ESI Notice Dilemma: Are We Liable for ESI Payments from 2009-2014 Despite No Deductions?

Hi,

We are a software firm covered under PF since 2009; however, we registered for ESI only in 2014. Before that, we had not been deducting any ESI from our employees. Recently, we received a notice from the ESI department asking us to deposit ESI from 2009 onwards.

Are we liable to pay for the period from 2009-2014 even though we had not deducted ESI from our employees? Please clarify for our knowledge.

Dear,

You are required to pay from 2009 onward if it was applicable to you from 2009, whether you have deducted or not is not the question.

Dear, you need to clarify all the terms before you ask these questions:

1. What is the maximum number of employees in any day from 2009?
2. What are the minimum and maximum gross salaries of employees?
3. What is the current strength of employees?
4. Why did you not follow ESIC before in your company?
5. What is the reason ESIC has sent you this notice now?
6. What is the location of your company? Does your company come under ESIC or WC?

Once we get answers to the mentioned questions, then we can advise!

EPF and ESI Coverage

A company covered under EPF would naturally come under the ESI Act as well because it should have had at least 20 employees in 2009 when the EPF was made applicable to the establishment. Though there can be voluntary coverage for PF, probability theory leads me to say that in 2009, the number of employees should have been more than 20.

There is no relevance to the maximum and minimum wages of 2009 because it is the number of employees, not the amount of wages, that will decide whether an establishment is covered or not.

The present strength of employees will not make any difference for the coverage of an establishment with a retrospective date.

It could be due to ignorance or a feeling that ESI is a waste, or the employees might have thought that going to an ESI hospital would put them at a disadvantage, that the company decided not to opt for ESI.

During an inspection conducted by the Social Security Officer, the ESI Corporation would have confirmed that the company had the required number of employees for coverage in 2009 and assessed accordingly.

The location must be in an ESI-implemented area, which is why the notice has been issued.

There is no specific place where you can say that this is a Workmen Compensation area. All establishments fall under the coverage of the Workmen/Employees Compensation Act. The only difference is that in the case of employees covered by ESI, the liability as per Workmen Compensation will be borne by the ESI Corporation and not by the employer.

Regarding the post by Tristar software, I would suggest that the response provided by Mallikji is final, and you should pay the contribution on the 'omitted wages' from 2009.

Regards,
Madhu.T.K

Understanding EPF and ESI Coverage

Don't panic. First of all, check the documents submitted at the time of EPF coverage. Normally, when an establishment is covered under EPF, it is also covered under the ESI Act. However, there are many factors involved. Based on information from EPFO, the ESIC has issued a notice.

EPF applies to establishments where there are 20 or more employees (direct + indirect/through contractor, etc.). Normally, in software companies, salaries (Basic + DA) are more than the prescribed applicable limit under the EPF Act, which is presently Rs. 15,000/- per month, previously Rs. 6,500/- until August 2014.

Under these circumstances, very few or even one employee can be covered under the EPF Act. Even though the establishment is required to register under the EPF Act and comply with coverable employee/member requirements, it may be few, one, or even zero.

ESI Act Applicability

As per the ESI Act, it applies wherever: a) 10 or more employees (direct + indirect) work where power is used for main business activities, and b) in other cases, 20 or more employees (direct + indirect), subject to 10 coverable members required.

Now, in your case, it is necessary to verify the facts and act accordingly on the notice. I have purposely responded in a general way for your understanding. It is observed that, at the time of obtaining EPF registration, you did not receive proper consultation. You should seek consultation from your EPF/ESI consultant.

Regards, Pramod Thakar

[Phone Number Removed For Privacy Reasons]

Dear Mr. Madhu,

How is the ESIC department doing the work? Hence, you cannot say notice has been received due to ESIC being applicable. On the other hand, wages always matter for coverage under ESIC and PF as well. Do not make wrong predictions from my question. We are elaborating on knowledge here, not engaging in a blame game.

Clarification on ESI Act Coverage

Sir, with reference to the remarks of Sh. Pramod Thakar ji as mentioned above, i.e., "As per the ESI Act, it applies wherever a) 10 or more employees [Direct + indirect] work where power is used for main business activities, b) in other cases, 20 or more employees [Direct + indirect], subject to 10 coverable members required." I would like to point out the following incorrect information provided by Sh. Pramod Thakar ji:

(a) Coverage under the ESI Act, 1948 is based on "persons" and not "employees." Please refer to section 2(12) of the said Act.

(b) Since June 2010, there is no longer a requirement that there must be "10 coverable employees." Even if there is only one coverable employee out of 10, the factory will still be covered under the said Act.

(c) I am aware that the State Government of Orissa (where the initiator of this discussion is located) issued a notification in 2011 reducing the threshold of coverage for shops and certain establishments to employing 10 or more persons. The requirement of 20 or more employees may be applicable in the areas of Maharashtra State (which I am presently unsure about).

I hope Mr. Pramod ji will forgive me for pointing out the above mistakes. If I have made any errors in my response, I welcome any suggestions so that I can correct myself.

Recommendations for Further Details

I recommend that the initiator of this discussion provide full details in this thread, such as (a) when the code number under the ESI Act was issued by ESIC, (b) the observations of SSO after conducting their verification, (c) whether any ad-hoc assessment has been conducted by the department under section 45A of the Act, etc. Coverage proceedings under the ESI Act are always independent of any other department, including EPFO, although some common documents may be relied upon by the authorities when determining coverage of any unit.

Retrospective Coverage Implications

In cases of retrospective coverage, the employer is not permitted to deduct contributions from employees for the previous period. Therefore, if coverage under the said Act is established, the employer is required to pay both the employees' and employers' share of contributions from their own source (Section 40).

Regards

Thanks for your responses. As suggested, I am providing below the facts that are known to me immediately. The rest I will have to check in the records.

In 2009, when we enrolled in EPF, we had a staff of around 30 employees. Yes, at that time, we made a significant mistake by not enrolling in ESI as our consultant did not give us proper advice.

In 2014, we had our first inspection from the ESI inspector, and we promptly enrolled and have been regularly paying ESI dues. However, we have now received a notice from them asking us to deposit around 20 lakh rupees due as ESI payable from 2009 onwards. While this amount seems arbitrary and can be challenged, I need to know if there is a way to minimize the payout.

Important Considerations for ESIC Code Number and Coverage

The important issue is on which date you received the Code Number from ESIC (Form C-11) and from which date your unit was covered under the said Act. If the date was provisional, the question is whether the Social Security Office (ESI Inspector) has finalized the date of such provisional coverage after verifying the records. If so, from which date? Whether the amount of Rs. 20 lakh has been assessed on an ad hoc basis or on an actual basis? If on an ad hoc basis, you can request the department to assess the contribution on an actual basis (if otherwise favorable to your unit) after verifying your records. Everything depends on the facts of your case and your decision since we are not in a position to offer any more comments on factual issues.

Definite Coverage and Contribution Obligations

Regardless of the facts, if coverage is definite, you have no alternative but to deposit the amounts of contribution. This was clearly mentioned by my seniors/experts Sh. J.S. Malik and Madhu T.K. in their remarks as above. This contribution amount, as mentioned earlier, may not include the amounts of damages and up-to-date interest, and I believe the department will make separate claims for these items.

Legal Plea Against Coverage

In my opinion, if you have any legal plea against such coverage, you can challenge it in the Employees' Insurance Court of the area where your unit is located by engaging an advocate. Perhaps the advocate can also argue that the contributions relate to a period of more than 5 years, for which some limitations have been set forth in the Proviso to section 45A of the said Act. This also depends on the facts of your case and any previous decisions of the Honorable courts, if any.

Best wishes.

Dear Sandeep Sharma, I believe that from the post by Tristar Software, you should have understood why I mentioned that there could be an assessment. It would be based on such an inspection that the assessment would have been made by the ESI Corporation's Social Security Officer.

For your knowledge, I would like to reiterate that for the coverage of an establishment, only the number of employees matters, and their wages have no relevance. This means if you have 10 or 20 employees, you are a covered establishment. Now, if you have no employees who are earning 15,000 or less per month, then nobody will be covered, but the establishment will still be covered, and every month you have to file NIL returns. This is the case for most companies nowadays. The situation is similar with PF as well. For PF coverage, only the number of employees should be counted, and there can be a situation where nobody is a member of PF because everyone is earning more than 15,000 per month.

I don't think that I have made any wrong predictions, but I would say that my observation was correct. Sandeep should know that I have been in this field for the last 30 years, and I started my career in those days when everything was clarified after meeting the Officers personally and referring to the Bare Acts, not like browsing through the internet. That should be the reason why I could say that there should have been an inspection by an ESIC officer without asking for further details like you had asked.

If you feel that my posts were like a blame game, I am sorry. I don't want to get involved in controversies. I believe that all the time I can spend educating HRs (not Consultants who are much more educated than I am and who use this forum to showcase or market their talents) should be spent positively and not in debating.

Regards, Madhu.T.K

Payment of the amount is better as the penalty under the statute is 6 months to 3 years of imprisonment and a fine.