Are We Liable for PF and ESIC Contributions on Outsourced Engineering Projects?

Liability for PF and ESIC Contributions in Outsourced Projects

Our company is covered under the EPF & ESI Scheme. Recently, due to an increase in workload, we had to outsource our Engineering/CAD projects to other companies (proprietorship concerns). This company has 2-3 employees and is doing this work for us. They also undertake similar engineering projects for various other clients in India. Currently, they are not covered under PF or ESIC as they do not meet the required number of employees. For each project they complete for us, they issue a monthly invoice.

My question is, am I liable for PF or ESIC contributions in this situation? We are treating this as work subcontracted. Is this the correct approach, or should we handle it differently? I wish to avoid paying ESIC/PF unnecessarily for someone whose services we may not consistently require for 12 months.

Please advise accordingly. Thank you.

It depends on how the contract is made. If the outsourcing is like getting something done completely and the making of the same is not carried out on your premises or premises under your direct control, then they may be excluded from ESI and EPF. In such cases, the contract should be "for service" they render for you. Here, there cannot be established any employer-employee relationship between you and the employees doing the work. You may not know who has done it for you. The contractor will be raising a bill which should describe the service as sold to you and should not contain a word like labor charges for doing so and so work. If the arrangement is for doing the labor side, then the picture will be different, and it will be presumed that you have control over the workers, and the manner in which the workers should work is as per your instructions, and ultimately, specific control can be easily established.

In the case of projects connected with Engineering or CAD, the arrangement seems to be like giving an order for a complete/finished product, and the vendor will do it at his office according to the drawings supplied. This is usually a contract for service in which no employer-employee relationship will exist between the person giving the job and the persons who do it. On the other hand, if you engage people to work for you and complete it even outside your office/factory premise, then the contract with the workers will be a contract of service, since they are engaged to do a certain thing, and the workers are expected to do that only. In the former case, no ESI/PF will have to be contributed, whereas in the latter case, you have to.

Regards,
Madhu.T.K