How Should We Handle PF and ESI Compliance for Contractors Without Codes?

Request for Guidance on Statutory Compliance Issues

1. My Company (a PSU in the manufacturing industry) outsourced transport services starting in July 2013. As per the terms and conditions of the respective tender, the transporters are required to comply with the provisions of relevant statutes, i.e., Minimum Wages, PF, ESI, etc.

2. Contractors were awarded the contract based on their undertaking to obtain PF & ESI codes shortly. However, after receiving the work order, these contractors were reluctant to furnish documents supporting compliance with PF and ESI, as they stated they did not possess the PF & ESI codes.

3. In the meantime, following an Audit Observation, Management decided to deduct and withhold the applicable PF & ESI contribution amounts from the contractors' bills.

4. After prolonged persuasion, the contractors agreed and obtained a PF code from November 2014. It also appeared that these contractors were covered under the ESI code at the time of the contract's commencement (since January 2013).

5. In the present scenario, the contractors are depositing ESI from the beginning, i.e., July 2013, but the amount of deduction is less than estimated (as it is not deducted at par with minimum wages). Regarding PF, these contractors have started depositing PF contributions from November 2014. An amount equivalent to PF & ESI contributions for the period from July 2013 to October 2014 has already been deducted from the contractors' bills and withheld by the Accounts department.

Solicitation of Opinions on Possible Actions/Measures

(a) As the Transport Contractors did not have PF codes allotted in their firm's names prior to November 2014, they are unable to deposit the PF contributions for the period between July 2013 to October 2014. My Company has deducted an amount equivalent to the PF and ESI liability of the contractors for the non-coded period, i.e., from July 2013 to October 2014, and retained the money as my Company cannot deposit the same in the contractors' code and also cannot directly deposit it to PF authorities. In no way can the contribution for the past period be deposited by the Contractor either. What will be the viable and possible course of action to ensure compliance with PF for the non-coded period?

As our Company is also not interested in holding the amount deducted on account of PF contribution amount recovered from the contractors, what is the right course of action open to my Company (Principal Employer) for statutory compliance?

(b) For Contractors who had an ESI code since the commencement of the contract, what possible options are available for statutory compliance of ESI, and whether the deducted money or part thereof may be returned to the Vendor?

Regards,
DG

Steps for Ensuring Compliance with EPF and ESI Regulations

1. In my opinion, you can ask your contractors, when they have their separate code/registration numbers under EPF & ESI, to get their records and accounts inspected by EPFO & ESI appropriate authorities for the period of dispute. They should make compliance accordingly in respect of any objections raised as a result of such inspections.

2. You can also inform the above authorities of the issues mentioned in this thread and ask them to conduct an inspection of your accounts, including the accounts of contractors. After such inspections are completed, comply with their objections accordingly. I think, in this way, you can protect the interests of your establishment. However, the delay in such compliance will also result in the levy of damages, interest, etc., as expected due to the delay in compliance under the above enactments and rules/regulations framed thereunder.

Regards

Yours is one of the very few complicated cases that I have come across to date, but it is quite interesting. Considering the fact that there are more parties involved in this offense and issues due to procedural aspects, I suggest you meet the AC of your group at the Regional PF Office and appraise him of the situation. See what he has to say in this regard and follow his advice. Please let me (and the forum) know the outcome of your discussion with the AC so that we all are informed about what needs to be done in such a scenario. Thanks and all the best.

Regards,
A.B.

I also agree with the above two statements of Harsh and A.B. You can approach the right authorities in PF (Assistant Commissioner) and ESI (office manager) for the same and make them aware of the scenario. They will definitely conduct an audit, post which whatever is required as per their suggestions needs to be implemented. This is the best solution for your case. Please share with us whatever happens.

I would like to correct Mr. Harpreet Walia (with reference to his remarks as above) that the appropriate officer in ESIC relating to revenue and inspection matters is the Deputy Regional Director or Regional Director of the Regional/Sub-Regional Office of ESIC to which the unit/factory is attached. The Branch Manager of ESIC has nothing to do with revenue matters. The Branch Manager is the appropriate officer relating to the registration of employees, their identity cards, and the payment of benefits to the insured persons, etc., only. Inspection of records of any unit is to be conducted by the Social Security Officer (SSO) of the area on the directions of the appropriate Regional/Sub-Regional Office authorities as mentioned above.

Regards

Understanding Employer-Employee Relationships in Transport Contracts

Basically, I do not find any employer-employee relationship between you and the crew of the transport company. As such, I do not think that the question of ESI and PF will arise in your case. My feeling is that your contract with the transporter(s) is a contract FOR service and not a contract OF service. In the latter, one person (contractor) agrees to engage some workers to work for the principal employer. In such a case, the workers engaged are indirectly controlled by the employer, and the amount is fixed based on the output given by them or the rate of wages agreed upon. Here, the workers come to your plant and do their work using your fixed assets/equipment and raw materials.

In the former case, it is an arrangement whereby a person (transporter) agrees to transport certain things in return for a price per kilometer. For discharging the service, he is using his own vehicle (or one hired by him, the cost of which is paid by him only). He himself fills fuel, carries out maintenance, and pays wages to the driver and others. You do not know who the driver is or who will come today or tomorrow. You are paying for the services the transporter is providing for you, and the payment you make is not salary or wages. If we start paying ESI and PF for all such services, we will have to pay it for taxi hire charges as well.

Significance of ESI and EPF on Transport Charges

In view of the above, what is the significance of the attraction of ESI and EPF on such charges? It is okay if the scenario is such that you have vehicles and the agency/contractor sends drivers who will work as per your plan, you fill fuel and take care of the maintenance of the vehicle, and at the end of the day/month, you pay the wages to him (plus some service charges to the transporter who engages the drivers). In such a case, you know who is engaged for today, and it is certain that he will work only for you on that day. He is indirectly controlled by you. But in the former case, you do not have any relation with the driver/crew because they are just like call taxi/truck drivers who are paid an amount calculated based on kilometers or some other terms. This is a case of Contract For Service which is outside the scope of the Contract Labour (R&A) Act also.

Regards,
Madhu.T.K

Dear Mr. Saptarshi,

I agree with the above two statements of Harsh and A.B. After PF inspection, they can pay PF contributions from July 2013 to October 2014. The Inspector needs to mention in his report that the contributions from July 2013 to October 2014 are pending, and the total amount of contribution. Only then can the contractor pay the balance amount. The Inspector also needs to mention the PF applicable date as July 2013, depending on the verification of the Transporters' documents.

Best Regards,
Praveen B

I agree with Mr. Madhu T.K. Basically, the drivers are not entering your premises. They are picking up your staff/workers from certain points to your factory and back. As such, I don't think ESI is your liability. Similarly, for PF, since you are not engaging them directly, I don't think, as a principal employer, you have any liability. It is for the transport contractor to take care of it. Moreover, his bills to you must be either fixed per trip or per kilometer basis, so it is not your responsibility.

Regards,
Nitin Tadvalkar