ESI Coverage and Contributions

"Insurable" covers the employee who ought to have been insured but was not, because the employer failed to register him. He is still an Insured Person if contributions were payable in respect of him. The employer's default does not strip the worker of the status.

"Are or were payable" covers the employee whose contributions have stopped. A person does not cease to be an Insured Person the moment the last contribution is made, because entitlement to some benefits looks back to an earlier contribution period.

Section 42 reinforces this, and it is taken in [ESI Enforcement and Schemes for Others]: the Corporation has rights where an employer fails to register.

Section 29: contributions

Section 29(1). The contribution payable in respect of an employee comprises the employer's contribution and the employee's contribution, and is paid to the Corporation.

Section 29(2). Both contributions are paid at such rates as may be prescribed by the Central Government.

Note what the Code does not do here. Unlike section 16(1)(a), which fixes ten per cent for provident fund on the face of the Code, section 29(2) fixes no figure at all for insurance. Both ESI rates are entirely delegated. A student who quotes a percentage for ESI out of the Code is quoting something that is not in it.

Section 29(3), the wage period. The wage period in relation to an employee is the unit specified in the regulations, in respect of which all contributions are payable.

Section 29(4), when they fall due. Contributions for each wage period ordinarily fall due on the last day of the wage period. Where an employee is employed for part of a wage period, or is employed under two or more employers during the same wage period, they fall due on such days as the regulations specify.

Section 30: administrative expenses

The types of expense that count as administrative expenses, and the percentage of the Corporation's income which may be spent on them, are prescribed by the Central Government, and the Corporation shall keep its administrative expenses within the limit so prescribed.

Short, and worth a line in an essay. An insurance fund whose running costs are uncapped is an insurance fund that pays smaller benefits. The Code caps the running cost as a proportion of income and makes the cap binding on the Corporation.

Section 31: how the contributions are actually paid

This is the operative section and it has nine sub-sections. Take them as a chain.

Section 31(1), the primary liability. The employer shall pay, in respect of every employee, whether directly employed by him or by or through a contractor, both the employer's contribution and the employee's contribution.

That is the heart of it. The employer pays both, and he pays for the contractor's people too. Everything that follows is about who may recover what from whom afterwards.

Section 31(2), recovering the employee's share. Notwithstanding any other law, but subject to the Code and the rules and regulations, the employer is entitled, in the case of an employee directly employed by him and not being an exempted employee, to recover the employee's contribution by reduction from his wages and not otherwise.

The proviso limits the deduction twice. No deduction may be made from wages other than those relating to the period, or part of the period, in respect of which the contribution is payable, nor in excess of the sum representing the employee's contribution for that period. So an employer cannot recover an old arrear out of this month's wages, and cannot deduct more than the share itself.

Section 31(3), the absolute bar. Notwithstanding any contract to the contrary, neither the employer nor the contractor is entitled to deduct the employer's contribution from any wages payable to an employee, or otherwise to recover it from him.

Section 31(4), the trust. Any sum deducted by the employer from wages under the Chapter is deemed to have been entrusted to him by the employee for the purpose of paying the contribution for which it was deducted.

This converts a failure to remit from a mere non-payment into a breach of an entrustment. It is the provision to cite when an employer has deducted from wages and kept the money.

Section 31(5), the cost of remitting. The employer bears the expenses of remitting the contributions to the Corporation.

Section 31(6), recovery from the contractor. An employer who has paid contributions for an employee employed by or through a contractor may recover the amount so paid, the employer's contribution as well as the employee's contribution if any, from the contractor, either by deduction from any amount payable to him under a contract or as a debt payable by the contractor.

Section 31(7), the contractor's register. The contractor shall maintain a register of employees employed by or through him, as provided in the regulations, and submit it to the employer before the settlement of any amount payable under sub-section (6).

Section 31(8), the contractor's recovery from the worker. The contractor may recover the employee's contribution from the employee by deduction from wages and not otherwise, subject to the same conditions as the proviso to sub-section (2).

Section 31(9). The Corporation may make regulations on any matter relating or incidental to payment and collection of contributions.

How section 31 differs from section 17

Both sections deal with the same commercial situation and they are not the same. This table is the safest way to keep them apart.

If an exam asks about deduction of contributions, check first which Chapter is in play. The insurance provisions are the fuller of the two.

A worked example

Kavita is employed at a hospital laundry with sixty workers. She is directly employed. Ramesh works alongside her on the roll of Shine Contractors. The wage period is a month. Assume both are within the wage ceiling.

Are they insured? Yes, both. Section 28(1) insures every employee in an establishment to which the Chapter applies, and section 2(26) defines an employee to include one employed through a contractor. They are Insured Persons under section 28(2).

Who pays? The employer of the establishment, for both of them, and both contributions in each case: section 31(1).

Can the employer recover Kavita's share? Yes, by reduction from her wages and not otherwise, provided the deduction relates to the same period and does not exceed her share: section 31(2) and its proviso.

The employer forgot to deduct for March and tries to take two shares out of April's wages. Lawful? No. The proviso to section 31(2) forbids a deduction from wages other than those relating to the period in respect of which the contribution is payable, and forbids a deduction exceeding the employee's contribution for that period.

The employer deducted Kavita's share and never remitted it. What is the position? Under section 31(4) the sum deducted is deemed to have been entrusted to him by her for the purpose of paying the contribution. The failure is a breach of that entrustment, not simply an unpaid bill.

Can the employer recover Ramesh's contributions from Shine Contractors? Yes, both of them, by deduction from what is payable under the contract or as a debt: section 31(6). But Shine must first give the employer the register of employees it is required to keep, before settlement of any amount: section 31(7).

Can Shine then deduct the employer's share from Ramesh's wages? No. Section 31(3) forbids it notwithstanding any contract to the contrary, and section 31(8) allows Shine to recover only the employee's contribution, by deduction from wages and not otherwise.

Ramesh was never registered by anybody. Is he outside the scheme? No. He is insurable under section 28(1), and section 28(2) makes an insurable employee in respect of whom contributions were payable an Insured Person. The employer's default does not remove his status.

What this does NOT mean

The rates are not in the Code. Section 29(2) leaves both rates entirely to the Central Government. Quoting a percentage as the Code's rate is wrong.

"Insured Person" is not the same as "employee". An employee becomes an Insured Person when contributions are or were payable in respect of him and he is by reason of that entitled to a benefit. The Code uses the two terms differently throughout Chapter IV.

The employer's ability to recover is not a shift of liability. Sections 31(2), (6) and (8) create rights of recovery. The obligation to pay the Corporation stays where section 31(1) puts it.

Section 31(2) does not apply to every employee. It is confined to an employee directly employed by the employer and not being an exempted employee. The contractor's people are dealt with by sub-sections (6) to (8).

Limits and criticism

Everything about the money is delegated. The rates under section 29(2), the wage period under section 29(3), the due days for part periods under section 29(4) and the administrative expense cap under section 30 are all outside the Code.

The wage ceiling is not in the Code either. Because the first proviso to section 2(26) limits "employee" for this Chapter to those at or below the notified wage ceiling, the reach of the entire insurance scheme is set by notification.

Section 31(4) creates a deemed entrustment but states no remedy. The consequences have to be found in Chapter XII and in the general law.

The register in section 31(7) is the only real check on contractor supplied labour, and it is owed to the employer rather than to the Corporation.

Quick revision

• Section 28(1): every employee in a covered establishment shall be insured, electronically or otherwise as prescribed. Section 28(2): an employee insured or insurable, in respect of whom contributions are or were payable, and who is thereby entitled to a benefit, is an Insured Person.
• Section 29: contribution comprises the employer's and the employee's, paid to the Corporation, at rates prescribed by the Central Government; wage period is fixed by regulations; contributions ordinarily fall due on the last day of the wage period.
• Section 30: administrative expenses and the percentage of income spent on them are prescribed, and the Corporation must stay within the limit.
• Section 31: the employer pays both contributions for every employee, direct or through a contractor; he may recover the employee's share by reduction from wages and not otherwise, only for the same period and not exceeding the share; neither employer nor contractor may ever pass on the employer's share, notwithstanding any contract; sums deducted are deemed entrusted; the employer bears the cost of remitting; he may recover from the contractor by deduction or as a debt; the contractor must produce a register of employees before settlement; the contractor may recover only the employee's share, by deduction from wages.

Test yourself

1. An employer never registered a worker and never paid contributions for him. Is that worker an Insured Person? Yes, if contributions were payable in respect of him and he is thereby entitled to a benefit. Section 28(2) covers an employee who is insured or insurable and in respect of whom contributions are or were payable, so the employer's default does not remove the status.

2. What rate of contribution does the Code fix for employees' state insurance? None. Section 29(2) provides that both the employer's and the employee's contributions are paid at such rates as may be prescribed by the Central Government.

3. An employment contract says the worker will bear both contributions. Effect? The clause is ineffective so far as the employer's contribution is concerned. Section 31(3) operates notwithstanding any contract to the contrary and forbids either the employer or the contractor from deducting the employer's contribution from wages, or otherwise recovering it from the employee.

4. What are the two limits on deducting the employee's contribution from wages? By the proviso to section 31(2), the deduction may not be made from wages other than those relating to the period, or part of the period, in respect of which the contribution is payable, and may not exceed the sum representing the employee's contribution for that period.

5. An employer deducts a worker's share and spends it. What does section 31(4) add? It deems the sum deducted to have been entrusted to the employer by the employee for the purpose of paying that contribution, so the money is held on trust rather than owed as a simple debt.

6. What must a contractor produce before the employer settles amounts payable to him under section 31(6)? The register of employees employed by or through him, maintained as provided in the regulations: section 31(7).