Is ESI Registration Necessary for Our Software Company with Few Low-Earning Employees?

Can anybody help me regarding the applicability of the ESI Act for our company? We are a software development company incorporated in the year 2009. Currently, we have about 95 employees on board, but only 4 employees are drawing less than ₹15,000 per month. Do we have to register with ESI, and if so, what is the procedure? Is there any penalty for not applying earlier?

Thank you.

Coverage Under the ESI Act, 1948

For coverage under the ESI Act, 1948, and the rules and regulations framed thereunder, the coverage eligibility starts immediately when the factory employs 10 or more "persons." Such coverage is required only if the factory is situated in a place/area where the Central Government has extended the provisions under section 1(3) of the said Act.

There is no requirement for a minimum number of employees earning wages up to Rs. 15,000 per month for the coverage of a factory under the said Act.

If the unit in which you are working is located in an implemented area where the provisions of the above Act have been extended under section 1(3), then it will be covered from the date it employs 10 or more persons. Contributions, including interest, will be required to be paid for coverable employees only, if any, from the date of coverage. Damages will also be required to be paid for delayed deposit of contributions.

Therefore, in the interest of the unit, your management may contact the nearest Social Security Officer, Branch Office Manager, or appropriate officer of the Regional/Sub/Divisional Office of ESIC for coverage under the said Act.

Regards.

Yes, you have to register your establishment under the ESI Act as you have crossed 10 employees. It doesn't matter how many are coverable employees.

ESI Act Applicability for Software Development Companies

The Software Development Company is not a factory within the meaning of the ESI Act read with the provisions of the Factories Act. It will fall under an establishment employing 20 or more employees. However, whether the establishment is located in a scheme-implemented area is another question. There are only 4 employees drawing less than the salary limit. Others drawing more than Rs. 15,000 cannot be counted for the applicability of ESI. Then, how is one required to register the establishment under ESI? This is the question I am also seeking an answer to.

Regards

I have found your views above, specifically (a) "the Software Development Company is not a factory within the meaning of ESI Act" and (b) "Others drawing more than Rs.15,000 cannot be counted for applicability of ESI," not in line with the spirit of the ESI Act, 1948 as it stands today. May I kindly request you to elaborate on your views so that I can update myself accordingly.

As per my understanding, software development is a manufacturing process. To classify a factory under the aforementioned Act, there must be 10 or more persons working in the factory.

Thank you.

Regards

In the ruling in The Assistant Director, ESIC v. M/s Western Outdoor Interactive Pvt. Ltd. & Oth, while determining the applicability of the ESI Act to a software company, the Bombay High Court took the view that software development is a manufacturing process, and the premises where computers are involved in such a manufacturing process is a factory for the purposes of the ESI Act.

However, this judgment is unlikely to have a significant effect on the coverage of software establishments since most of the states have already issued notifications covering various 'shops' and/or 'commercial establishments' within the scope of the ESI Act, and most IT/ITeS establishments are therefore already covered.

It seems you are either from Maharashtra, HP, or Assam, and you are following the law in force or in practice in your state for shops and commercial establishments. Please note that ESI law in other states regarding its applicability to shops and commercial establishments is different. This issue has been discussed in this forum on a number of occasions.

Regards

Dear Shri. Korgaonkar,

The Software Development Companies (SDCs) and IT Companies are establishments, and if they employ 20 or more persons, they are generally under the ESI Act, except in cases where certain states have granted exemptions for a year or so. As you have rightly stated, most of the SDCs and ITs are covered under the ESI Act.

It is nice that you mentioned the solitary judgment of Justice Mrudula Bhatkar of the Bombay High Court in the Western Outdoor matter passed in 2012. In this judgment, as you said, software development has been held as "manufacturing," and such SDCs having computers installed and used for Software Development are held as "factories." If we read the judgment, we will know that the Court has liberally interpreted the term "manufacturing process" to bring the SDCs into the fold of ESI. The Court observed that there is a difference in the definition of "factory" in the two acts, and the benefit of "Explanation II" found in the Factories Act cannot be given to the definition of "factory" found in the ESI Act.

However, division benches of the High Courts of AP and Madras had taken a different view.

In spite of the said judgment, I am a bit reluctant to accept that software development would mean manufacturing and SDCs are factories. No doubt, the advancement of technology is day-by-day giving newer meanings, and we are required to redefine old concepts and ideas. Who knows, tomorrow, intellectual work such as novel and poem writings, music composition and orchestration, architectural designing would mean "manufacturing," and making such things would mean "factory."

Thanks and regards, and wishing all a happy new year.

Regards,
Adv. K. H. Kulkarni.