Employees' compensation: history, definitions and the employer's liability

1. History and evolution

At common law an injured workman had to sue his employer in tort and prove negligence. Three defences, the “unholy trinity”, usually defeated him: contributory negligence, volenti non fit injuria (he accepted the risks of the job) and the doctrine of common employment (the employer was not liable for the negligence of a fellow servant, from Priestley v. Fowler, 1837). England answered with the Employers' Liability Act, 1880 and then the Workmen's Compensation Act, 1897, which made the employer liable without proof of fault. The Fatal Accidents Act, 1855 and the Employers' Liability Act, 1938 did some of this work in India.

The Workmen's Compensation Act, 1923 was India's first social security law. It was renamed the Employee's Compensation Act by the amending Act of 2009, which also replaced “workman” with “employee”, made the law gender-neutral, and added reimbursement of medical expenses. It is now repealed by section 164(1) of the Code with effect from 21 November 2025.

Meaning of compensation. Section 2(15) says only that compensation means compensation as provided under Chapter VII. In substance it is a statutory payment, fixed by formula, for loss of earning capacity or loss of the breadwinner caused by an employment injury. It is not damages: it does not depend on fault, and it is not measured by pain, suffering or actual loss.

2. Who is covered

By the First Schedule, Chapter VII applies, subject to the Second Schedule, to employers and employees to whom Chapter IV (ESI) does not apply. And section 41(7)(a) bars a person eligible for ESI dependants' or disablement benefit from claiming compensation from his employer. The two schemes are alternatives.

• Employee — section 2(26) is the general definition, but its third proviso says that for Chapter VII “employee” means only the persons in the Second Schedule and any class added by notification [EC Act s.2(1)(dd)]. The Schedule runs to fifty entries: railway servants, factory workers using power, mine workers, seamen, building and construction workers, drivers and loaders of motor vehicles, sewer and septic tank cleaners, farm workers using tractors, circus employees, divers and others. Entry (l) keeps in every class to which the 1923 Act applied in any State.
• Employer — section 2(27): the person who employs one or more employees, directly or through any person, and includes the occupier of a factory, the owner or agent of a mine, the person with ultimate control of any other establishment, a contractor and the legal representative of a deceased employer [EC Act s.2(1)(e)].
• Dependant — section 2(24), in three groups [EC Act s.2(1)(d)]:
  • (a) dependants by status, who need not prove dependency: a widow, a minor legitimate or adopted son, an unmarried legitimate or adopted daughter, a widowed mother;
  • (b) a son or daughter who has attained eighteen and is infirm, if wholly dependent;
  • (c) others who must prove they were wholly or partly dependent on the earnings of the employee: a widower, a parent other than a widowed mother, a minor brother or unmarried sister, a widowed daughter-in-law, a minor child of a pre-deceased son, a grandparent if no parent is alive, and so on.

3. The kinds of disablement

• Temporary disablement, section 2(83): a condition resulting from an employment injury which requires medical treatment and makes the employee temporarily incapable of doing the work he was doing before. It may be total or partial.
• Permanent partial disablement, section 2(55): a permanent disablement that reduces the employee's earning capacity in every employment he was capable of at the time of the accident. Every injury in Part II of the Fourth Schedule is deemed to cause it [EC Act s.2(1)(g)].
• Permanent total disablement, section 2(56): a permanent disablement that incapacitates the employee for all work he was capable of at the time of the accident. It is deemed to result from every injury in Part I of the Fourth Schedule (loss of both hands, total loss of sight, and the like) or from a combination of Part II injuries adding up to 100 per cent [EC Act s.2(1)(l)].

The test is functional. In K. Janardhan v. United India Insurance Co. Ltd., 2008 INSC 624, (2008) 8 SCC 518, a tanker driver lost a leg. The Schedule figure for that injury was well below 100 per cent, but he could no longer work as a driver at all. The Court treated it as total loss of earning capacity for the work he did. In Golla Rajanna v. Divisional Manager, 2016 INSC 1054, (2017) 1 SCC 45, the Court held that loss of earning capacity is a question of fact for the Commissioner (now the competent authority) on the evidence, which a High Court cannot disturb in appeal unless a substantial question of law arises.

4. The employer's liability: section 74 [EC Act s.3]

Section 74(1): if personal injury is caused to an employee by accident or an occupational disease listed in the Third Schedule, arising out of and in the course of his employment, the employer is liable to pay compensation. Four conditions therefore: personal injury; caused by accident or occupational disease; arising out of employment; in the course of employment. The last two are the subject of the next note.

The proviso removes liability in two situations:

• (a) an injury that does not disable the employee, totally or partially, for more than three days;
• (b) an injury not resulting in death or permanent total disablement, caused by an accident directly attributable to the employee being under the influence of drink or drugs, his wilful disobedience of an express safety order or rule, or his wilful removal or disregard of a safety guard he knew of.

The defences in (b) never apply where the employee dies or is totally disabled. Section 74(2) adds that an accident still arises out of and in the course of employment although the employee was breaking the law or his employer's orders, or acting without instructions, if it would have so arisen otherwise and the act was done for the purpose of and in connection with the employer's business.

5. Occupational disease

An occupational disease is one specified in the Third Schedule as peculiar to the employment (section 2(51)). Section 74(3) deems such a disease, contracted by an employee in a Second Schedule employment who has served the same employer continuously for at least six months, to be an injury by accident, and presumes, unless the contrary is proved, that it arose out of and in the course of employment [EC Act s.3(2)]. The Third Schedule lists, among others, diseases caused by lead, mercury, benzene and arsenic, silicosis and other pneumoconioses, occupational asthma, noise-induced hearing loss and diseases caused by extreme heat or cold. Section 74(5) lets Governments add employments and diseases on three months' notice. Outside these deeming provisions, section 74(6) allows compensation for a disease only if it is directly attributable to a specific injury by accident arising out of and in the course of employment.

6. Civil suit and contracting

• Election of remedy, section 74(7) [EC Act s.3(5)]: an employee who sues for damages in a civil court loses his right to compensation; and no suit lies if he has claimed before the competent authority or agreed with his employer on compensation under the Chapter.
• Contracting, section 85 [EC Act s.12]: where the employer has work that is ordinarily part of his trade or business done through a contractor, he is liable to the contractor's employee as if he had employed him directly, with a right of indemnity against the contractor. The employee may sue the contractor instead. This does not apply to an accident outside the premises where the principal undertakes the work or which are under his control.
• Plantations, section 75: the employer is liable for death or injury caused to a worker or his family by the collapse of a house he provided, unless the collapse is solely due to an occupant's fault or a natural calamity.

7. Problem

A, a machine operator in a factory to which ESI does not apply, comes to work drunk. He removes the guard from his machine and loses two fingers. B, his co-worker, also drunk, is killed by the same machine a week later. Advise the employer.

Issue. Whether the drink and safety-guard defences under the proviso to section 74(1) protect the employer.

Law. Section 74(1)(b) excuses the employer where the accident is directly attributable to drink or drugs, or to wilful removal of a safety guard, but only where the injury does not result in death or permanent total disablement.

Application. Loss of two fingers is permanent partial disablement under the Fourth Schedule, not total. If the employer proves the accident was directly attributable to A's drunkenness or to his wilful removal of the guard, he is not liable. B's case is different: the injury resulted in death, and the proviso does not apply to death at all.

Conclusion. No compensation to A if the employer discharges the burden of proving the defence; compensation to B's dependants under section 76(1)(a) whatever his condition. Had the factory been covered by ESI, both claims would lie to the Corporation, not to the employer (section 41(7)).

How this is examined

The old papers on this subject were set on wages, bonus and child labour and seldom reached the 1923 Act, so expect fresh questions on the Code. The likely essays are “Discuss the liability of the employer to pay compensation” and “Explain the evolution of employees' compensation law in India”; the likely short notes are “dependant”, “partial and total disablement” and “occupational disease”. For the essay, give the four conditions of section 74(1), the two exceptions, section 74(2) and (3), and close with the bar on double remedies. A problem on drink or disobedience is answered by asking first whether the result was death or total disablement.