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The Coffee Break Guide to Compliance – Vol. 11

Posted by: on 17 August 2018 in HR, Payroll

This post is part of the Coffee Break Guide to Compliance by Anandan Subramaniam. Please subscribe to the blog updates if you’d like to be notified of these posts. Please comment below with your doubts and queries.

The Coffee Break Guide to Compliance – Vol. 11 {Various Types of Wages under the ESIC – DEFINED}

The largest and best social security benefit in India for the working class is the Employees’ State Insurance (ESI). The coverage extends to those workers who draw up to Rs.21,000 per month and the benefits are extensive –including Medical, Sickness, Extended Sickness, Enhanced Sickness, Disablement Benefit, Maternity Benefit, Funeral Benefit, Death Benefit and more.

What constitutes wages under ESI AC, for deduction and contribution?

For the purpose of arriving at contribution, what Employer needs to consider as Wages, and the four different types of wages that determine the contribution towards ESIC, are discussed here.

1) WAGES: As per Section 2(22) of ESIC Act, Wages means all remuneration paid or payable in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled if any, paid at intervals not exceeding two months

  • Any remuneration which is paid or payable only in cash (now through bank) and not in any other kind, which is as per the terms of contract of employment (oral, written and implied)
    • Paid – wages including all allowances (HRA, OT &any other allowances, unless excluded
    • Payable – wages for an employee who was separated in mid of month, authorised leave, payment towards Lay-off, Lockout and Legal strike
  • Any additional remuneration, if any, paid at intervals not exceeding two months – Production Incentive or Statutory Bonus paid monthly, etc.
  • Some Employers were showing that an additional payment (remuneration) was payable once in a quarter as per announcement. But they were paying an amount every month as advance and setting off the advance amounts from the quarterly payments, and were booking the final amount paid for the quarter under Quarterly Incentives. In such a case, the fact was that the payments were made every month, although the final quantum was decided once in a quarter. And they were, therefore, Wages under the Act.
  • Exclusions:
    Washing allowance Shoe allowance to polish shoes Annual sales commission Travelling allowance Sum paid to defray special expenses
    PF Contribution ESI Contribution Gratuity Annual bonus EL encashment
    Salary drawn by the Proprietor, Partners, Contractors Tips paid by Hotel Managements
    Apprentices under the Apprentices Act, Notice pay Retrenchment compensation
    Payments made to Labour consultants, Lawyers, Engineers, Chartered Accountants, Counsels

2) OMITTED WAGES: Contribution on wages on which contribution is due but not paid. As and when the wages on which contribution has not been paid although legally due are detected by the Social Security Officer (SSO) during inspection or test inspection of records of the Employer, he may issue an observation slip indicating the details of such omitted wages noticed by him, with an advice to the Employer for immediate compliance.

The SSO has the right to examine the relevant books of accounts to dig out any deliberately omitted wages. For this purpose, the SSO may examine the Cash Book, including Petty Cash Book, Journal, Ledger, Profit & Loss Account, Balance Sheet, Income-Tax & Sales-Tax Returns, etc. To ascertain the number of employees actually working in a factory/establishment, the Time Office Record and/or Attendance Register must be inspected. In case of Security Agencies/ Labour Contractors etc., checking the fund inflow/outflow is essential

The purpose of the inspection is to ensure that all coverable employees are covered under the Act, and all the components of wages are taken into account for payment of contribution. Keeping this in view, the SSO will verify all relevant records including the Books of Accounts to find out the omitted wages, if any.

3) ARREAR WAGES: As and when any increase in the wages/ remuneration is declared with retrospective effect, the liability towards payment of contribution accrues only in the month in which the decision is announced, and no contribution is payable on the arrears pertaining to the period prior to the month of declaration/ announcement.

4) ASSUMED WAGES: (which was considered by ESIC, only during the non-remittances and wages could not be determined during inspection)

When ESI remittance due is not paid by the Employer, ESIC considers the wages to be calculated for the purposes of levying damage as revised to Rs.11,550. This is an automatic calculation. If the wages are more, after any inspection, the enhanced damage would be levied.

In conclusion, ensure the Remittances are paid till the Employee is covered and if his/her wages are enhanced in between the contribution period, the same must be remitted till the end of the contribution period. Most importantly, at the end of coverage period, the Employee must be show “out of coverage” in the following month’s challan.

The above is applicable to workers engaged by both, the Principal employer and the contractual labour engaged by Immediate Employer (Contractor).


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TAGS: Anandan Subramaniam Benefits Contribution Deduction ESIC Social Security The Coffee Break Guide to Compliance

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