ESIC Inspection Procedure and its Impact on Society

(Dear Readers,

We have seen the theory and practice in Administrative Procedure in the earlier Posts. We have seen the link between the internal administrative procedure of a department and its impact on public. The current Post deals with certain vital aspects of the administrative procedure evolved in the Revenue Wing of the ESI Corporation and the way it directly affects the insured persons, insurable persons, employers, Social Security Officers and the Revenue Branch Officers. All the instructions cited in the Post are available in public domain.)

The objective of the ESI Scheme is to provide a variety of benefits to the working population. The provisions for inspection mentioned in the statute are, therefore, intended only to further that objective.  Concealed employment can be detected only through proper inspection including Ledger Verification in a thorough manner. A simple visit by the Inspector or his going around the factory cannot help detecting such cases. Inspections alone can ensure that all the coverable employees have been covered without being left out, and that contribution is paid on their behalf on all items of wages. If contribution is not paid on all items of wages, the benefits payable would only be a pittance and would not help sustenance of the family of the insured persons during the periods of sickness, maternity, etc., The provision for inspection in the ESI Act is, therefore, intended, mainly, to safeguard the benefit provisions.

The ESI scheme pre-supposed mutual trust on the part of the Employers and the Corporation. It was presumed that the compliance would be honest and correct. That was why the Act did not make inspection mandatory. But, when the scheme was enforced, it was found that the reality in the field was different. The working population was denied coverage or was given benefit very very less as the wages on which the contribution was paid was very less.

Periodical and proper inspections alone could safeguard the interests of the working population by ensuring proper coverage and compliance, the authorities understood. As the saying goes, the ESIC did not get what it expected. It got only what it inspected.

Former Director General, Mr. T.C. Puri who was in charge of the ESIC during the period from 1967 to 1972 had done personal research on insurance matters and issued orders for  proper documentation of the behaviour of the employers so that the Inspection methods could be made more effective when dealing with recalcitrant employers. He ordered that such details available with the ESIC authorities must help them to ascertain which employer was ‘absolutely honest’ and ‘above board’ and which employer was ‘trying to cheat the ESI Corporation’. He said that such information must be readily available to the SSOs whenever they join a particular inspection division. Proper and necessary focus was there at that time on the inspection procedure. That set the trend of inspections for more than 24 years from 1968 to 1992.

That was a period when inspections were conducted periodically every year or, at least, once in two years. The inspectors were, actually, warned that they should not go for inspection within nine months of earlier inspections. Such was the frequency of inspections. The staffing pattern was done keeping in view the workload and every inspection division had manageable number of factories and establishments. Work study in these cases was also conducted in a serious manner and the day-values fixed.

If an employer had not complied in respect of some coverable employees or had not paid contribution on some coverable items of wages, the facts could be brought to his knowledge within a year (or two at the most, generally) because of timely inspections so that he had also got the opportunity to rectify the defects at the earliest and was not required to pay contribution on accumulated amount of omitted wages.

But, things started going wrong when the inspection policy was relaxed in 1992 for two years as an experimental measure. The factories and establishments with less than 50 employees were not inspected. When this experiment was proposed, the EPFO had rightly refused to accept it but the ESIC did. As the feedback after two years was negative, the Corporation reverted to the original position. But, the backlog of two years had snowballing effect and resulted in further accumulations in pendency. When inspections were done later for so many years, contributions had to be claimed on huge amount of omitted wages which posed avoidable problems to the employers as well as the ESI Corporation.

 Omitted wages: an essential concept

 When an SSO finds that the employer has not paid contribution on certain items of wages during the past, he reports the matter to the Regional Office and contribution demanded on those wages which had been omitted by the employer to be taken into account for compliance.

This concept and procedure is essential to ensure that the employer does not get the benefit of his own negligence, especially in the context of the inspection not having been made mandatory by the Parliament.

Any argument that this amount is collected without identifying the beneficiaries is basically wrong. When the ESI Corporation has not deployed adequate number of inspectors in the field for conducting inspections every year, the concept of recovering contribution on the omitted wages is the only measure that acts as a deterrent on the erring employers.  Otherwise, the employers will try to avoid inspections to the extent possible and through all means as such delay becomes beneficial to them. On the other hand, because contribution was demanded on omitted wages, the ESIC could see employers asking why inspections had not been conducted every year, when they were asked to pay contribution on heavy amount omitted wages for so many years. If the assessment of contribution on the omitted wages should not become oppressive to the employers, inspection must be made a routine monthly affair or half-yearly affair or, at least, annual affair.

In this background, we may examine the situation faced by the SSOs working in the organization during the past five years from 2007.  They have, during the past five years, faced three different situations.

 Phase I: Inspections before June 2008

 When an ideal SSO found that he had to verify the records of about six or seven years, he was verifying them all, sought more man-days and completed the inspection of that factory. The ideal Branch Officer of the Insurance Branch issued notices, completed the hearing process by extending adequate and reasonable opportunity to the employer to represent his case and to submit the further documents that the Branch Officer wanted, issued proper order that would speak for itself and thereby brought the issue to a correct finality.

 Phase II: Inspections after June 2008 but before June 2010

 Later, an Inspection Policy was introduced on 16.06.2008. As per the inspection policy , an SSO has to complete the following formalities in a factory or establishment when he goes for inspection:

I. He must verify (a) Wages Register, (b) Accident Register, (c) Challans, (d) Returns of Contributions and (e) etc.,

II. “Great importance” had been attached to (a) “verification of books of accounts” and (b) for that, “knowledge of accounting procedure adopted by that particular unit” had to be ascertained and acquired.

III. He has to “examine” relevant books and accounts for the purpose of digging out deliberately omitted wages. For this purpose, he must verify Cash Book, Journal, Ledger, P&L A/c, Balance Sheet, IT&ST Returns, etc.,

IV. In case of survey and labour contractors he has to examine the fund inflow and outflow.

V. In the case of contract workers and outsourced the elaborate procedure of 25.10.2007 instructions must be followed.

VI. He must make it a point to meet the CEO / Occupier.

VII. He must take round of the premises and interact with the workers.

All these directions had already been there. A proper inspection required all these things to be done. But, never had it been specified that all these works should be done by an Inspector within half a day. The 20:20 formula introduced in June 2008 had resulted in putting the entire Inspection work out of gear.

During this period, the Inspectors were doing what they could do. They sent separate reports for every year of record verification to meet the 20:20 target. They expressed their bona fide difficulties in understanding the meaning  of the Hqrs. Instructions dated 16.06.2008 on various counts.

Their main grievance was with reference to the unrealistic target of 20:20 and the queer, incomprehensible and unexplainable certificate ordered to be given on 31st March every year. Their questions were not answered. Because, the said policy contained so many baffling conceptual errors both on inspection side and on registration side. The hallmark of the leader is to demonstrate by performance. “Be able to perform the duties of those you supervise.” (Page 13 – What is a Supervisor? ). If the practicability of these instructions had been considered, such a formula would not have been introduced. This inspection policy had been prepared by persons who were not aware of the practical problems involved in conducting inspections. The SSOs were grumbling. But, they did not know that they were in for more difficulties from June 2010.

 Phase III: Inspections after June 2010

 There came an amendment to Sec. 45 A, which took effect from June 2010:

“Provided no determination shall be made in respect of the period beyond 5 years from the date on which the contribution shall become payable”.

It is argued, in support of the amendment, that five years is a sufficiently long period to inspect the factories, examine their stand and issue orders. Agreed. AGREED. But, can the inspection of all the factories be completed with the existing strength of SSOs and Branch Officers? No. The SSOs can do proper inspection of 240 medium-sized factories or establishments only in a year at the maximum (presuming that they verify the records of one year only and also presuming that they do not go on leave at all during the entire year). In regard to the Branch Officers, there must be a time-gap of, at least, one year for them to complete the formalities of Sec. 45 A in a meaningful way and issue final orders. Because, the Branch Officers in the Regional Offices receive files from a minimum of ten Dealing Assistants while the Section Officers in the Headquarters Office receive only from five Dealing Assistants. Every Dealing Assistant in the Revenue Branch is saddled with about 400 – 500 files. In Mumbai it is much more for every Dealing Assistant. The monitoring mechanism is, actually, bursting at seams. (The way the Insurance Branch Officers are ordered to shoulder extra burden, throughout the nation, and the genuine difficulties experienced by them in rendering justice to the work are not examined here.)

Many factories and establishments do not get inspected, in the process, for years. The five years’ bar has come as a boon for them to escape. The sufferers are only the persons employed in those factories and establishments.

The ESIC must deploy sufficient number of SSOs to inspect the factories in time. Otherwise, the public perception will be that the ESIC is, consciously, turning a blind eye when large number of insured persons are denied coverage and consequential benefits under the ESI Act.

If there are 20,000 factories or establishments in a region and there are only 25 SSOs, what would be the extent of action on the part of the ESI Corporation to ensure the compliance in respect of insured persons?

Each SSO can inspect only 240 normal-sized units in a year to verify the records of one year. So, 25 SSOs can complete the verification of records of 6000 units only in a year. Consequently, 14000 units remain un-inspected. Next year, the accumulation will be more. If the SSOs are advised to inspect records of more than year or if they concentrate on Major Employers, the number of left-over cases will become even more. But, there is no proposal in sight to augment the staff strength in the cadre of SSOs.

At present, the inspections are said to be governed not only by the Inspection Policy of 16.06.2008 but also by the amendment to Sec. 45A in 2010 and the instructions dated 24.06.2010 and subsequent instructions which are codified in the Revenue Manual (which has been made available in the public domain the website of the Regional Office, Delhi and is also available on search through ‘Google’ from the Hqrs. website in the ‘Publications’ link).

So, when the same ideal SSO whom we have referred to earlier, visits a factory on 22.11.2012, he finds that he has to verify the records of about six or seven years. What does he do?

He tells the employer that he will not verify the records pertaining to the period up to 21.11.2007.  Because, the Hqrs. instructions dated 24.06.2010 (available in public domain) bar him although the Act does not bar it and the Parliament did not  contemplate it.

But, how can he verify the Cash Book or Ledger of 2007-08 only for a part period from 21.11.2007 and ensure the correctness of it? Nobody has the answer.

Let us presume that the SSO has verified, at least, the records of 2007-08 (From 22.11.2007 to 31.03.2008) and 2008-09 on the same day of his visit and sent his report to the Regional Office. The Dealing Assistant, Superintendent and the Branch Officer must take steps on war-footing basis to process his Inspection Report, issue notices to the employer, complete the hearing and issue final orders on or before 21.12.2012. If the matter is delayed and the orders are issued in the last week of December, 2012 the Corporation loses the revenue of one month. With every month’s delay the revenue is also lost for a month.

The aforesaid SSO, therefore, avoids the earliest year’s records and examines the later ones. That way the revenue, if any, of the earliest years get permanently lost forever.

 Role of the Regional Office

The staff and Officers of the Regional Offices are put to a lot of stress as they have to complete all the procedural formalities and issue orders before 21st of the particular month as otherwise they have to, on their own, reduce one month contribution when they issue the order under Sec. 45A.

Surely, the Insured Persons do not have the last laugh. It is the employers. But, they too cannot have the last laugh. Because, there are the instructions dated 10.11.2010 para 1 of which says as under:

“… it has been decided that the …assessment may be restricted to maximum of … 2 personal hearings by the … Revenue Branch Officer….No concession under any circumstances shall be allowed in this regard and further action of… passing order u/s 45 A shall be taken”.

Real stress is laid in these instructions on the  following sentence: “No concession under any circumstances shall be allowed in this regard and further action of… passing order u/s 45 A shall be taken.” The word ‘shall’ makes the directions mandatory. It overrides the impact of the word ‘may’ used in the previous sentence. (The Revenue Manual has omitted the second sentence in Page 224 on Para L.13.3. But nobody knows whether such omission was deliberate. Again the instructions on adjournment by the Appellate Authority are even more specific. Please see the instructions dated 04.11.2010 Para 4 Page 3. But, that will be examined when Sec. 45 AA is analysed separately).

So, the Branch Officers adhere to these administrative instructions and overlook the actual need felt by them, while hearing the employers, to give more than two adjournments. How would they? But, then, how could they issue proper reasoned orders? They do not collect relevant facts by granting more adjournments because of the administrative limitation of two hearings. It becomes difficult for them to examine even the facts brought before them, because of the time factor introduced in Sec. 45A by the Amendment-2010. The Branch Officers, therefore, choose to err on the safer side by issuing orders stating that everything is wages. The best way is to issue laconic orders and throw the employers before the Appellate Authorities, they found. In the process, justice is not rendered to the employers.

The first requirement of natural justice is to grant adjournment when it is essential. That is the primary part of the ‘opportunity of being heard’ extended to the employer. But, the mandatory cap of two hearings took away that right of the employer.

The concept of natural justice should, at all stages, guide those who discharge judicial as well as quasi judicial functions. This is not merely an accepted but is an essential part of the philosophy of the Rule of Law. Whatever standard is adopted, one essential requirement is that the person concerned should have a reasonable opportunity of presenting his case (N.V. Chinne Gowda vs State Of Karnataka And Ors. – Supreme Court – 29 July, 1976).

Adjournments depend on the facts of each case. There can be no denial of adjournments the cause for which arises from the facts revealed during the hearing on a particular day. If a document is required on seeing a record and the employer says that he would be able to produce it during the next hearing, he must be given the opportunity to produce it. Every adjournment must have proper justification. That alone is the requirement of law.

But, that would result in loss of revenue, in the present state of things, with each passing month because of the amendment to Sec. 45A that was rushed through in 2010. As a result, the complicated issues involved in many cases are not examined. Or, the orders are appealed against and get annulled. The best way of overloading the judiciary!

 This administrative procedure of the ESI Corporation in revenue related matters has, ultimately, resulted in non-detection of numerous persons who would, otherwise, have become insured persons. Directions of mandatory nature cannot be issued to quasi-judicial authorities in quasi-judicial functions. “That would directly impinge on the administration of justice and the rule of law…. A body even if be a part of the machinery of the same Act cannot be permitted to issue direction controlling the discretion of the authority exercising quasi-judicial powers”.(Sudarshan Kumar Vs. EPFO –High Court, Mumbai- 30.04.2010.)

 The Solution

 The way out is:

1.    Work study must be conducted by directing the SSOs to conduct inspection by following all the procedural formalities.

2.    SSOs must be trained properly to cull out the omitted wages without resorting to send the report with ledger figures, when the employer has actually produced the relevant records.

3.    Test Inspections by higher officers including Vigilance Officers must be done in a meaningful manner and action must be taken only if there is mala fide intention and not omissions in spite of honest efforts.

4.    Work study must also be conducted in the Regional Offices to know the work-load of the Branch Officers of the Insurance Branches.

5.    Adequate number of SSOs and Branch Officers must be posted to ensure that no factory or establishment remains uninspected for more than two years at any time. The expenditure on this count will be infinitesimal when compared to the revenue earned in respect of identified beneficiaries.

6.   The Administration must create an atmosphere in which honest SSOs and Branch Officers feel encouraged to work in the Revenue Branches and the black-sheep in every cadre in the Revenue Wing, who believe in wrong-work-and-right-lobby, feel, really, scared.

That alone will enable the authorities to provide proper benefits to all the eligible and insurable persons in the nation under the Act. That alone will ensure that the administrative procedure of the ESI Corporation achieves the declared purpose of the ESI Act.

 ESIC is meant to detect and protect

 An organization entrusted with the statutory duty of providing benefits to the voiceless section of the society has to meaningfully activate Sec. 45 and detect the coverable employees and extend them the benefit provisions, in time. It is possible to do so under the existing provisions of the Act. The Inspection Policy must be modified accordingly to help advance the purpose of the Act.

 ¨

N.B: Readers may please go through the letter dated 10.09.2012 of the EPF Officers’ Association, Guwahati sent to the Working Group to frame guidelines on quasi-judicial proceedings. It runs into 36 pages. We differ on certain aspects. But, we appreciate the enthusiasm and involvement of the EPF Officers’ Association in furthering the organizational goal. To know more, please click on the following link:

EPFO-association-on-quasi-judicial-procedure

2 Comments

Filed under Amendments 2010, For Trainees

2 responses to “ESIC Inspection Procedure and its Impact on Society

  1. siv

    Sir,
    Very informative and takes care of all stake holders of ESIC. My sincere thanks to this initiative.

  2. ranjana

    very good suggestions but need to b followed immediately for betterment of all the stakeholders

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