High Court: Establishment Cannot Avoid ESI Coverage by Showing Employees Under “Allowance” to Stay Below 10-Employee Threshold

The petitioner, M/s. Diamond Silk Khadi Society, a certified Khadi institution functioning under KVIC guidelines, challenged orders passed under Sections 45-A and 45-AA of the Employees’ State Insurance Act, 1948. The ESI authorities had assessed contributions on the footing that the establishment employed more than the statutory threshold of 10 employees. The society contended that it had never employed more than 9 persons and that artisans associated with it were self-employed individuals, not employees. It further argued that being part of the khadi and unorganised sector, the ESI Act was not applicable. However, during inspection, the authorities found a payment register reflecting 13 individuals, 9 shown as employees and 4 separately recorded under “allowance”, with provident fund deductions made.

Main Issue: Whether the petitioner’s establishment could avoid coverage under the ESI Act by splitting wage records and classifying certain workers under “allowance” to remain below the statutory threshold of 10 employees?

HC Decided: The High Court dismissed the writ petition and upheld the applicability of the ESI Act. It held that the total number of employees must be determined from the substance of records and not their form. The Court found that maintaining separate pages in the payment register to show 9 employees and 4 additional persons receiving allowances with PF deductions was a clear attempt to evade statutory obligations.

While the Court accepted that artisans, in principle, may be self-employed and not automatically treated as employees, it held that the remaining workforce itself exceeded the statutory limit. The classification of payments as “allowances” was rejected, particularly in light of provident fund deductions, and was treated as part of wages. The Court emphasised that the ESI Act is a beneficial social welfare legislation and any attempt to artificially structure records to defeat its applicability cannot be sustained. Accordingly, the orders passed under Sections 45-A and 45-AA were upheld.

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