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ESI Act: Company Directors, Who Receive Remuneration, Are Also Employees: SC

The Supreme Court has held that Directors of Company, who are receiving remuneration, comes within the purview of "employee" under sub-section (9) of Section 2 of the Employees' State Insurance Act, 1948.

In this case (Employees' State Insurance Corporation vs. Venus Alloy Pvt. Ltd.), the company had challenged the order of Employees' State Insurance Corporation directing them to make payment of contribution in relation to the remuneration paid to the Directors. The ESI Court and later the High Court of Madhya Pradesh held that the Directors of the establishment do not come within the purview of the "employees", as defined under sub-section (9) of Section 2 of the ESI Act.

The bench comprising Justice Abhay Manohar Sapre and Justice Dinesh Maheshwari noted that, in Employees' State Insurance Corporation Vs.Apex Engineering Pvt. Ltd., it was already held by the Supreme Court that the Managing Director, even when to be treated as principal employer, could also be an employee and could carry such dual capacity.

The court said that the corporation, in the present case, had asserted that the Directors of the Company were paid remuneration at the rate of Rs. 3,000/- p.m. and they were falling within the definition of "employee" under the ESI Act and hence, contribution was payable in regard to the amount paid to them. It further observed that the only contention raised was by the company was that the Directors did not fall within the category of "employee". But no attempt was made to show as to how and why the remuneration paid to its Directors would not fall within the purview of "wages" as per the meaning assigned by subsection (22) of Section 2 of the ESI Act, the bench added.

While setting aside the orders of the ESI Court as well as that of the High Court, the bench observed:

"The ESI Court cursorily attempted to distinguish the decision of this Court in Apex Engineering (supra) only with reference to the fact that therein, the amount was being received by the Managing Director. The High Court, on the other hand, overlooked the said decision of this Court and relied only on the decisions of the Bombay High Court though the propositions in the referred decisions of the Bombay High Court stood effectively overruled by the decision in Apex Engineering (supra) where this Court held in no uncertain terms that the High Court was in error in taking the view that the Managing Director of the Company was not an employee within the meaning of Section 2 (9) of the ESI Act. The said decision directly applies to the present case and we have no hesitation in concluding that the High Court in the present case has been in error in assuming that the Director of a Company, who had been receiving remuneration for discharge of duties assigned to him, may not fall within the definition of an employee for the purpose of the ESI Act."