Navigating PF & ESI Deductions: What If Your Outsourced Supplier Has Fewer Than 20 Employees?

Outsourcing and Compliance with PF & ESI Regulations

We are a Fire Alarm Manufacturing Facility in Chennai, employing around 150 people. For some specific operations, we outsource our products to a supplier for value addition, and there will be no trace of the supplier inside our premises. The entire operation is conducted at the supplier's location, and only the finished goods are returned to our premises.

If the supplier has fewer than 20 employees, do they need to deduct PF & ESI for their staff? In case they fail to deduct, stating that they have less than 20 employees, do we need to deduct and pay the same for them? Please share if any rules have been established specifically for the above query.

Regards,
KPV

Understanding Coverage Under the ESI Act, 1948

The coverage under section 1(3) of the ESI Act, 1948 is based on the engagement of 10 or more persons. A similar situation may arise regarding the notification under section 1(5) issued by the State Government, which you can verify or examine.

Clarifying the Status of Outsourced Suppliers

Have you clarified whether the "outsourced" supplier is also covered under the Act separately or not? Is the outsourced supplier performing similar work for other units as well? Is the outsourced supplier separately covered or registered under various other laws such as Sales Tax, Excise, and labor laws? Is the outsourced supplier manufacturing or finishing the goods (being supplied to you) at their own premises, and do they have proper registration under the Shop & Commercial Establishment Act of the concerned State? It is also important to consider whether the employer of the outsourced supplier is related to the owners of your unit.

Factors Influencing Association with the Main Unit

There are various factors that can lead to a unit (even if working remotely from another unit) being associated with the main unit. Geographical location or separation, in my opinion, has little relevance in such cases. This depends on the facts of each case. I hope you can discuss the issue with the relevant officials from the department mentioned above and act in accordance with the law and decisions of the relevant authorities.

From your post, I understand that the contract is outsourced work and does not fall under contract labor. In this situation, you are not liable for the statutory dues of your supplier. It's up to them to decide whether they are covered and should pay. Since you are only providing work to them as a normal vendor and not as contractors, the liability does not fall on you.

Understanding ESI and PF Coverage for Outsourced Work

I have a different view on this matter. It is a job given to an outside contractor. The bill raised will be for "labour" and not the sale of goods. An outworker with fewer workers than required for independent ESI coverage will be considered part of the employer giving the work (the Principal employer or the Fire Alarm Manufacturing Company, in this case) if the outworker exclusively works for the Principal employer. In this scenario, the facility where the work is carried out is seen as an extension of the main factory even though it is geographically separated. Furthermore, control and supervision clearly lie with the Principal employer.

If the establishment undertaking the work serves various others, then the workers will not be covered. The key point here is the control and supervision during manufacturing. While there may be ultimate supervision or quality checks at the Principal employer's location, any supervision at the outworker's site during manufacturing processes establishes an employer-employee relationship. This would result in the employees of the outworker being covered under ESI and EPF.

Ultimately, it is the type of supervision over the outworker's employees that determines their coverage under ESI and PF.

Regards, Madhu.T.K

Outsourcing and PF/ESI Obligations

In the case of outsourcing employees, the manpower contractor is liable to provide or pay P.F. without fail by registering their contracting firm with the labor department and obtaining the P.F. code from the EPFO of India. Before outsourcing work to a contractor, the principal employer must obtain necessary documents such as EPF, ESIC coverage, Contract Labor License, etc. Only then should the principal employer allow the contractor to carry out the stipulated work or job.

EPF Coverage Requirements

Regarding EPF, as per the EPF Act, any establishment, factory, manufacturing unit, etc., with 20 or more employees working or having worked should be covered under EPF. I would like to mention that when obtaining the EPF code, the employer should demonstrate having 21 employees. In any establishment or manufacturing unit, employees may leave their jobs, resulting in the employer having fewer employees than the required 21. In such cases, the employer is still obligated to pay PF contributions monthly for the employees remaining with them.

Therefore, the employer must pay for any number of employees (even one employee) once covered under EPF of India. At the time of initial coverage, the employer needs to show 21 employees.

Thank you.

Definition of Contract Labour

A workman is deemed to be employed as "contract labour" in or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer. A worker is defined under the Act as any person employed in or in connection with the work of any establishment to do any skilled, semi-skilled, or unskilled manual, supervisory, or clerical work for hire or reward, whether the terms of employment are express or implied. However, the following are not included:

- One who is employed mainly in a managerial or administrative capacity; or
- One who, being employed in a supervisory capacity, draws wages exceeding five hundred rupees per month; or
- One who is an out-worker, that is to say, a person to whom any articles and materials are given out by or on behalf of the principal employer to be made up, cleaned, washed, altered, ornamented, finished, repaired, adapted, or otherwise processed for sale for the purposes of the trade or business of the principal employer, and the process is to be carried out either in the home of the out-worker or in some other premises, not being premises under the control and management of the principal employer.

The last line specifies that it excludes an out-worker. Therefore, if the worker of the contractor is doing the work at his factory and never steps into the fire alarm factory, he is not a contract worker. If he is not a contract worker, the main company is not liable for any of the statutory dues of the contractor/vendor. Thus, the supervision, etc., is not a factor at all.

Thank you, Sreeganesh, for educating me on the CLRA and PF laws. The issue is not whether the principal employer should ensure that the contractor possesses independent PF or ESI registration or a license under the CLRA Act. Anyway, a license under the CLRA Act cannot be obtained by a contractor before work is obtained from the principal employer but is taken only after the contract is obtained and a declaration/certificate to this effect in Form V is given to him by the principal employer. It is also to be noted that the principal employer who engages contract workers of 20 or more should get a registration for such engagement before it actually takes place.

It is also not disputed that as per the present law, there should be at least 20 (not 21) employees to make an establishment covered under the EPF & Mis Prov. Act, and an establishment once covered will continue to be covered even if the number of employees comes down drastically and becomes zero. This is available in all the Labour Acts.

The question here is, will there be any employer-employee relationship between the employees of the outworker and the principal employer? I have put my views on it. To make it clearer, I would say that the degree of supervision and control over the workmen of the contractor would be the deciding factor in all cases where the outsourced work is carried out outside the factory premises of the principal employer. By supervision, I mean supervision during the course of manufacture. Supervision is absolute when the contractor undertakes work only for the principal employer, whereas if he carries out similar work for others, then establishing supervision becomes difficult. Then it will be the responsibility of the Social Security/Enforcement Officer to find out whether there exists any control and supervision, and if yes, naturally, the workers of the contractor will be covered by ESI/PF.

Now, in the event of the contractor not having separate registration, the workers of the contractor should be enrolled under the principal employer's registration.

Regards, Madhu.T.K

Clarification on ESI & EPF Applicability

1. The initiator of this thread has sought views on matters pertaining to ESI & EPF and not under the CLRA. Therefore, in my opinion, any definition, etc., under CLRA on what is an outworker is irrelevant.

2. I may further submit that when we review past judgments of the Hon'ble Supreme Court of India, we find that in the case of P.M. Patel & Sons vs. Union of India (& EPFO) (decided on 25/9/1985), the court declared that even home workers rolling beedis at home are employees within the EPF & MP Act, 1952. Similarly, in another case, L.N. Gadolia & Sons vs. RPFC (EPFO) (decided on 26/9/2011), the Hon'ble court decided in favor of clubbing some units. The facts of each case may differ, but my point is that every case is decided based on its facts and merits. This is why I have opined that the initiator of the thread, if deemed proper, may seek views from the appropriate authorities of ESI & EPFO on the matter.

3. With due respect to Sh. Madhu T.K. ji, I may submit that if any expert or senior has information on whether the above judgments (as mentioned in paragraph 2) have been reversed by any subsequent judgments of the Hon'ble Supreme Court, it would be appreciated if the same could be indicated. This would allow me to refresh and update myself in the right direction.

Regards

This is not an issue related to contract labor but something related to PF and ESI coverage for an outworker who works from a place distant from the principal factory. I am yet to get an answer to my query about whether the outworker works exclusively for the Fire Alarm manufacturing company or not because this is a determining factor to decide whether there exists an employee-employer relationship. I have already elaborated on this.

Madhu.T.K

Please find the notification issued by ESI Corporation.

Madhu.T.K

To the best of my knowledge, neither the PF nor the ESIC acts have any provision making the principal employer liable for statutory dues of contract workers, outworkers, or any factory doing job work. The provision making the principal employer liable for statutory dues of contract employees comes only in the Contract Labour Act.

In view of the above, you need to see whether they are contract workers under the act or not. If not, then there is no law requiring the outsourcing factory to ensure statutory compliance of the outsourced company. Please let me know if you know of any provision other than the CLRA that makes this mandatory.

Kindly see sections 39 to 41 of the ESI Act, 1948, and section 8A of the EPF & MPs Act, 1952, which are self-explanatory.

Further, both the ESI Act, 1948, and the EPF & MPs Act, 1952, are self-contained codes and do not depend in any manner on CLRA. In the ESI Act, the word "contractor" has not been used. In the ESI Act, 1948, some definitions can only be referred to from the Industrial Disputes Act, 1948 (ref section 2(24)).

So far as the provisions of the ESI Act, 1948, and the EPF & MPs Act, 1952, are concerned, the provisions of CLRA are neither applicable nor do they have any relevance because the provisions of CLRA are applicable in respect of those functions/subjects as mentioned in its preamble. This is a matter of interpretation, and I think you can find various judgments of Hon'ble courts on the interpretation of the relevance of provisions of other Acts.

Regards

Thank you, Harsh. I will review the sections you have mentioned. Of course, I have seen the ESIC circular on contractors attached by Madhu on the last page. Thank you for taking the trouble to identify the sections for me.

Hi Madhu ji, Harsh ji, Saswata ji, and Sreeganesh ji,

I have one more doubt regarding the thread. In that case, on what basis/terminologies should the bill be obtained from the supplier? If the supplier has mentioned the bill as "Labour Charges," will the principal employer be liable for the statutory norms of PF & ESI?

Please clarify.

Regards,
KPV

It would be better for him to give you a bill for job work or processing charges instead of labor charges. For labor charges, you will have an issue with service tax and reverse charges. That finally has an impact on your cost in terms of available or disallowed credit and VAT input credits. Please speak to your auditor as he can comment based on all parameters as to which is more cost-effective for you.