal employer or the contractor to maintain such records (even if for a few casual workers and for a limited duration) and keep them in the office itself (not with the contractor) to demonstrate proper compliance with social security enactments. When the contract work is completed and the contractor is no longer available, there may be no alternative but to pay the contribution on the total amounts of such loading and unloading charges.

I would also like to point out that persons engaged need not necessarily be persons employed. There is a difference between persons engaged and persons employed. The Punjab and Haryana High Court has observed in Employees State Insurance Corporation v. Malhotra and Co., Chandigarh, (1981 Lab I.C. 475), that “a clear distinction must be made between a casual worker and a person engaged for a specific item. The distinction is between employment and an engagement. If a person is engaged casually for a process unconnected with the operations of the establishment or some work which does not form an integral part of such operations, he will not be an employee. There is no relationship of employer and employee. The employer has no control to take disciplinary action. He would only be engaged for the purpose.”

Further, in Regional Director, E.S.I. Corporation v. P. R. Narahari Rao, (1986 Lab I.C. 1981), the Kerala High Court has clarified that where an employer has no control over the persons engaged, like reporting to duty at a specified time, obtaining permission for taking leave, etc., and when the persons engaged are free to take up other activities when they are not engaged by the employer (that is to say, after the work of unloading they can go and take another work and they are not expected to spend the whole day in the employer’s premises once engaged for the day), they will not come under the definition of employees.

Notification of ESI Corporation about notional wage is also attached for your reference.

Regards,
Madhu.T.K

Dear All, Once again, Mr. Mehta and Mr. Madhu, thank you for your feedback. I always thought our statutory compliances were quite clear and that there was no grey area. However, after receiving valuable input from members, I'm more confused. Finally, my management accepts the social responsibility towards these workers. We are planning to maintain a register from our end and also divide the wage charges into two parts: actual wages paid and contractor service charges, so that workers can be covered under ESI. However, the contractor is not willing to provide any proper bill, and all the payments will be in cash. Please advise on any other legal aspects that should be taken care of in this case.

Thanks and Regards