ESI Deduction Dilemma: Do We Need to Deduct for Contractors Working Offsite Without Supervision?

Dear Members, Is it mandatory to deduct ESI from the payment of a contractor who has been engaged for job work outside the factory/establishment premises where no supervision was exercised, and the contractor does not have an independent Code No.?

Thanks,
Apurba Mitra

Interesting question. Please provide us with complete details. It is dangerous to answer these questions with assumptions and limited information.

Most Importantly:

- Where is the work being done, and what type of work is it?
- Does it amount to outworking (since that is excluded from the definition of a contractor)?
- Is that place covered by ESIC?
- How many employees does the contractor have, and is he liable for ESIC on his own right?

If the work is being done even outside the factory/unit premises as per the guidelines and specifications of the principal employer, the element of supervision by the principal employer is present. Therefore, such contractor employees are definitely coverable under the ESI Act along with the main factory. However, home workers have not been covered under the ESI Act.

As mentioned by Sh. Saswata Banerjee above, there are many factors to be ascertained since the facts of each case may differ.

Regards,

Work done as per the specification of the company does not, in itself, amount to supervision. If that were the rule, every ancillary unit would be a contractor. So, we need to see if there was any supervision annually, or whether only quality control is being done. A lot depends on the actual facts. At this point, I accept at face value the contention of the original poster that there is no supervision.

Thanks for the responses. Further explanation in this context is as follows:

Job Contract Execution

A particular job contract is given to the contractors. They execute the job through their workers outside the office premises. There is no direct supervision by the principal employer; only the finished job is checked. The work is carried out at different locations in West Bengal. Most of the contractors do not come under the coverage of the ESI Act due to the size of their workforce.

Regards,
Apurba Mitra

From the quoted facts, it is conveyed that if a contractor performing any manual job within the factory premises is definitely covered under the provisions of the ESIC, and the principal employer is bound to ensure compliance. In my opinion, if a contractor is performing job work outside the factory premises, who is not covered or coverable independently under the ESIC scheme and is not totally dependent purely on such job work, no compliance to ESIC is required.

Regards,
P K Sharma

If the contractor does not have an ESI Code No., it is your bounden duty to deduct ESI contributions and pay them to the ESI authorities, either along with your employees or separately in your code along with the list of employees.

Since the contractors are not working in your factory or at a place that is not under your control or ownership, then the contractor is not a contractor as defined under the Contract Labour Act. Please refer to the definition in the act, including the exclusions, to ensure you fall squarely within it.

Since he is not a contractor under the act, you are not responsible for ensuring the payment of wages and statutory dues to the concerned workers. In effect, he is not a contractor but an external vendor from whom you are getting some job work/processing done.

As such, there is no need to deduct ESIC, PF, etc., from the payment made to the vendor.

Dear Sirs, Following the facts as desired by Sh. Saswata Banerjee in his earlier comments have not been replied to by the starter of this thread:

- "Where is the work being done, what type of work is it?"
- "Is that place covered by ESIC?"

In addition, various other questions will also arise, viz.:

1. Whether the contractors take semi-finished articles from the office/premises of the company and after doing some finishing/job work on said goods, return the same to the principal employer. If so, whether there are gate-passes for such shifting of goods. If required by law, whether the contractors have their separate numbers for sales tax, excise, etc.

2. Whether the contractors have their premises where they work, whether the said premises are registered under the shop and commercial establishment Act/rules framed thereunder.

3. Whether such contractors are also working independently for other similar types of units.

4. How the job charges paid to these contractors are being booked/reflected in the accounts books of the principal employer is also important. Whether the said charges are shown as labor charges, wages, etc.?

The coverage/non-coverage of any contractor with the principal employer depends upon the facts of each case separately. It is for the assessing authorities to decide, keeping in view the facts based on verification of records. Therefore, in my opinion, it will be better if the matter is referred to the appropriate Regional/Sub/Divisional Office of the ESIC with full facts and the opinion of the employer for a decision on the issue.

Yes, it is mandatory to deduct ESIC from the contractor payment, but not on the whole bill. Only a part, i.e., labor charges, should be deducted. If there are no labor charges mentioned in the bill, 60% of the total bill amount should be considered as labor charges, and 6.5% of that 60% should be deducted and deposited with ESIC via challan. The circular on this matter is enclosed for reference.

Thanks & Regards,
Sumit Kumar Saxena

Apurba needs to read the document mentioned and notice in full and then figure out where they stand. From what I understand, probably option F or G applies, and therefore the company is not liable to pay ESIC.

As already conveyed, job work done outside the factory or establishment premises through a factory or establishment engaging fewer than 10 or 20 employees, which are not independently coverable, and where no supervision is exercised by those undertaking the work for more than one employer, the employees of such job contractors are not covered under the provisions of the act, and as such, no contribution is payable.

Regards,
P K Sharma

Dear Apurba, In case the "contractor" is supplying your organization with finished/semi-finished materials, why do you wish to cover him under ESI? He is working in a remote location outside your premises and with no day-to-day supervision from your organization. He should only be treated as a "Supplier" and should bill for the materials supplied. He will be governed by the prevailing tax laws.

Take care,

Sourav Mukherjee

Hi APURBA, I agree with Saswatabanerjee because, on a contract basis, they are supplying only finished goods to your end, not employees. Therefore, they will be considered as a vendor. They are not supplying an employee to your company, so there is no need to pay ESI for them.