Authorities Cannot Levy Contribution U/S 1(6) Of ESI Act On Establishments Employing Less Than 10 Workers: Andhra Pradesh High Court

The Andhra Pradesh High Court has clarified, that Authorities under section 1(6) of the Employee's State Insurance Act, 1948; cannot levy a 'contribution' on establishments employing less than 10 individual at all given times. 

Section 1(6) States that a factory shall continue to be governed by the above-mentioned Act, even if the number of employees falls below the specified limit.

The Division Bench of Justice Ravi Nath Tilhari and Justice Challa Gunaranjan noted that section 1(4) of the Act makes it clear that the provisions of the Act would strictly be applicable only to 'factories.' Similarly, section 1(6) also is taken with regard to a 'factory'.

'Factory', the Bench went on to explain, was defined as any precinct which employed at least 10 members on that date or in the previous 12 months as per section 2(12) of the Act, amongst other things.

The Bench further explained that prior to the amendment of 1989, the ESI Act prescribed a minimum of 20 employed individual (amongst other things) for an establishment to be considered a 'Factory'. 

Court thus, explained that section 1(6) should be interpreted to understand that if at any point an establishment was considered a factory under the ESI Act, mere reduction of number would not remove that factory from within the ambit of the Act. That, it should not be interpreted to understand that irrespective of number if other specifications are compiled with an establishment can be governed by the ESI Act.

"Sub-Section (6) of Section 1, starts, "a factory or an establishment to which this Act applies shall continue to be governed by this Act". So, it provides for continuation of the applicability of ESI Act i.e., if the Act was already applicable, then even after the reduction of number of persons employed it is reduced below 10, the Act shall continue to apply. The provision is clear that if the ESI Act was applicable to a 'factory' considering the number of the persons employed being not less than 10, then if there was reduction in the number of its employed persons below 10, still such factory would continue to be governed by the ESI Act. The reduction in number of employees below 10, would not bring out the factory from the purview of the ESI Act, after the amendment, is the correct reading and interpretation of Section 1(6) of the ESI Act."

Relying on the ESI Corporator vs. Radhika Theatre judgment rendered by the Supreme Court, the Bench concluded

"So it is very clear from the judgment that, for the applicability of Sub-section (6) of Section1, the first and foremost condition is that the Act was applicable to the factory' or the 'establishment'; which shall continue to be applied even if the number falls below 10. Section 1(6) makes the continuity, of the applicability of the Act, irrespective of reduction in the number of persons employed below specified limit under or by the Act."

Background: 

The Appeal had been filed by the Regional Director of ESI challenging an order passed in an ESI original petition, by way of which, the Trial Court had directed the Regional Director, ESI to return the amount of INR 88,657, back to Sri Ramakrishna Rice Mill, (respondent in the appeal) that was levied as 'contribution' under section 45A&G of the Act.

The appellant contended that section 1(6) of the Act relaxed the mandate of minimum employees, and thus, since the respondents met other criteria, should be governed by the Act. 

The respondents on the other hands contended that ever since it's inception, it had employed only 9 employees and since the minimum number of employees set by the ESI Act to be considered a factory was 10, the Act would not be applicable.

The Bench conceded with the reasoning of the Trial Court and the argument of the Respondent. 

". So, as per the definition of the factory' to be a "factory', there should be employed 10 or more persons i.e., in present, or 10 or more persons were employed previously on a date preceding 12 months. We are confining to the aspect of number of the persons employed, in view of the limited argument raised, and are not dealing with the other part i.e., manufacturing process. Consequently, if at present or on any date preceding 12 months, 10 or more persons are/were employed in any premises including the precincts thereof, it would be a 'factory' and covered by the ESI Act, subject however to the fulfilment of the other statutory requirements. The finding recorded in the present case is that there are less than 10 persons employed. So, we are of the view that the respondent No.1 would not be a 'Factory' and therefore the ESI Act will not be applicable."

Thus, the appeal was dismissed, and the order passed by the Trial Court was confirmed.

Regional Director ESI vs M/s Ramakrishna Rice Mill

Counsel for appellant: Venna Kalyan Chakravarthy 

Counsel for respondent: U.R.P Srinivas

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