Is ESIC Deducted from Performance Incentives? Seeking Clarity on Contractual Employee Benefits

Hello,

We provide manpower to various companies on a contractual basis. ESIC is applicable to us, and we already pay ESIC on the basic salary of employees. Now, we want to provide some amount as a performance incentive. Is ESIC applicable to the performance incentive as well?

Hi Dhara,

ESIC is always paid on the gross, not on the basis. Employees drawing a salary less than or equal to Rs. 15,000 are eligible for ESIC coverage. If in any particular month, a bonus/incentive/overtime is paid, then ESIC amount must be paid on it as well.

Thank you.

Sir, all types of incentives paid in connection with or relating to work are considered wages under section 2(22) of the ESI Act, 1948, and contributions are required to be paid if the concerned employee is covered or coverable under the said Act.

If you are willing to save the company costs, you can disburse it in the name of quarterly performance incentives or production incentives. Any other payment or remuneration does not attract ESI if it is paid at intervals exceeding two months.

Yes, if the incentive is not regular and not paid on a monthly basis, then ESIC is not applicable. For more details, log on to the ESIC website; they have mentioned everything in more detail.

Hi Dhara,

If any incentive is paid on a monthly basis, it definitely falls within the definition of wages, and ESIC contribution is payable.

Regards,

P K Sharma

Dear Mr. Dhara,

You can pay the incentive monthly, but ask your accounts to be booked on a quarterly basis. Prepare one voucher and attach a signed statement without mentioning the month.

Thanks.

On a monthly basis, provide incentives in advance and settle the quarterly amount for accounting purposes. For example, in January, an incentive of 5000/-, in February an incentive of 2645/-, and in March an incentive of 2410/-. These should be reflected as advances in January (5000/-), February (2600/-), and March (2400/-).

Then, in April, calculate the quarterly amounts by subtracting the advances given in January, February, and March from the respective incentives received. For instance, January incentive (5000/-), February incentive (2645/-), March incentive (2410/-) minus January advance (5000/-), February advance (2600/-), March advance (2400/-) equals 55/- payable. Disburse 55/- in the bank, create a statement of 10055, and deduct the advanced figures.

Sir, if the amount arrived at as a performance incentive is paid monthly as an advance but adjusted after the close of a quarter, even then the same is subject to contribution under the ESI Act, 1948. The term used in the definition of "wages" is "or payable." Actual payment of wages is not as important, but the issue is whether the said wages were due and payable at the close of a wage period.

Dear Mr. Mehta,

If an employer gives a fixed loan every month, let's say Rs. 2,000/-, and recovers that loan after three months in quarterly incentives, the accounting treatment would involve paying out the incentive every three months while the employee would receive a portion of the incentive amount every month, not necessarily the exact incentive amount.

In this scenario, would ESI contributions still be payable on the incentive? We currently pay incentives monthly and prefer not to delay. What would be the best course of action?

Thank you.

I have gone through the responses up till now and would like to submit as under:

Question on Performance Incentive

One can call it an Incentive Bonus or Production Bonus. It is additional remuneration.

As per the decision of the Supreme Court delivered on 8.3.2000 in the case of M/s. Whirlpool India Ltd. Vs. ESIC in civil appeal No. 1903 of 2000, additional remuneration to become wages has to be paid at intervals not exceeding two months as distinguished from being payable. Thus, there has to be actual payment, and the payment of production incentive does not fall either under the first part or last part of the definition of the term wages as defined in Sec. 2(22) of the Act; hence, no contribution is payable on the incentive bonus, provided the periodicity of payment is more than two months.

The queriest said that this payment is not possible to make quarterly. Somebody suggested to him to pay it monthly but to do so on a quarterly basis so that no ESIC attracts.

Please bear in mind that when such additional remuneration is paid at intervals beyond two months, the SSO has to verify thoroughly whether there is any agreement/settlement between the employer and employees, either express or implied, and report the facts with documentary evidence for the RO to take a decision on whether such payment attracts ESIC or not.

Some employers are showing certain additional payments payable once a quarter and paying some amount every month as an advance against such additional payment. They book the final amount, i.e., the total of three-month advance payment, as quarterly incentive, as suggested here also by one of the learned members. This payment amounts to wages only under the Act, and ESI attracts on it unless there is an agreement/settlement to make this payment quarterly or so, based on performance quarterly or so.

One should not forget that such additional payment is based on monthly performance, generally.

Hope everyone understood what I mean to say.

Regards

If the amount of performance incentive is paid once or twice a year, then it will not be calculated in ESIC. But if it is paid every month, then it will be calculated.

Thank you.

Dear Sir,

There are some employees whose gross salary is less than the ESI limit. However, we pay incentives on a monthly basis, and they end up crossing the ESI limit. In this case, they will become eligible for ESI.

Hi all,

Please let me know if an employee's gross salary is 20500/- per month and he is also doing overtime, earning 38000/- in total. Is he eligible to be in ESIC or not? If yes/no, please share the reason. If there is any documentary evidence, please do share it as well.

Dear Vimal,

Eligibility:
All employees of a covered unit, whose monthly incomes (excluding overtime, bonus, leave encashment) do not exceed Rs. 21,000 per month, are eligible to avail benefits under the Scheme.

Hi Friends,

If anyone has the circular on the incentive rules, which states that if we pay monthly incentives, then we include the gross salary + incentive = actual ESIC deduction amount. If we pay quarterly incentives, then it's excluded from the salary. Kindly share the circular if anyone has it.

Prakash Kalal