Karnataka HC : Contract Labour For Factory Maintenance Qualifies As Employees Under ESI Act | Employer Cannot Evade Liability By Suppressing Records
Sanchayita Lahkar
The High Court of Karnataka Single Bench of Justice Ramachandra D. Huddar allowed an appeal challenging the modification of statutory contribution dues under the Employees State Insurance Act, 1948. The Court set aside the order of the lower court that had reduced the assessed contribution amount and restored the original demand of Rs. 13,52,825 as determined by the statutory authority. The respondent was directed to pay the amount within eight weeks from receipt of the judgment, failing which it would attract interest and other statutory consequences under the provisions of the Act. The Court issued this direction after finding that the modification of the demand by the lower court was unsupported by any cogent evidence, calculation, or legal rationale.
The matter arose from a statutory appeal under Section 82(2) of the Employees State Insurance Act, 1948, filed by the Employees State Insurance Corporation. The dispute concerned a demand raised under Section 45-A of the Act for a sum of Rs. 13,52,825 covering the period from April 1999 to March 2005. The respondent is a private limited company engaged in the manufacture of automobile components, operating multiple units within the Corporation's jurisdiction. It was not in dispute that the respondent qualified as a "factory" within Section 2(12) of the Act.
Following inspection of records, the Corporation found that the respondent had engaged contractors for various construction, maintenance, and repair works within its factory premises during the relevant period. No contributions had been paid in respect of the labour engaged in such works. The respondent also failed to provide relevant wage records or registers despite multiple opportunities. In view of this, the Corporation invoked its powers under Section 45-A and determined the contribution payable based on available information.
The respondent challenged the demand before the Employees State Insurance Court on grounds including the contention that the workers in question were under independent contractors and not under its control and supervision, that the contractor payments included substantial material costs making the labour component indeterminate, and that the assessment lacked a rational basis.
The ESI Court recorded that the demand appeared to include non-wage elements and proceeded to reduce the liability from Rs. 13,52,825 to Rs. 3,50,000 without assigning any precise calculation or logic. The Corporation's appeal before the High Court challenged this reduction as arbitrary and lacking legal justification.
The Court noted the purpose of the ESI Act as social welfare legislation, stating that "the provisions of such a welfare statute should be construed liberally to advance its beneficent purpose and not in a manner that defeats its statutory intent."
On the issue of whether the labourers engaged through contractors for the construction and repair works fell within the definition of "employee" under Section 2(9), the Court observed that the provision "encompasses persons directly employed by the Principal Employer" as well as those employed through an immediate employer such as a contractor, provided they are engaged in work connected with the factory's operations. It further stated that "construction and maintenance work undertaken for the expansion or operational upkeep of the factory premises are integral to the continuity, efficiency and safety of the factory's operations."
Addressing the validity of the Section 45-A order, the Court recorded that the Corporation is empowered to determine contributions based on reasonable estimates when employers fail to maintain or furnish records. It stated: "When an employer withholds material records, it cannot later be heard to complain that the assessment was speculative." The Court found "no infirmity in the method adopted by the Corporation", which had estimated that 25% of contractor payments represented labour costs, and computed contributions accordingly.
Regarding the ESI Court's modification of the demand, the High Court stated: "The Court has not recorded any finding to the effect that the 'Labour' component was less than 25% nor has it relied on any contrary material or expert testimony. There is no computation offered to support the revised figure of Rs. 3,50,000." It concluded that the lower court's approach was "perverse" and amounted to "conjectural quantification", which undermined the purpose of the Act.
The Court also referred to a Division Bench judgment in a similar case, noting: "Since the records were not produced before the Corporation during determination under Section 45-A of the Act, the ESI Court had to accept such determination unless and until the same was disproved." It found this precedent applicable to the present facts.
The Court allowed the appeal. It ordered that the ESI Court's decision reducing the contribution be set aside. It restored the Corporation's determination under Section 45-A, holding the respondent liable to pay Rs. 13,52,825. The Court directed the respondent to pay this amount within eight weeks from receipt of the judgment. It further ordered that if the amount was not paid within the stipulated period, it would attract interest and other statutory consequences as provided under the ESI Act. The Court made no order as to costs.
Advocates Representing the Parties:
For the Petitioners: Sri. Kumar M.N., Advocate
For the Respondents: Sri. Somashekar, Advocate
Case Title: The Assistant Director, ESI Corporation, Regional Office (Karnataka) v. M/s. Sansera Engineering P. Ltd.
Neutral Citation: 2025: KHC:29355
Case Number: MFA No. 3687 of 2016
Bench: Justice Ramachandra D. Huddar
