Is Deducting ESI from Employees Earning Above Rs. 21,000 a Legal Violation? How to Fix It?

Dear Experts, request your help to solve my issue in the following three situations—our factory consists of 30 employees.

Situation 1

Three employees' salaries increased above Rs. 21,000 during April 2017. Based on the expectation that it is optional for the employee and employer, we continued deduction of ESI on wages above Rs. 21,000 for these three employees to date.

Situation 2

Meanwhile, as of 30-09-2018, seven other employees are receiving salaries above Rs. 21,000 (which increased between April 2017 and April 2018). ESI was deducted on the actual salary paid, i.e., above Rs. 21,000, and employees were availing treatment facilities from the ESI Hospital to date. This also happened on the same assumption that it is optional for the employee and employer to deduct ESI above Rs. 21,000.

Situation 3

Five new employees joined on 01-07-2018 with wages fixed at Rs. 25,000 to Rs. 30,000. Based on the same assumption, we deducted ESI contributions from these employees and remitted them properly to the ESI Department.

Now, when working out October 2018 wages, 15 employees are drawing wages above Rs. 21,000.

Clarification Needed

Upon reviewing the clarifications posted on this site, it is understood that we have to remove all these 15 employees from ESI coverage. When discussed with the ESI Local Office, they informed us that ESI benefits will not be extended to employees whose salary is above Rs. 21,000, and we should not deduct ESI from such employees.

My Query

1. For almost 18 months, we have been deducting ESI from employees with wages above Rs. 21,000, and a few employees were availing medical benefits. Will this amount to a violation of ESI Law?

2. How can we rectify or settle if it is a violation?

Thanks in advance.

Violation of ESI Law and Steps to Rectify

1. Violation Identification:
- Deducting ESI from employees with salaries above Rs. 21,000 for an extended period is indeed a violation of ESI regulations since the law exempts employees earning above this threshold.

2. Rectification Steps:
- Cease Deductions:
- Immediately stop deducting ESI contributions from employees whose salaries exceed Rs. 21,000 as per the ESI Local Office's guidance.
- Reimbursement:
- Calculate the total amount erroneously deducted from these employees and ensure reimbursement to them promptly. This may involve adjustments in the upcoming payroll.
- Documentation:
- Maintain clear records of the rectification process, including the cessation of deductions, reimbursement calculations, and actual repayments made to affected employees.
- Communication:
- Inform the impacted employees about the cessation of ESI deductions and the reimbursement process to maintain transparency and build trust.
- Compliance Review:
- Conduct a thorough review of ESI compliance practices within the organization to prevent similar violations in the future.
- Legal Consultation:
- Seek legal advice or consultation to ensure full compliance with ESI regulations and to address any potential legal implications resulting from the violation.

3. Preventive Measures:
- Regular Compliance Checks:
- Implement regular audits and compliance checks to ensure adherence to ESI laws and prevent inadvertent violations.
- Employee Education:
- Educate HR personnel and relevant staff about ESI regulations, especially concerning salary thresholds and exemptions, to avoid future non-compliance issues.

By promptly rectifying the ESI violation, reimbursing affected employees, and enhancing compliance measures, your organization can mitigate the consequences of the oversight and demonstrate a commitment to legal and ethical HR practices.