SUPREME COURT HOLDS NUMBER OF EMPLOYEES NOT A KEY CONSIDERATION FOR PAYMENT OF ESI BY AN ESTABLISHMENT

Introduction

The Supreme Court, on Friday, held that Section 1(6)[i] of the Employees’ State Insurance Act, 1948 (hereinafter, “ESI Act”), which contemplates that an establishment would be governed by the Act irrespective of the number of the employees. This decision means that establishments that were already in operation when the provision was enacted will be covered by the provision given. A Division Bench consisting of Justices M.R. Shah and C.T. Ravikumar upheld the order passed by the Employee Insurance Court (hereinafter, “EI Court”) thereby overruling the Telangana High Court’s decision to quash the demand notices issued by ESI Corporation.

Facts of the Case

Radhika Theatre, which was founded in 1981, paid ESI contributions up until September 1989. Following that, it ceased providing contributions because the number of employees fell below the required threshold of 20, hereby ESI Corporation sent out demand notices. The Theatre contested the same before the EI Court, but their case was dismissed. An appeal was filed before the Telangana High Court.

The Theatre contended that since the addition of Section 1(6)[ii] of the ESI Act, which provided that all establishments would be subjected to the ESA Act regardless of whether they employed less people than required, went into effect on October 20, 1989; it should not be applied retroactively. On the other hand, the Corporation contended that since the act deals with social welfare and the wellbeing of the workers, a liberal interpretation and regard is to be given to objective of the act.

It is essential to note that the ESI Act only applied to businesses and factories with more than 20 employees previous to the addition of Section 1(6). The Telangana High Court in allowing the appeal noted that “…amendment to section1 of the ESI Act by which Sub-section (6) of Section 1 came to be inserted w.e.f 20.10.1989, the same shall not be applicable retrospectively and the same shall not be made applicable to an establishment, established prior to 20.10.1989/31.03.1989.”[iii]

Employees State Insurance Corporation (the “ESI Corporation /Appellant”) appealed the Telangana High Court’s ruling that ESI Act’s Section1(6) could not be retroactively applied before the Supreme Court.

Issues

Whether the ESI Act apply to factories and other establishments, established before October 1989 when it comes to demand notices, even if the number of employees at any given time is below the cap set forth in the ESI Act?
Whether the stated Section 1(6) of the ESI Act may have been applied retroactively to demand notices for the time period starting October 1989?

Legal Principles

The ESI Act serves as a constitutional instrument because of its practice of providing insurance and medical insurance. While the ESI Act is mostly executed through the ESI Corporation, the Central Government takes control of most of the proceedings.
Considering insurance, whether it be public or private, is mentioned in the Seventh Schedule of the Indian Constitution as a Union List subject, it can only be regulated by the Central Government, which greatly adds to the legitimacy of the Act.
The Workers’ State Insurance Corporation, formed by Section 3 and charged with upholding social security, serves as the vehicle through which the ESI Act performs its duties. It was founded on February 24th, 1952.

Arguments by Appellants

That the respondent in this case has been operating a cinema since 1981. Up until September 1989, ESI contributions were paid. But, after that, it stopped paying the payments because the number of its employees was under 20. As a result, the corporation that filed the appeal issued demand notices.
The respondent, the original appellant, argued before the High Court that Subsection (6) of Section 1 of the ESI Act, which was added on October 20, 1989, would not be made relevant retroactively and would only be operative on or after that date and not before.
It was argued that, in accordance with Section 1’s modified Subsection (6), all establishments must abide by the ESI Act’s regulations regardless of whether they employ the minimum number of people.
By ruling that the alteration to Section 1 by inserting Subsection (6) shall not be applicable retroactively, the High Court committed a significant error in granting the appeal and invalidating the demand notices even for the time after October 20, 1989.
The ESI Act is a social welfare law that is meant to protect the interests of the affected workers. So, it is argued, in order to fulfill the ESI Act’s goals and objectives, the legislature deemed it appropriate to add Sub-section (6) to Section 1 of the ESI Act.
It was noted in the case of Bombay Anand Bhavan Restaurant v. ESI Corpn.[iv], that:

The Workers’ State Insurance Act is a social security law, and the standards for evaluating social laws differ from those for interpreting tax laws. In order to accomplish the goal that the legislature had in mind when it put this legislation on the books, the courts must not tolerate any ruse that would subvert the provisions of social legislation and, if necessary, they must stretch the Act’s meaning. Therefore, a liberal interpretation of the Act is required to advance its goals.

On October 20, 1989, Subsection (6) of Section 1 of the ESI Act was added. As a result of this radical change, a factory or establishment to which the ESI Act applies would be governed by the ESI Act even if the number of people employed there at any given time fell below the limit outlined by or under the ESI Act.
In accordance with what the High Court observed and held, subsection (6) is applied retroactively. It is only possible to claim that the same provision has been applied retroactively in the case of demand notice for the time frame before the addition of Subsection (6) of Section 1 of the Act.
As a result, the High Court made a very serious mistake when it observed and held that even for demand notices for the period after October 20, 1989, that is, after Section 1’s Subsection (6) was added, the said provision is applied retroactively. The High Court also made a mistake when it allowed the appeal and invalidated the demand notices even for the period after October 20, 1989.

Arguments by Respondents

The respondent in this case challenged the demand notices before the EI Court via EIC No. 14/2003, claiming, among other things, that because it employed fewer than 20 people before the addition of Sub-section (6) of Section 1 of the ESI Act, 1948, effective October 20, 1989, it was not subject to the ESI Act’s protections.
In the contested judgment and order, the High Court upheld the appeal filed by the respondent herein, reasoning that the amendment to Section 1 of the ESI Act, by which Subsection (6) of Section 1 was added effective as of October 20, 1989, should not be applied retroactively and should not be made applicable to an establishment founded before October 20, 1989/March 31, 1989.
The area of interpreting laws and the rule of law is a dynamic idea that is always expanding and being fulfilled, and any interpretations that are made must serve the social and economic fairness that is envisioned in the Constitution. A deliberate attempt at a societal direction in the process of change is legislation.

In Buckingham and Carnatic Co. Ltd. v. Venkatiah[v], a three-judge bench of the Apex court, speaking through then-Judge Justice Gajendragadkar, accepted the learned counsel, Mr. Dolia’s argument that the relevant provisions should not be interpreted in a technical or narrow sense because the social legislation is intended to confer specific benefits on the workmen to whom it applies.

Court’s Analysis

The Court initially took into consideration the ESI Act’s objective, purpose, and preamble. The preamble outlines benefits for workers in the event of sickness, maternity, and workplace injuries, as well as making provisions for a few other related issues. The Court stated that the ESI Act should be given a liberal interpretation that leans in direction of the beneficiary as ESI is a social welfare law.

In accordance with the Supreme Court, before Sub-section (6) of Section 1 of the ESI Act was added, only factories or establishments employing more than 20 people were subject to its regulations; however, following the amendment of the provision in 1989, any factory or establishment would be subject to the ESI Act regardless of the number of people employed. Due to this, factories and other establishments on and after October 1989 will be governed by the ESI Act irrespective of the number of employees, making the demand notifications sent by the ESI Corp for the time period following October 1989 lawful.

The amended Section 1(6) was applied retrospectively, according to the Supreme Court, and the Telangana High Court erred in striking aside the demand notice for the time following October 1989. It believed that the identical provision could only be deemed to have been applied retroactively in the instance of demand notice for the time prior to the insertion of Section 1(6) of the ESI Act.

Therefore, the Supreme Court held that Section 1(6) of the ESI Act shall be applicable even with respect to those establishments that were established prior to October 1989 and that the ESI Act shall be applicable regardless of the number of persons employed below the limit specified under the ESI Act while setting aside the order of the High Court and restoring the demand notice issued by the appellant for the period post October 1989.

Conclusion

The ESI Act is special in that it benefits both employees and employers in tangible ways. While employees are covered by the act and receive financial assistance in the event of an injury, companies are also shielded from being placed in jeopardy again in place of providing the employees with compensation. The ESI Act is an important element for working-class employees in India that benefits them while also helping sectors outside of the working class.

And in this particular case, the consequences would be experienced by the working class, if the judgment is implemented and the number of employees is taken into account.

Due to the significant influence that ESI has on the younger workforce, it would result in employers being less aware of the law, which would be problematic for the individual who requires it.

[i]The Employees’ State Insurance Act, 1948 (Act No. 34 Of 1948), S 1(6).

[ii]ibid.

[iii] Eligibility for 5 [re-appointment] or re-election. —from ESCI Act https://labour.gov.in/sites/default/files/TheEmployeesAct1948_0.pdf.

[iv]Bombay Anand Bhavan Restaurant v ESI Corpn. ((2009) 9 SCC 61: (2009) 2 SCC (L&S) 573) SCC p. 66, para 20).

[v]Buckingham and Carnatic Co. Ltd. v Venkatiah AIR 1964 SC 1272.