Employees' State Insurance: evolution, scope and definitions

1. Evolution and object

The Royal Commission on Labour (1931) and the Labour Investigation Committee pointed to the lack of sickness insurance for industrial workers. The Government of India commissioned Professor B.P. Adarkar, whose 1944 report proposed a health insurance scheme for factory workers, reviewed by ILO experts. The Employees' State Insurance Act, 1948 followed, and the scheme was first launched at Kanpur and Delhi in 1952. It was extended over the years from factories to shops, hotels, restaurants, cinemas, road transport, newspaper establishments, private educational and medical institutions, and then to the whole country.

The object is to provide, through one contributory scheme, for sickness, maternity, employment injury and death, together with medical care for the insured person and his family. It relieves the employer of individual liability for these contingencies and spreads the risk across all covered employers and employees.

2. Scope and applicability

The First Schedule applies Chapter IV to every establishment in which ten or more persons are employed, other than a seasonal factory. Three provisos widen or adjust it:

• an establishment carrying on a hazardous or life-threatening occupation notified by the Central Government is covered even if it employs a single employee;
• a plantation employer may opt in where ESI benefits are better than what he provides;
• contributions become payable only from the date the Central Government notifies that ESI benefits are being provided to the establishment's employees.

Further, the Director General may apply Chapter IV to an establishment where the employer and the majority of employees agree (s.1(7)), and the Central Government may apply the Code to any establishment above a notified size on two months' notice (s.1(6)). Once Chapter IV applies, it continues to apply even if the number of employees later falls below ten (s.1(8)) [ESI Act s.1(6)]. Factories and establishments of the Government or a local authority whose employees get substantially similar or better benefits may be exempted (s.46) [s.90].

Coverage of establishments other than factories was always by notification. In Bombay Anand Bhavan Restaurant v. Deputy Director, ESI Corporation, 2009 INSC 1102, (2009) 9 SCC 61, the Court held that a restaurant or hotel is a “shop” for the purposes of a notification extending the ESI Act to shops, giving the word its wide popular meaning in a welfare statute.

3. Key definitions

• Factory, s.2(32) [ESI s.2(12)]: premises where ten or more employees work (or worked on any day of the preceding twelve months) with a manufacturing process carried on with the aid of power, or twenty or more without power. It excludes a mine, a mobile unit of the armed forces, a railway running shed and a hotel, restaurant or eating place. A computer unit alone does not make premises a factory. “Manufacturing process” is in s.2(42).
• Employer and principal employer. The ESI Act distinguished the principal employer (s.2(17): the owner or occupier of the factory, or the person responsible for the establishment) from the immediate employer (s.2(13): the contractor who engaged the worker). The Code does not use these terms. It defines employer in s.2(27) to include the occupier of a factory and the contractor, and section 31 places the obligation where the old Act did: the employer pays both contributions for every employee, “whether directly employed by him or by or through a contractor” (s.31(1)), and recovers them from the contractor (s.31(6)) [ESI ss.40, 41].
• Employee, s.2(26): any person employed on wages, directly or through a contractor, to do any kind of work, other than an apprentice under the Apprentices Act. For Chapter IV it is limited by the first proviso to employees drawing wages up to the wage ceiling notified by the Central Government (s.2(89)) [ESI s.2(9); the ceiling under the 1948 Act was Rs 21,000 a month from 2017]. Employees above the ceiling are still counted to decide whether the establishment is covered (second proviso).
• Dependant, s.2(24): the same list as for compensation, but for Chapter IV a legitimate adopted son is a dependant until twenty-five, and an infirm son or daughter is a dependant if wholly dependent and over twenty-five instead of eighteen [ESI s.2(6A)].
• Family, s.2(33): spouse, minor dependent children, children in education up to twenty-one, unmarried daughters, infirm children, and dependent parents (including the parents-in-law of a woman employee) within a prescribed income.
• Insured Person, s.28(2) read with s.2(39): an employee in respect of whom contributions are or were payable and who is by reason of that entitled to benefits. Section 28(1) requires every employee in a covered establishment to be insured [ESI ss.38, 2(14)].
• Employment injury, s.2(28)(i): personal injury caused by accident or occupational disease arising out of and in the course of employment, to an insured or insurable employee, whether it occurs in or outside India [ESI s.2(8)].
• Insured woman, proviso to s.2(91): includes a commissioning mother and a woman who legally adopts a child up to three months old.

The definition of employee is read widely. In Royal Talkies v. ESI Corporation, 1978 INSC 126, (1978) 4 SCC 204, workers in a canteen and cycle stand run by contractors inside a cinema were held to be employees of the cinema, because the work was incidental to its business and done on its premises. In Kirloskar Brothers Ltd. v. ESI Corporation, 1996 INSC 121, (1996) 2 SCC 682, staff at the company's regional and branch sales offices, away from the factory, were held covered because their work was connected with the work of the factory.

4. Contributions: sections 29 and 31 [ESI ss.39, 40]

• Contribution has two parts, the employer's and the employee's, both paid to the Corporation at rates prescribed by the Central Government (s.29). Under the 1948 Act the rates from July 2019 were 3.25 per cent of wages (employer) and 0.75 per cent (employee).
• The employer pays both parts and may recover the employee's share only by deduction from the wages of the period concerned (s.31(2)). He can never recover his own share from the employee (s.31(3)). A sum deducted is held in trust for the employee (s.31(4)).
• Contributions fall due on the last day of each wage period (s.29(4)). Amounts due are a charge on the establishment's assets, paid in priority under the Insolvency and Bankruptcy Code (s.47) [s.94].

5. The ESI Corporation: section 5 [ESI ss.3, 4]

The Corporation is constituted by the Central Government and consists of a Chairperson and a Vice-Chairperson appointed by it; up to five Central Government officials; one representative of each notified State and one for the Union territories; ten representatives each of employers and employees, appointed after consulting their organisations; two of the medical profession; three Members of Parliament (two from the Lok Sabha, one from the Rajya Sabha); and the Director General, ex officio. Its principal officers are the Director General and the Financial Commissioner (s.24). It works through a Standing Committee (s.5(3)) and a Medical Benefit Committee, and administers the ESI Fund (s.25), which may be spent only for the purposes in s.26.

How this is examined

Because the old papers were set on wages, bonus and child labour, ESI questions will come in the new form: “Discuss the object and scope of ESI under the Code on Social Security”, or short notes on “principal employer”, “insured person”, “employment injury” and “contributions”. In the short note on principal employer, explain that the term belongs to the 1948 Act, give the Code's equivalent in sections 2(27) and 31, and cite Royal Talkies.