Dear Seniors, I am aware of the concept of contribution periods for ascertaining coverage under the ESI Act. In our factory, we pay a substantial amount of wages as a variable monthly production incentive and also pay overtime when applicable. The fixed elements of basic, HRA, etc., total only Rs. 10,000 maximum for all our employees. In many months, the total earnings for a full month exceed the upper ceiling of Rs. 15,000, often throughout the contribution period. Our consultants are telling us that, as long as the fixed elements of basic, HRA, etc., are less than Rs. 15,000, the employee is always covered under the Act, even though the total earnings, including variable production incentive and OT, exceed Rs. 15,000. I would like your views on whether this advice is correct and, if so, any references in the Act or in court judgments which support this view. I am sure I will get very knowledgeable advice in this forum! Thank you in advance! Regards, Raghav Rao
From India, Hyderabad
Acknowledge(0)
Amend(0)
1From India, Hyderabad
Acknowledge(0)Amend(0)
Understanding Wage Components Under the ESI Act
Sir, as far as I understand the subject, the items of wages like production incentives, etc., and overtime are treated differently in the ESI Act, 1948. While all such wages are considered as wages for the purposes of coverage and compliance under the said Act, the item "overtime" has a different character. This is because, based on this item, an employee cannot be exempted by virtue of specific provisions contained in section 2(9) of the said Act and Rule 50 of the ESI (Central) Rule, 1950. The reason may be simple: the term "overtime" is not always fixed and can vary according to the exigencies of the work.
Classification of Wages: Variable vs. Non-Variable
I feel that the classification of wages as "variable" and "non-variable" is not mentioned in the said Act. If, based on production incentives/attendance bonuses, etc. (all items excluding overtime), the wages of an employee exceed the coverable limit, then the said employee can be exempted from the coverage of the said Act, provided that his exemption is examined and monitored as per the proviso to section 2(9) and Rule 50 as mentioned above. If the wages of an employee, by adding his production incentive/attendance bonus in the base month of April, exceed the coverable limit (presently Rs. 15,000), then the said employee is exempted from the said Act. However, his coverage needs to be continuously monitored for the rest of the contribution period. For example, if his production incentive is reduced in the month of May, then starting from that month, the said employee will again be covered/coverable under the said Act until the end of the contribution period, i.e., up to September.
Court Judgments and Compliance Challenges
There may be various court judgments, including judgments of the Honorable Supreme Court, stating that certain allowances are considered wages. However, it is challenging to find a judgment on how to cover or exempt employees in cases where the amounts of production/attendance bonuses vary from month to month. Therefore, in my opinion, it is the responsibility of your HR personnel, time office in-charge, or accounts personnel to deduct and cover employees under the said Act. Although in cases where the wages of production/attendance bonuses change monthly, it is a difficult task to monitor compliance and coverage every month, we have no choice but to comply with the Act and the rules/regulations framed thereunder. Otherwise, the Social Security Officer of ESIC, during inspections, will be obligated to report any mistakes. By adding the amounts of wages of production/attendance bonuses (and also of overtime), the average wages of the covered employee will increase, and they will consequently receive benefits from ESIC at enhanced rates.
Seeking Advice from ESIC Offices
If deemed appropriate, I suggest approaching the nearest Regional/Sub-Regional Office of ESIC to which your unit is attached and seeking their advice in writing as well on the matter.
From India, Noida
Acknowledge(0)Amend(0)
Sir, as far as I understand the subject, the items of wages like production incentives, etc., and overtime are treated differently in the ESI Act, 1948. While all such wages are considered as wages for the purposes of coverage and compliance under the said Act, the item "overtime" has a different character. This is because, based on this item, an employee cannot be exempted by virtue of specific provisions contained in section 2(9) of the said Act and Rule 50 of the ESI (Central) Rule, 1950. The reason may be simple: the term "overtime" is not always fixed and can vary according to the exigencies of the work.
Classification of Wages: Variable vs. Non-Variable
I feel that the classification of wages as "variable" and "non-variable" is not mentioned in the said Act. If, based on production incentives/attendance bonuses, etc. (all items excluding overtime), the wages of an employee exceed the coverable limit, then the said employee can be exempted from the coverage of the said Act, provided that his exemption is examined and monitored as per the proviso to section 2(9) and Rule 50 as mentioned above. If the wages of an employee, by adding his production incentive/attendance bonus in the base month of April, exceed the coverable limit (presently Rs. 15,000), then the said employee is exempted from the said Act. However, his coverage needs to be continuously monitored for the rest of the contribution period. For example, if his production incentive is reduced in the month of May, then starting from that month, the said employee will again be covered/coverable under the said Act until the end of the contribution period, i.e., up to September.
Court Judgments and Compliance Challenges
There may be various court judgments, including judgments of the Honorable Supreme Court, stating that certain allowances are considered wages. However, it is challenging to find a judgment on how to cover or exempt employees in cases where the amounts of production/attendance bonuses vary from month to month. Therefore, in my opinion, it is the responsibility of your HR personnel, time office in-charge, or accounts personnel to deduct and cover employees under the said Act. Although in cases where the wages of production/attendance bonuses change monthly, it is a difficult task to monitor compliance and coverage every month, we have no choice but to comply with the Act and the rules/regulations framed thereunder. Otherwise, the Social Security Officer of ESIC, during inspections, will be obligated to report any mistakes. By adding the amounts of wages of production/attendance bonuses (and also of overtime), the average wages of the covered employee will increase, and they will consequently receive benefits from ESIC at enhanced rates.
Seeking Advice from ESIC Offices
If deemed appropriate, I suggest approaching the nearest Regional/Sub-Regional Office of ESIC to which your unit is attached and seeking their advice in writing as well on the matter.
From India, Noida
Acknowledge(0)Amend(0)CiteHR is an AI-augmented HR knowledge and collaboration platform, enabling HR professionals to solve real-world challenges, validate decisions, and stay ahead through collective intelligence and machine-enhanced guidance. Join Our Platform.
Enhancement of Maternity Benefits under the ESI Act,1948.pdf
Employee Benefits.doc