Article (November-2016)


Liability on outsourced jobs under ESI Law

Dr. Deepak Sharma

Designation : -   Executive Coach & Faculty Member -HR

Organization : -  Narsee Monjee Institute of Management Studies, Bengaluru

Other Writers : -  Chandra Prakash Purohit


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Sec. 2(9) of ESI Act defines the term employee. It has wide connotation. Employee covers :

  • Directly employed by Principal Employer.
  • Indirectly employed through contractor, on the premises of the factory and outside, but under the supervision of principal employer.
  • Part-time employee on contract of service.
  • Employee whose services are temporarily lent or let on hire to principal employer or his agent by the direct employer of the person.
  • Employed for wage for any work connected with the administration of factory/establishment, department or branch dealing with purchase of raw material or for distribution or sale of products.
  • Persons who are on "contract of service" will only come in category of "employer".
  • A apprentice not being engaged under Apprentices Act.

Following persons are also held as employee :
Casual worker, Drivers engaged on trip basis, Band boys playing music, Persons distributing and selling products, Canteen employee, Cycle stand employee, Persons executing sales, Persons doing editorial work/and or administrative work in news paper, Home workers, Medical Representatives, Persons working in HQ/Reg. Office/Zonal/Branch Office of establishment, Persons engaged in equipment maintenance deptt. of hospital, Persons of factory hospital, Book-binders, Loading/Unloading workers through contractor, Persons working for boarding and lodging, Sales clerks.

Held not "employee" :
Apprentices under the Act, Casual contractors like-plumbers, Electricity repairers, A/c repairers, Computer Repairers, TV Repairers, Casual "hamalies' not working exclusively for one company, ITI student trainees.

Section 40 of the ESIAct deals with liabilities of Principal Employer to pay contributions. Question was raised in Employees' State Insurance Corporation v. M/s Harrison MalyalamPvt. Ltd AIR 1993 SC 2655 that whether employees of the contractor engaged by respondent -company to execute certain contract were covered by ESI Act, 1948 and whether contribution in respect of them was payable  although contract was completed prior to demand. Supreme Court held that it was duty of the company to pay the contribution. In PM Patel v. Union of India(1986) 1 SCC 32 = AR 1987 SC 447 = 1985 II CLR 322 (SC) workers were given work of making 'bidis' as home. Right of rejection of bidis was with employer. It was held by Supreme Court that test of control and supervision lies in the right of rejection so the employees working outside can also be covered under ESIC, if there is master servant relationship.

H.P. High Court in Manoj Kumar v. M/s Sintex Industries Pvt. Ltd. 2016 LLR 580  recently held that depositing ESI contributions of contract labour by Principal Employer employed by unregistered contractor does not make such contract labour an employee of Principal Employer simply because the ESI card of such person carries the name of principal employer. Under ESIAct, it is the liability of principal employer to ensure that all employees are covered under the scheme.

Madras High Court in the case of Dy.Director, Insurance No.V, ESI Corporation, Chennai v. India Pistons Repco Limited 2014 LLR 536  held that in absence of any control or supervision over the employees of the independent contractor who was given various job work to be carried out, the principal employer cannot be held liable for the ESI contribution hence the ESI authority has wrongly determined the money which is rigidly set aside by the Employees' Insurance Court.

The ESI Corporation took into the consideration the judgment of the Hon'ble Supreme Court, ESIC V/s. JMD Fashions 2007-III-LLJ 509,Hon'ble High Courts of Madras in the case of  ESI Corporation V/s. Bethall Engineering Company2007 LLR 1054 (Mad HC), Madhya Pradesh and Karnataka respectively. It then decided to form a team which was advised to ascertain the pattern of outsourcing in different industries and to ascertain the element of supervision involved in the jobs outsourced. The team then held extensive discussions with individual Employers and various Employers' Associations and came out with broad categories of workers engaged by the Job Contractors/Immediate Employers and the responsibilities for payment of contribution.Guidelines have been issued through a circular by Employees State Insurance Corporation for the workers who have been engaged by the outside agencies or Job Contractors in connection with the work of the principal employer outside the premises to remove any ambiguity about the coverage of such workers in ESIC and the responsibility of the stakeholders regarding the payment of contribution. The categories which were formed to deal with various cases falling under these were:-

A. The Jobwork done inside the Factory/Establishment premises through Contractors/Immediate Employers having independent Code Nos. :  
In the case where the workers or employees are working in the premises of Principal Employer but they are on the rolls of the vendor/contractor, the Principal employer in such case will not be liable to pay ESI contribution of these workers. The supervision is implied in this case. However the Principal Employer has to keep the records of such payment of contribution being made to the workers and should present it before the insurance inspector at the time of inspection as per the provisions of Section 41 (1 A) ESI Act. 

B. Jobwork done inside the Factory premises through Contractors/Immediate Employers not having independent Code Nos.: 
The employees of such Job Contractors/ Immediate Employers who are not having independent Code Nos., but working in the Factory/Establishment of the Principal Employer are coverable and the compliance is to be made by the Principal Employer. The Supervision is implied in this case. Thus the principal employer is responsible for payment of ESI contribution of such employees. 

C. Jobwork done outside the Factory/ Establishment     premises  through Factories/  Establishments which are having independent Code Nos.:
The responsibility to ensure compliance is upon the Factories/Establishments having separate Code Nos. and Supervision by Principal Employer is not involved under this category. The quantum of work done by the workers in this case should be ensured by the inspector  in form of Gate Passes, Return Gate Passes, Challans and bills, etc., prepared for sending the material outside the Principal Employer's Factory/Establishment and returning back after the job work. The principal employer should keep the Code Number of such Factories /Establishments from which he gets the job work done.   

D. Jobwork done 
outside the Factory/Establishment premises through Factories/Establishments which are not having independent Code Nos. but the supervision being exercised by the Principal Employer: 

The employees engaged in jobs outsourced by the Principal Employer to outside Factories/Establishments which are not having independent Code Nos. but such outsourced job is being undertaken under the supervision of the Principal Employer or his agent are to be covered under Section 2 (9) (ii) of the Act. In this case the responsibility to ensure the compliance is upon the Principal Employer. The inspector will inspect to bring out the instances of the degree of supervision being exercised upon the workers. 

E. Jobwork done outside the Factory premises through units engaging less than 10/20 employees but working exclusively for the Principal Employer:
This category of employees are coverable under Section 2 (9) (i) of the Act as this amounts to ‘notional extension of Factory premises’.  In this category the supervision is implied.  The employer has to maintain a record under Section 41 (1 A) and Regulation 32 (1) (a). It should be presented before the inspector during inspection. 

F. Jobwork done outside the Factory/Establishment premises through Factory/establishment engaging less than 10/20 employees which are not independently coverable, and where no supervision is exercised and who are undertaking the work for more than one employer: 
The employees of such Job Contractors are not coverable under the provisions of the Act.  The Insurance Inspector shall clearly bring the details of such employees in their report, which will be subject to cross-verification. 

G. Jobwork done outside the Factory premises through Contractors/Immediate Employers who perform the work through Home workers or works in nonimplemented areas:
The workers falling in this category are not coverable.  The Insurance Inspectors shall provide the details in their reports.   

Supervision: Meaning  
The following parameters are taken care for construing supervision: -  

(a) In case where the employee is put to work under the eye and gaze of the principal employer, or his agent, where he can be watched secretly, accidentally or occasionally, while the work is in progress, so as to scrutinize the quality thereof and to detect faults therein, as also put to timely remedial measures by direction given, finally leading to the satisfactory completion and acceptance of work amounts to supervision, for the purposes of Section 2 (9) of the Act CESE Ltd. Vs. S.C. Bose &Ors. (Civil Appeal Nos. 3197-98 of 1988 : SC)    

(b) The right of the principal employer to reject the finished product after the work is over would not alone constitute supervision. The `supervision' has to be established while the work is in progress. CESE Ltd. Vs. S.C. Bose &Ors.  (Civil Appeal Nos. 3197-98 of 1988 : SC) 

(c) The right to control the manner of work is not the exclusive test for determining the relationship of employer and employees.  It is also to be considered as to who provides the equipment.  The fact that the sewing machines on which the workers do the work, generally belong to the employer, is an important consideration for deciding that the relationship is that of Master and Servant( M/s. Silver Jubilee Tailoring House and others Vs. Chief Inspector of Shops and Establishments  (AIR 1974 : SC 37)

So, for workers, involved in jobs outsourced, engaged by principal employer, the responsibility of ensuring and maintaining the compliances for ESI thus clearly depend upon the factor of "Supervision" as clearly stated by the ESI Corporation in its circular (No.P-12(11)-11/83/05-Rev.II). This categorization and segregation of the different category of jobwork and supervision by principal employer has brought clarity in effective functioning of the ESI Act.