Employee benefit plans and investment schemes are a vital part of the overall compensation package of employees and acts as an important social security parameter for a large workforce in India. While such benefits surely boost the welfare of the bottom line in the short run, a cohesive employee benefit and investment package ensures prosperity of the organization in the long run inasmuch when the employees feel that the benefits and financial security provided by their job is adequate, they tend to be more productive. Over the last few decades, a huge emphasis has been given by the legislature to these investment schemes and benefits to ensure that the employees / workers are adequately compensated. The Employees’ Provident Fund (“EPF”), the Employees’ State Insurance (“ESI”) and Gratuity have been of particular emphasis and importance in this regard. While separate legislations have been enacted to operationalize the payment / deduction of EPF, ESI and Gratuity, namely the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (“EPF Act”), the Employees’ State Insurance Act, 1948 (“ESI Act”) and the Payment of Gratuity Act, 1972 (“Gratuity Act”) respectively, the obligation to make such payments / deductions still remains an issue of concern and contention. In most cases, the Principal Employer attempts to shift the liability of the payment / deduction to the Contractor and vice versa. While there are a line of judicial precedents coupled with the provisions of the EPF Act, ESI Act and Gratuity Act which bring about clarity to the issue of liability, it can be often seen that Principal Employers and/or Contractors attempt to evade this liability by misinterpretation and/ or ignorance of law, thereby resulting in prejudice to the workers and protracted litigations thereafter.
DEDUCTION / PAYMENT OF EMPLOYEES’ PROVIDENT FUND UNDER THE EPF ACT
Section 2(e) of the EPF Act defines ‘employer’ in relation to the EPF Act and includes the owner, occupier and/or the person who has the ultimate control over the affairs of the establishment. Further, Section 2(f) defines ‘employee’ which includes any person who gets, his wages directly or indirectly from the employer and specifically includes any person employed by or through a ‘contractor’. Additionally, paragraph 30 of the EPF Scheme, 1952 (“EPF Scheme”) stipulates that the payment of employee contributions (including Employees’ Provident Fund) and those pertaining to the Contractor, shall be the obligation of the ‘employer’. On a perusal of the aforementioned provisions, it appears that the Principal Employer shall be liable for all PF contributions, including for those belonging to the labourers / workers of the Independent Contractor, particularly in view of paragraph 30 of the EPF Scheme. Further, Section 2(f) includes within its ambit even those persons who are appointed through an Independent Contract, which gives the impression that the Principal Employer would be liable for all statutory disbursements / deductions pertaining to such employees, including PF contributions. However, judicial precedents on the issue have clarified the position in relation to the liability of Principal Employer and the Independent Contractor pertaining to the payment of PF contributions. It has been repeatedly held by Courts that in the event the Independent Contractor operates independently having its own code, it would be liable for the PF deductions / disbursements themselves and such liability cannot be imputed on the Principal Employer. The High Court of Madras in its ruling in The Madurai District Central Cooperative Bank Ltd. v. EPFO [2012 LLR 702], while dealing with a situation where an independent code was allotted to the Independent Contractor, clearly stipulated that the obligation under paragraph 30 of the EPF Scheme would only fall on the Principal Employer in the event the Independent Contractor does not have an independent code. However, when such independent code has been obtained, the independent contractor shall be liable for all PF payments. Similarly, the High Court of Madras in its ruling in Brakes India Ltd. v. EPFO [2015 (2) LLN 233 (Mad.)] while dealing with the aspect of PF deductions / contributions by the Principal Employer and/ or the Independent Contractor wherein the Independent Contractor had an independent PF Code, relied on the aforementioned ruling in Madurai District Central Cooperative Bank Ltd of the High Court of Madras and held the Independent Contractor shall have the liability in relation to the PF payments. Further, the High Court of Punjab and Haryana at Chandigarh in its ruling in Calcutta Constructions Company v. Regional Provident Fund Commissioner and Ors. [2015 (146) FLR 579] has held on similar lines that in the event the Independent Contractor has an independent code, such Independent Contractor shall be liable for the PF contributions and not the Principal Employer.
DEDUCTION / PAYMENT OF EMPLOYEES’ STATE INSURANCE UNDER THE ESIC ACT
Section 2(9) of the ESI Act has stipulated the scope and ambit of ‘employee’ in relation to the ESI Act and includes anybody who is employed through an immediate employer and who works under the supervision of the Principal Employer. Clearly therefore, pursuant to the aforementioned provision, the workers of the Independent Contractor over which the Principal Employer has control and supervision would fall within the ambit of employee under the ESI Act and their monetary liabilities would have to be taken care of by the Principal Employer. However, the element of ‘supervision’ becomes extremely crucial to determine the liability of the Principal Employer for monetary deductions / disbursements. The Division Bench of the Madras High Court in its ruling in South India Surgical Company v. The Regional Director, ESIC [L.P.A. No. 74/1992], while dealing with an issue relating to ESI disbursements / deductions by the Principal Employer and/or the Contractor, held that when the Principal Employer had no control and supervision over the workers of the Independent Contractor, such workers would not fall within the ambit of Section 2(9) of the ESI Act and accordingly would not be ‘employees’ as per the Act. Clearly therefore, the ESI compliances in relation to such workers would have to be taken care of by the Independent Contractors. A Full Bench of the Madras High Court, thereafter in its ruling in ESI Corporation v. Bethall Engineering Company [C.M.A. (NPD) No. 1765 of 1999], while relying of the aforementioned Division Bench decision of the Madras High Court in South India Surgical Company held that in the event the Principal Employer does not exercise ‘supervision’ over the workers of the Independent Contractor, then such workers would not fall within the ambit of ‘employees’ under Section 2(9) of the ESI Act and the monetary liabilities in relation to the workers would accrue to the Independent Contract in such case. Similarly, the Madras High Court in its ruling in Deputy Director, Insurance No. V, ESIC v. India Pistons Repco Limited [C.M.A. No. 1516 of 2010] held that the liability of ESI would only on the Principal Employer when the Principal Employer controls and supervises the work in relation to the workers of the Independent Contractor, otherwise, such liability would be imputed to the Independent Contractor.
DEDUCTION/PAYMENT OF GRATUITY UNDER THE GRATUITY ACT
Section 1(3) of the Gratuity Act stipulates the scope of the Gratuity Act and includes within its ambit ‘establishments’ within the meaning of any law and/ or where ten or more employees are employed. Section 2(f) of the Gratuity Act defines ‘employer’ to be the authority having control and supervision of the employees working in the establishments. Further, it is pertinent to note that Section 2(e) of the Contract Labour (Regulation & Abolition) Act, 1970 (“Contract Labour Act”) defines establishment to include any place where any industries, trade, business or manufacture or occupation is carried out. Additionally, Section 2 (vi) of the Payment of Wages Act, 1936 (“Payment of Wages Act”) becomes relevant inasmuch it defines ‘wages’ and includes sums on the termination of the employment of the person. The aforementioned provisions clearly give the impression that the Principal Employer shall be responsible for the payment of gratuity in relation to the workers of the Independent Contractor inasmuch such Principal Employer shall be an ‘establishment’ and liable for wages on termination, which would include gratuity. However, Section 21(4) of the Contract Labour Act stipulates that in the event the Independent Contractor fails to make payment of wages, then the same shall be paid by the Principal Employer which can thereafter be recovered from the Independent Contractor. Accordingly, Section 21(4) of the Contract Labour Act makes it clear that if the primary liability for payment of gratuity to its workers lies on the Independent Contractor, in the absence of which the liability shall lie on the Principal Employer. In the aforementioned context, the Madras High Court in its ruling in Madras Fertilizers Limited v. The Controlliing Authority, Assistant Commissioner of Labour (Gratuity) and Ors. [2003 (97) FLR 275], while dealing with the aspect of gratuity compliances pertaining to the Principal Employer and/or the Independent Contractor, categorically held that in the event the Independent Contractor, who has engaged the workmen does not pay gratuity, then pursuant to Section 21(4) of the Contract Labour Regulation Act, the Principal Employer shall be liable to pay such dues and then recover the same from the Independent Contractor. The aforementioned ruling therefore clearly stipulated that the Independent Contractor, who hires the labourers, shall fall within the ambit of ‘establishment’ in the Contract Labour Act and accordingly the primary liability to pay gratuity would be on such Independent Contractor. In the event such Independent Contract does not fulfill its obligations of paying gratuity, the same shall be fulfilled by the Principal Employer. The Bombay High Court, thereafter, in its ruling in Cummins (I) Limited and Ors. v. Industrial Cleaning Services and Ors. [2017 (1) ARB 705] held on similar lines that in the event the Independent Contractor does not pay gratuity to its workers, the Principal Employer shall pay the same and thereafter recover the amounts from the Independent Contractor. Further, The Madras High Court recently, in its ruling in Superintendent Engineer, Mettur Thermal Power Station v. Appellate Authority, Joint Commissioner of Labour, Coimbatore and Another [(2012) 3 CLR 243], while relying on the decision of the Madras High Court in Madras Fertilizers Limited, held the Principal Employer shall pay the gratuity and recover the same from the Independent Contractor in case of defaults by the Independent Contractor.
CONCLUSION
1. In the light of the aforementioned legal analysis, the following conclusion can be derived in relation to statutory contributions / deductions pertaining to EPF, ESI and Gratuity: i. In the event the Contractor / Sub-contractor has an independent code, the Principal Employer shall not be liable to make PF deductions / contributions pursuant to paragraph 30 of the EPF Scheme and such liability shall be on the Contractor / Sub-contractor. ii. In the event Principal Employer exercises supervision and control over the workers of the Independent Contractor, then such workers would fall within the ambit of Section 2(9) of the ESI Act, and accordingly the ESI liabilities would accrue to the Principal Employer in such case. Otherwise, such liability would be imputed to the Independent Contractor. If the Contractor / Subcontractor has defaulted in its gratuity payments, the Principal Employer shall be liable to make such payments and thereafter recover such amounts from the Contractor / Sub-contractor.
On a perusal of the aforementioned provisions, it appears that the principal employer shall be liable for all PF contributions, including for those belonging to the labourers/ workers of the independent contractor, particularly in view of paragraph 30 of the EPF Scheme. Further, Section 2(f) includes within its ambit even those persons who are appointed through an independent contract, which gives the impression that the principal employer would be liable for all statutory disbursements / deductions pertaining to such employees, including PF contributions.