Confused About ESI for Variable Salaries Under 15,000? Need Guidance on Managing This!

I was computing ESI for the staff in my company. For marketing staff, we have a profit-linked allowance based on net sales.

Queries on ESI Computation

I have queries on two grounds:

1. If the variable portion is part of wages for ESI computation.

My related searches below imply it to be part of wages, although I have heard it is not part of wages for ESI calculation. If I am not wrong, the line of demarcation is on a two-month basis. In our case, where the profit-linked allowance based on net sales is on a monthly basis, it will be, although elsewhere it has been prescribed that the variable portion is not part.

2. If it is not a part, there is no issue. But if it is a part, then there is one more issue: how do we manage the ESI? At the time when the total salary (i.e., fixed pay portion and variable pay portion) is less than or equal to 15,000, ESI becomes applicable, and when it exceeds 15,000, it will not be applicable.

As far as I know, this is not practically implementable that we pay at the time (when <15,000) and skip another time (when >15,000).

Can someone guide me on this issue?

================================================== =================

Links are:

CONSTITUTION OF WAGES UNDER THE EMPLOYEES STATE INSURANCE ACT, 1948 - heading: sales commission

Handloom House Ernakulam vs Regional Director, ESI on 29 April, 1999 (Case Study)

Employee's State Insurance Corporation - heading: incentive bonus

Regards.

With reference to the issue raised by you regarding the coverage of profit-linked sales allowance as wages under the ESI Act, 1948, it is submitted as follows:

1. You have not indicated how such sales commission is assessed/calculated. If it is calculated every month, then it is considered part of wages, and contributions are payable under the said Act. It is also not mentioned whether the payment of such sales commission is a part of the terms and conditions of employment for marketing salesmen.

2. While calculating contributions to be paid under the ESI Act, the amount of sales commission is to be added to the wages obtained in respect of an employee in a month. If, after adding sales commission in the first base month of the contribution period, the employee's wages exceed Rs. 15,000, then the employee can potentially be exempted. However, if the total wages, including the sales allowance, fall back to Rs. 15,000 or less in subsequent months, the employee will be coverable again, and contributions will be payable for the rest of the contribution period on the total wages, including the profit-linked sales allowance. Please refer to Section 2(9) of the said Act read with Rule 50 of ESI (Central) Rules, 1952.

If you have any doubts and to err on the side of caution, I suggest you take up the matter with the Regional/Sub/Divisional Office of ESIC in your area, providing complete details of the profit-linked allowance on net sales along with your views for approval.

As I mentioned, the sales commission is based on sales turnover, pro rata, which does not exceed the total salary (fixed pay and variable pay). This is computed monthly and paid as per the terms and conditions explicitly stated in the Appointment letter.

Implementation Process Concern

My concern is regarding the implementation process. In the first month, ESI is to be paid. However, in the following month, when the total salary (fixed pay + variable pay) exceeds 15,000, ESI becomes payable. Is it feasible to pay ESI in the month when it becomes payable and not pay it in the month when it is not payable? Is there a way to avoid this discrepancy?

Please advise on how to address this issue.

Thank you.

Regards

I would appreciate it if you could shed more light on this. I have also learned that there are two quarters: April-September and October-March. If the base period has a salary less than 15,000, then ESI is applicable for that half-yearly period. If the base period has a salary greater than 15,000, then it is not applicable for that half-yearly period.

Application Within a Two-Month Period

Kindly elaborate on the application within a two-month period and also if there are any other options available.

Regards

Please refer to the ESIC Portal where you will get a detailed idea for your above-mentioned query. In my view, ESIC contribution will be applicable on sales commission paid every month, whether the gross salary crosses the limit of Rs. 15,000/- per month.

Case Law

Please refer to the below case law: Sales commission received by employees once a month, which is additional remuneration paid at intervals not exceeding two months, would attract contribution under the Act. Gem and Company, Madras v. ESI Corporation, Madras - 2000 (3) LLN 310.

Your doubt is specifically answered by the proviso to Sec. 2(9) of the ESI Act, which states that an employee whose wages (excluding overtime) exceed Rs. 15,000/- per month after adding sales commission, at any time after the beginning of the contribution period, shall continue to be covered as an employee till the end of the contribution period. Thus, if an employee's wages exceed Rs. 15,000/- per month after adding sales commission in the month of May, he will continue to be covered till the month of September. By this, you will mostly avoid the dilemma of coverage.

Regards,
B. Saikumar
In-House HR & IR Advisor