The principal employer is not laible to pay ESI on outside jobs executed through contract labour. This clarification has come from the highest court of the land, the Hon'ble Supreme Court.
In the case of ESIC Bangalore V/s JMD Fashions (No. MFA 1089/2001), the Karnataka High Court held that outside establishments are not immediate employers under Section 2(13) of the ESI Act. The ESIC decided to go on appeal against this verdict, before the Supreme Court. The SC in its judgment dated 12.03.2007 dismissed the petition of the ESIC and upheld the decision of the HC.
Recently the MP High Court had also given a similar judgment, stating that in case of job works done by contract labour, there is no element of supervision by the principal employer, and therefore the principal employer will not be responsible for payment of ESI contributions in respect of such contract labour.
Earlier, the ESI authorities had been demanding and in many cases, even recovered the ESI contributions from the employers for outside jobs done by contracted vendors.
ESI contribution on outside job works
Recent judgments in this regard provide relief to employers who outsource work to outside establishments.
As per guidelines prescribed in circulars dated 26.08.2005 and 17.08.2006 by ESI Corporation, New Delhi, the Corporation's inspectors made huge demands of ESI contributions on the employers at the time of periodical inspection, causing undue hardship to the employers.
As mentioned above, the Supreme Court has upheld a verdict of the Karnataka High Court in the ESIC v/s JMD Fashions - MFA 1089/2001 case, that outside establishments are not immediate employers under Section 2(13) of the ESI Act, and so, if jobs are done outside by contract labour, and where there is no element of supervision by the principal employers on such contract labour, the principal labour will not be liable for ESI contribution on job work charges paid to such contract labour.
In a similar case, the Madhya Pradesh High Court has also upheld this view, and has further held that checking of works executed by such outside contractors is a normal activity, for the purpose of finally accepting or rejecting the work done, on the touchstone of job specifications, which cannot be termed as supervision or control.
These decisions have finally set to rest the controversy caused by the decision of a Bench of the Madras High Court in the case of Khaleel Corporation v/s ESIC.
In the light of this, all Associations and Industry Chambers should urge the ESIC, New Delhi to withdraw its circulars dated 26.08.2005 and 17.08.2006.
ESI Contribution on Casual Contractors
The Bombay High Court, relying on Supreme Court judgments, has held that casual contractors like plumbers, electricians, air conditioner repairers, computer repairers, TV repairers, etc who are engaged for temporary repair work will not be coverable under the ESI Act (ESIC vs RK Furniture & Another - 2007 LLR 14).
This should come as a great relief to employers who have for a number of years faced the ordeal of meeting demands for contributions on casual contract works, after every ESI inspection. Apart from the monetary aspect, it was a time consuming and expensive task to cull out from accounting records, payments made for such sporadic engagement of technicians and contractors, and pay ESI contributions.
All Associations and Industry Chambers should urge the ESIC, New Delhi to issue appropriate instructions to its ROs and Inspection staff and reverse the practice of demanding contributions on such casual, stray contracts. Otherwise, the employers will be left with no remedy other than to approach the appellate forum for redressal, every time.
- KASSIA News; August 2007