Understanding Labor Costs: Is Your 6.5% Calculation on Wages Correct?

Hi Seniors in HR,

This is Mohan, HR Manager from Coimbatore. If our factory building is extended, what are the labor costs of the construction workers? It is estimated that 60% of the total cost is materials and 40% is labor. Assuming the total amount is Rs. 100,000.00, the breakdown is as follows:
- Materials: Rs. 60,000.00
- Labor Wages: Rs. 40,000.00

Now, the question arises whether we should calculate 6.5% from the Labor Wages. Is this calculation correct or not?

S. Mohan
Manager-HR
Coimbatore-641050
Mobile: 94430 42311

Considerations for ESIC Contributions on Construction Projects

Though in the past, there were some instructions from ESIC to consider a percentage of the amount as wages in the total bill for repair, maintenance, or construction, in my opinion, such instructions are rarely followed by law enforcement agencies. The competent authorities are empowered to assess contributions, considering 100% of the amount as wage content. Therefore, this system is risky and, in some cases, can result in losses to the employer due to heavy amounts of interest and damages for late payment of contributions. Under this system, the names of the workers/employees assigned to work are not disclosed, thus they would not be able to claim various benefits, including accident insurance under the said Act if the need arises.

Best Practices for Compliance

The best approach, in my opinion, is to request your contractor or the relevant official to maintain the bills, vouchers, and accounts for material purchases, as well as employment records such as attendance and wage registers of the employees assigned to such work. Ensure their contributions under the aforementioned Act are paid correctly and on time, and submit their forms and returns promptly. When any officer conducts a verification of records, you can present these records to demonstrate that compliance regarding workers engaged in the building extension was based on actual data.

Regards

Dear Mr. Mohan,

Please find attached a copy of the Madras HC judgment in which it has been held that in the absence of details relating to labor and materials, ESI contribution will have to be paid at 25% of the total cost. If you require more information or documents, please contact us.

Regards,
N. Nataraajhan
Sakthi Management Services
HP: +91 94835 17402
Email: natraj@sakthimanagement.com