Action Against Defaulters: Quo vadis, the ESIC?

Excerpts from a news item from the Times of India dated 07.12.2012:

“It has been observed that open-ended assessment, inquiries and investigations serve no real purpose. Moreover, such inquiries often do not result in the identification of beneficiaries and only tend to harass the employers and establishments. It is accordingly directed that no inquiry or probe shall ordinarily go beyond seven years that is, it shall cover the period of default not exceeding preceding seven financial years. It is to be ensured that compliance actions are initiated in time and there is normally no reason for extending the scope of investigation and assessment inquiry beyond previous seven financial years,” Central PF commissioner R C Mishra said in a circular issued on November 30, the day he superannuated.

“This circular is anti-worker. The law of limitation does not apply on us and does not stand the test of law as there are several Supreme Court rulings on the issue,” said A D Nagpal, Hind Mazdoor Sabha secretary and a trustee on the EPFO board.

“Nagpal said that fearing action, employees often do not complain against their employer till they leave service and the new provision will make it impossible for them to claim what is due to them.”

“It is not proper to have a time limit for what is an employee’s right,” added CITU president A K Padmanabhan, who is also on the EPFO board. He said the EPF statement usually does not reach employees on time and very few actually check the balance and deposits carefully.

Even before the circular was issued, there were protests within EPFO over the move. Sources said some of the members of a committee of officers on judicial proceedings had opted out from giving their recommendations as they recognized that the move was not employee-friendly. Yet, Mishra went ahead and issued the directive.


“In a country which has precious little by way of a social safety net, the provident fund is one of the few such fallback options, even if only for those in the organized labour force. Any change in the rules governing this scheme must therefore be tested on the touchstone of whether it enhances the safety net or weakens it. Imposing a time limitation on when defaults can be investigated clearly weakens it. Most of those whose savings lie in the EPF do not regularly track whether money is being deposited in it by their employers and, if so, whether it is as much as it should be. They may well discover a default well after it happens. Clearly, they cannot be left with no scope for redress due to a time limitation clause.”

What happened in the ESIC? The ESIC had, silently, restricted the duration to five years (and not seven as in the EPFO) and got the Act amended too. The cut-off date for determining the five years period is not with reference to the financial years but with reference to the 21st of every month. The cut-off date was just left to float, so fast.

The way in which Sec. 45 – A of the ESI Act got amended this way explains the extent of blissful ignorance on the part of the employees’ representatives in the Standing Committee and ESI Corporation. When the Act forbade only the issue of order for a period exceeding the five years’ limit, the administrative directions went beyond the Act and prohibited even calling for the records beyond the five years’ period, precluding, thus, the opportunity even to know the extent of evasion. This amendment which did not take into account the practical working of the system has rendered the revenue branch work topsy-turvy. (The loss of revenue caused to the organisation by enforcing all the amendments wholesale on 01.06.2010 is not examined here).

 The way the monitoring mechanism in the ESIC is suffering for want of adequate manpower to circumvent the ill-effects of the said amendment to Sec. 45-A, and also for want of proper guidelines have already been brought out to some extent in the Post:

The extreme hardship to which the Branch Officers of the Regional Office are put to because of this peculiar amendment which excludes the liability fo the employers on the 21st of every month and prevents the Officers from issuing proper orders determining contribution under Sec. 45 – A cannot be explained in a few paragraphs. The problems faced by the ESIC because of this provision are proposed to be dealt with separately and exclusively. Because, the stakeholders must know that the loser, ultimately, is the insured person.

Will these employees’ representatives of the ESI Corporation who supported the cap of five years (not five financial years) explain the solution for the following problems?

1. A Regional Director verifies the Regional Office records. A cursory verification shows that  the employer has been paying contribution regularly without single default for years. But, the contribution has been paid, throughout, for 25 employees only and the amount of contribution also had not changed, for years. This employer does not figure in the Defaulter List as he is paying contribution regularly. Entertaining natural doubt, the Regional Director orders for a  surprise inspection of the unit. The emerging truth is  that the employer employs more than 400 employees in the factory for long but pays contribution, consistently, only for 25 persons. If regular inspections had been conducted at least once in two years, the evasion would have come to light in time and would have been put an end to.

2. Another employer, a jeweller, is paying contribution regularly every month and in time. But, the ESIC stumbles on the fact that he had been evading contribution on ‘Making Charges’ for many years. That employer claims that this amount is paid to outsourced personnel and that he does not employ anyone directly. But, his website claims that he has his own factory and his advertisements claim that his unit is a unique one as his factory produces jwellery with special designs which are not available anywhere else.  This employer does not figure in the Defaulter List as he is paying (some) contribution regularly. He has, thus, been avoiding inspection by the authorities of the ESIC merrily because of his status as an employer making regular compliance. The under-compliance which would come to light in the normal course could not be detected in time.

3. Another employer employs more than 2000 persons at various places but pays contribution to the ESIC only in respect of a few. He, however, collects contributions from all his employees. Whenever some mishap occurs, he passes on the liabiltiy to the ESIC. The ESIC is put in a position to investigate the eligibility or otherwise of the employee to provide even the medical benefit. This employer also pays contribution regularly and his name never figures in the Defaulters’ List. He was avoiding the inspection also, thereby.

4. These are not stray incidents. Evasion of ESI coverage has become a fine-art  and it sis fine-tuned by middlemen called Consultants with every instruction issued by the ESIC.

5. Added to it is the assurance given to the employers that their units would not be inspected, if they file the Returns of Contributions with Self Certification. This enabled evasion of payment of contribution easier.  The employers went to the extent of challenging the visit of the inspectors and complaining to the Regional Offices. (The concept of Self-Certification and the serious statutory flaws in it deserve special treatement and will be narrated in a separate Post)

But, the pity is that the instructions issued periodically by the ESIC help these middlemen to make hay, instead of preventing the scope for evasion. Are the employees’ representatives, who are in the Standing Committee and in the ESI Corporation aware of these problems, at least?

One side of argument is, that the improvement in beneifts and services  in the ESIC would motivate the employers for voluntary coverage and willing compliance. There is, of course, merit in that  argument. There had been cases where the employers who were satisifed with the performance of the ESI Scheme in their areas came forward to provide accommodation to the ‘Local Offices’ without charging any rent. Also, there is a definite case for initiating action in a sustained manner for attitudinal change among the benefits-delivery personnel.

But, that cannot be the reason to justify non-compliance. Improving the benefits netwok and tightening the  inspection process are complementary to each oher and not contradictory to one another. It cannot be argued that the employers do not pay contribution under the ESI Act, simply because the benefits provided or services rendered are not satisfactory. Both must go hand in hand, simultaneouly.The scheme was conceived in every nation around the world only as a compulsory scheme, the concept being ‘collect the contribution from all who are exposed to the risks and pay the beneifts to those who faced the risks’.

The EPFO provides only financial benefits. The contribution and the benefit derived out of it by the employees under the EPF Scheme are proportionate. Yet, the EPFO encounters the problem of non-compliance with the provisions of the Act by the employers. This would show that there are employers in India who simply do not want to part with the money of their factory or establishment, whatever be the benefits  and whatever be the standard of the benefits that accrue to their employees.

As the experience of the ESI Corporation has shown, the following two factors have alone brought more coverage of insured population to the Scheme in a proper manner:

  1. Proper periodical inspection
  2. The prospect (or threat?) of proper inspection where the employer will be required to pay lumpsum contribution on the wages on which he had not paid contribution in the past.

But, the ESI Corporation has not been paying the attention it deserved to these matters for quite some time. The result is the non-availability of even medical benefits to a large number of working  population.

There have been employers who employ large number of employers but pay some amount of contribution every month only for a few employees and ensure that their names do not figure in the Defaulters’ List  with the intention of avoiding inspection under the ESI Act, taking refuge under the new theory that the inspection would be only for those who default and not for those who comply.

History Vs. Revenue Manual

The history of revenue management in the ESIC was that the defaulting employers were brought to line by action through the C-18 (Adhoc) on Assumed Wages. The complying employers were subjected to inspection to ensure that the compliance was sincere and was not a sham. The requirement of the number of Inspectors were assessed on the basis of this premise only. Occasional diversion of Inspectors to visit the defaulters’ unit was done in deserving cases.

But, the experience gained thus has been forgotten and the instructions issued, including those in the Revenue Manual, on this subject do not advance public interest.

The instructions in Page No. 205 of the Revenue Manual under Para L.12.4 do not take into account the reality.

  • Item 2 in Page. No. 205 says that the Social Security Officer has to visit ‘each of defaulter unit’ and submit report.
  • Item 4 says he need not conduct detailed inspection at this moment. ‘However a short inspection of employers’ wages records including that of immediate employer shall be seen by SSO for assessing the contribution required to be paid by the Principal Employer. He shall intimate the employer in the visit note to be given by SSO on the spot.’
  • It has also been mentioned therein that “The instruction will have no bearing on priority of inspection as mentioned in the Inspection Policy.”

These instructions are simply impractical, unless we have an army of SSOs. What is the difference between the ‘short inspection’ and ‘regular inspection’? Has it been explained anywhere in the statute? How many times does the ESIC propose to send SSOs to the same factory for inspection of records of the same period, first for short inspection and then again for regular inspection? Will every factory visited for Short Inspection be visited or not, subsequently and necessarily, for Regular Inspection of the same period? If not, will it not result in leakage of huge revenue for which the SSO cannot be made accountable, as he had done only Short Inspection? Can any SSO complete the Short Inspection of all the Defaulting Units in his Division when he is also clearly advised in Page 205 of the Revenue Manual that he must follow the priority listed out in the Inspection Policy, i.e., to complete the regular inspections of other factories and also conduct the survey of all the coverable factories and establishments in such a manner that he gives the ‘unexplainable’ certificate on the 31st March every year as specified in the Inspection Policy of 2008?

The approved day-value given by the Hqrs. was 1/10 of a day for a single Short Inspection. Does it not necessitate an SSO to visit ten factories a day to complete his one-day’s work? If day-value is not intended to be calculated how is his output assessed, then?

Can an organization just throw the work on a subordinate and issue impractical instructions when it is fully aware that its instructions would not really work? Has the Administration conducted any time study and work-study, by utilizing the services of the people who know the work, to see whether it is possible for a sincere SSO to obey these instructions?

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. But, the present Inspection Policy must be modified for that purpose, to help advance the purpose of the Act. The system that was prevalent in the Seventies and the early eighties were correct and they would work even today. The field reality has not changed warranting dilution of standards in inspections.

But, what happens is totally contrary to public interest. The latest instruction dated 20.12.2012 that the Test Inspections should also adhere to the time limit of five years specified under 45-A makes the evasion of compliance even easier while increasing the burden on the Branch Officers beyond limit. Besides, it makes everyone know that the borderline cases in which inspections are done or orders are issued under Sec. 45-A cannot, practically, be subjected to Test Inspection or Vigilance Inspection. The monitory mechanism loses not only its power but also its purpose. Instead of setting right the matters to protect the interests of the insured and insurable population, the statutory right of the ESIC to inspect the records of the employers to detect the concealed employees is being waived more and more, gradually, with every passing day.

The present system benefits only the middlemen and the employers who want to avoid compliance, but, certainly, not the Insured Persons.




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