Can We Pay Factory Trainees as Contractors to Avoid PF and Gratuity Issues?

We have a factory with about 30 workers on daily wages. We want to take in 5 new people who have been working with us for some time on a trainee basis. However, we want to avoid PF/gratuity/bonus issues, and the workers are also agreeable to it. Can we take a professional fees bill from them every month, deduct TDS, and make the payment to them instead of a regular salary? Is this allowed?

Certainly, you can engage professionals, and the remuneration payable to them will not attract PF or ESI. However, they will not come regularly to your plant at the scheduled time and remain in your plant for 8 hours as per schedule. They will not take permission to avail one or two days' leave; they will not follow your dress code, etc. If this is acceptable to you, you can engage them as 'professionals'.

Understanding Professional Engagement

Please understand that by professional means a person who has some knowledge in the field and can extend such professional service to you. How can a trainee be a professional? A trainee is a learner. He has to attend the routine work regularly following all the HR protocols. As such, by whatever name his remuneration is called, it will be considered only as wages/salary or stipend. If you are worried about ESI/PF or bonus, engage them as an apprentice following the Apprentice Act of 1961. You can register under the National Apprentice portal, call for applications, and take them. But never use it as a tool to run the factory with apprentices alone and to avoid paying statutory dues to which an employee is legally entitled.

Hi. Thanks for the reply. I understand your points. The workers are also not interested in deducting PF or ESIC, and there are no ESIC facilities in our area. They will not have a problem taking the money as professional fees. However, is this allowed, or can it be penalized in the future? Otherwise, can we just pay them as labor charges on a voucher every month and deduct TDS at 1%? I understand that it's not such a good idea, but we already have 30 people on PF, and we don't want to increase further.

Another query: Removing an employee for non-performance

Is there any way to remove an employee (daily wages worker) for non-performance?

ESI and EPF Coverage in Non-Implemented Areas

If your area is a non-implemented area for ESI, your establishment will not be registered under the ESI Act. Consequently, nobody would fall under ESI. However, since the number of employees has crossed 20, and you already have EPF coverage, you cannot ignore covering employees under EPF.

Employee Opt-Out and Employer Liability

Employees cannot opt out of EPF (also ESI and other labor welfare schemes like bonus, gratuity, etc.), and the employer cannot make any agreement with such employees to exclude them from the scope of the Act. In the future, this will become a liability for you, and at that point, you will have to pay the outstanding contributions, both your share and the employees' shares, together with interest and damages. When a notice from the EPFO comes, your employees will not assist you; instead, they will be pleased that their share will also be paid by you. Moreover, in the future, if there is any dispute, it will be the workers who will first claim that the employer does not take care of any of the welfare schemes mandated by different Acts. At that time, you cannot say that the workers were not interested in getting covered, and hence you excluded them.

Exclusion from PF for Certain Employees

If the employees are freshers, and the experienced employees who join your company were not covered by EPF in their previous organizations and are earning wages above Rs 15,000, you can legally exclude them from PF. To establish that they are not existing members of PF or were not covered by EPF in the past, you can collect Form 11.

Voucher Payment and Statutory Liabilities

Voucher payment will not exempt you from statutory liabilities. It is illegal to pay wages in cash. Even if paid, if it is reflected in the books of accounts, you should pay ESI (if your establishment is in an implemented area), EPF, Bonus, etc. Even daily rate workers are entitled to all these statutory benefits. TDS is not a remedy. By deducting tax from the wages/revenue that a person earns by working with an employer, what is his benefit? Nothing. Therefore, if he has provided labor, the return/remuneration or consideration for the service of labor should be wages. There can be an addition to it by way of ESI or PF, but when you just deduct tax, it becomes a burden on him, especially when he is not a person coming under the tax brackets. Obviously, a person earning a salary of less than Rs 15,000 will not be under tax brackets.

Handling Non-Performing Workers

If a daily-rated worker is not performing, the employer can stop calling him for work. If he has been working with you for the past year with at least 240 days' attendance, the maximum liability is to pay 15 days' wages as a terminal benefit. No employer can be compelled to keep a non-performing worker. Moreover, a workman engaged casually or a casual worker has no right to regularization. If you think that the worker is unfit, ask him not to come. That's all.

Hi Madhu, thank you for your insights. It is very helpful. In the past (1990s), we had a case where an employee was not performing his duties and was regularly absent. We fired him, but he went to court, and after 10 years, he won the case, and we had to reinstate him with back wages. This is the reason we are very apprehensive about taking on new people. Our field is such that they will not get other similar jobs, and they know this and take the work for granted. As soon as we start giving them EPF/ESIC, etc., their output drops or stagnates because they know that we may not be able to remove them from work.

Can I remove someone who has worked for more than 15 years but is not performing?

How can I prove this? We don't mind giving 2 months' salary as compensation. Is there any age after which we cannot remove the workers? We are sympathetic towards them and also retain good workers after retirement, but we want to be careful about taking in new people.

Hi, thank you for your replies. Yes, we are fully compliant with all regulations and do everything possible from our side. However, being a small unit, we don't have a dedicated human relations officer. Workers' performance does drop after they get confirmed, and after retirement, it improves again. We have practically seen this over the last many years. Maybe we are not able to motivate them, but they do become very complacent. We have not issued any memos for performance or any other indiscipline in all these years, and maybe we need to start doing this now. Thanks for this suggestion.

Query about leave policies

Another query, if you don't mind answering, is about leaves. We give 1 day of paid leave per 18 days earned in previous years as per the company act. So the maximum is 15 days if the worker is present all working days, which is rare. Most of the workers have a few leave without pay days also. However, we are giving 18 days of paid leave instead of 15, and also 7 days of casual and 4 days of sick leave additionally. We are also giving paid holidays on 9 days (Independence, Republic, Diwali, etc.). All these are affecting production now as salaries have increased a lot over the years. Can I revert back to the 15 days maximum leave as per the company act? Or can I stop giving additional leaves to the people who are not performing well? Or can this also be contested?

Hiring Workers Without PF and ESI

Do you want people to work for you with payment but without PF, ESI, and other welfare measures applied to a factory for workmen? The best way is to notify in the newspaper mentioning the work conditions. You can hire those who have opted to work under the aforementioned conditions.

Coverage of EPF & ESI

What's all about the coverage of EPF & ESI? Going by your description, they are beyond the coverage of these two obligations unless they are already existing members. I may suggest you hire them for a full-time/specific contract with responsibilities adequately defined, with targets together with entitlements and a clear termination clause (something like gig workers).

Thanks for the further replies. We are a small company with no dedicated HR person, so it might be best for us to hire them with all dues like EPF/ESIC. We don't want issues in the future.