Navigating Compensation for Contract Workers: What Are Our Legal Obligations After an Accident?

In one of our fashion store outlets in UP, a contract employee drawing less than 18K per month has met with an accident on the job. This establishment is governed under the Shop & Establishment Act.

The accident and subsequent injury occurred while the employee was performing routine store work. The employee was on contract with a contractor whom we have discovered had not enrolled the said contract employee under the provisions of the ESI Act.

Statutory Guidance Needed

From a statutory point of view, please guide me:

1) If such a contract employee is covered under the Employee Compensation Act.
2) Should the company have to pay for the contract employee under the provisions of the Employee Compensation Act, considering his wage as Rs 8K? Also, will the company have to pay any loss of pay to the employee in addition to compensation?
3) If the contractor is not fulfilling his obligations under the ESI Act, is there any penalty towards the principal employer?
4) Does the Employee Compensation Act also apply to an employee if he/she decides to work on the day of his/her weekly off?

Liability of Principal Employer for Compensation

The principal employer will be liable for payment of compensation when an employee engaged by the contractor dies in an accident arising out of her employment. This was established in the case of State of Maharashtra v. Milhadeo Krushna Waghmode, 1994 LLR 950: 1994 (69) FLR 571: 1994-II CLR 238: 1994-II LLN 829 (Bombay HC).

Principal employers and contractors will be liable for payment of compensation to a workman injured in an accident. This was highlighted in the case of Mohammad Rafiq Mohiuddin v. S. Narasimha, (2002) IV LLJ (Supp) NOC 1306: 2002 LLR 718 (AP HC).

Compensation Based on Minimum Wages

In a recent judgment, the Madras High Court reiterated that compensation payable for the death of employees must be based on the wages payable under the Minimum Wages Act, 1948, unless the employee’s actual wages exceed the minimum wage.

I am unable to find any provision in the EC Act or Shop & Establishment Act showing the applicability of the EC Act on shops. The understanding used to be that the EC Act applies to blue-collar workers (Schedule 2).

Dear Ms. Anuradha,

I invite your kind attention to Section 39 of the Uttar Pradesh Shops and Establishments Act, 1962, which reads as follows:

"Sec. 39. Application of the Workmen's Compensation Act, 1923 and Rules:
The provisions of the Workmen's Compensation Act, 1923, and of the Rules made thereunder shall mutatis mutandis apply to every employee of a shop or commercial establishment."

Your post clearly indicates that the affected person was a contract laborer in your establishment, engaged through a contractor who failed to enroll him under the ESIC for obvious reasons, whether with or without your knowledge. Admittedly, the injuries sustained by the employee were certainly due to an employment accident on your premises. Therefore, the factual and legal position is as follows:

(1) Since the contract laborer was not a member of the ESIC at the time of the employment accident, the contractor is liable to pay compensation to him under the E.C Act, 1923, for the consequential loss of earning capacity caused by the disability.

(2) If the contractor fails, as the Principal Employer, you must first pay the compensation and other expenses stipulated under the EC Act, 1923, and can later recover it from the contractor. Please refer to the provisions of Sec. 12 of the E.C Act, 1923.

(3) When the fact remains that he was allowed to work in the establishment during the accident, in my opinion, questions such as whether the particular day was his weekly off or if he volunteered to work are simply irrelevant.

Just some clarifications:

1) As per point 1 of your answer, the consequential loss of earnings will be calculated taking the salary of 8k per month with the scope of disability.

2) During the period of loss of pay, will the principal employer or the company also have to pay EPF contribution at 12% of 8k, or is it the standard norm not to pay?

3) Also, I have been informed that there is unrest among the contract employees against the contractor for not implementing ESI, and they are threatening to approach the respective labor competent authority. What is the role or penalty on the company in such a situation?

Thanks once again.

Regards, Anurad

Principal employers are held responsible for non-compliance. Contractors are required to be audited regularly to ensure they fulfill all statutory liabilities.

Dear Madam, my answers to the follow-up queries are as follows:

(1) Yes, if the salary/wages of the employee on the date of the accident are on the higher side, it should be notionally restricted to Rs. 8000-00 per month only for the purpose of calculating E.C. under the Act. If the actual salary is less than the statutory minimum wages, only the minimum rate of wages should be taken into account, as already mentioned by Mr. Babu Alexander.

The period of loss of pay

(2) "The period of loss of pay" as mentioned can be of two types: one is the period of treatment, and the other is the period of non-employment resulting from the disability created by the injuries sustained in the employment accident. The employer is obligated to pay wages for the entire period of treatment until recovery from the injuries, in addition to covering the expenses of the treatment. This should reflect the actual wages payable had the employee not met with the accident. Therefore, all the statutory employer's contributions should remain as usual.

Responsibilities of the Principal Employer

(3) First, it is advisable to review the definitions of "Immediate Employer" under section 2(13) and "Principal Employer" under section 2(17). Subsequently, refer to section 40 which addresses the primary responsibility of the Principal Employer for the payment of contributions to ESIC and their recovery from the Immediate Employer as per section 41 of the ESI Act, 1948. As the Principal Employer, you are responsible for ensuring the enrollment of the Contract Labour before allowing them to work. Failure to pay contributions may lead to recovery proceedings and potential actions against the concerned Principal Employer or Immediate Employer. It is recommended to be proactive and resolve any issues amicably.

Thank you.

Your queries are answered as follows:

Contract Employee and Employee Compensation Act

1. If such a contract employee is applicable under the Employee Compensation Act: Should the company have to pay for the contract employee under provisions of the Employee Compensation Act considering his wage as Rs 8K? Also, will the company have to pay any loss of pay to the employee in addition to compensation?

Answer: In your case, it is an admitted fact that the contract employee is not covered under the ESI Act. Hence, you are liable to pay the compensation as per the provisions of the Employees Compensation Act for the loss of earning capacity arising out of the accident. You will also be liable to pay any loss of pay to the employee in addition to compensation if the loss of pay is caused due to the accident, i.e., the period of treatment till recovery from the injury and the medical expenses.

Contractor Obligations and Penalties

2. If the contractor is not fulfilling his obligations under the ESI Act, is there any penalty towards the principal employer? Yes. It is a well-settled principle of law that the Principal Employer has to ensure that the contractor complies with the provisions of the applicable labor laws. In case of non-compliance by the contractor, the Principal Employer will be held responsible, and penalties can be initiated against the Principal Employer.

Employee Compensation Act and Weekly Off

3. Does the Employee Compensation Act also apply to an employee if he/she decides to work on the day of his/her weekly off? Yes, it applies.

Regards,
P.S. Lakshmanan
S. G. Management Services
(PAN INDIA Consultant - Labour Law Compliance, P.F., ESI, P Tax, Benefit Management & POSH COMPLIANCE)
Kolkata

Contractor Responsibilities and Statutory Payments

It is very common with many contractors. You are providing service against the service charge, and if it includes the company's contribution of PF, ESI, Bonus, Gratuity, etc., then it is your responsibility. If it is not, then in the agreement between the Principal Employer (PE) and contractor, it should mention that all statutory payments are the responsibility of the PE. Moreover, as per your version, you are receiving a small amount of service charge.

Based on your agreement with the PE, you have to make a decision. The healthy agreement between the contractor and PE may be (Monthly gross + Employer portion of PF & ESI) + Service charge of the contractor + GST as the invoice amount. Periodical payments such as Bonus, Gratuity, Leave pay, etc., may be claimed by the contractor with a small service charge from the PE and paid to the contract labor.

It is also essential for the PE to have control over the different statutory payments made by the contractor and to provide necessary support to the contractor for a proper partnership relation.

S K Bandyopadhyay (Howrah, WB)

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