Test Inspections in the ESIC: A charade!

(This article deals only with the theory of checks and balances in the functioning of an organization and not the practice in Test Inspections, which will be dealt with separately. The theories must always be correct and take into account the problems that would be encountered in the field when it is enforced).

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Every system in a democracy must have checks and balances. As far as the ESIC is concerned, a provision for inspection of factories and establishments was incorporated in the ESI Act to facilitate monitoring proper compliance by the employers. Inspecting the records of the past periods helps the ESIC Administration detect (a) the occasions and (b) the manner in which the employers had, in the past, concealed the concealment of employment of persons and payment of wages. Such inspections help the Administration to find remedial measures to ensure that such concealments do not recur in future. The ESI Act is a labour-welfare legislation and the provision for inspections in the Act are, obviously, intended to advance the purpose of labour and their welfare. Such advancement can be achieved only when the inspections are done in a qualitative manner with adequate depth and substance. This being the importance of inspections under the ESI Act, as a natural corollary, the Administration must provide a system to monitor the performance of the Inspectors, the way there is a need to police the police.

The only way in which such monitoring can be done is to conduct Test inspections by higher officers. This system of checks and balances is there in the EPF Organisation also where it is called Supervisory Inspection.

Test Inspection is only an Administrative action

Test Inspection is only an Administrative action. It does not require any statutory provision. Reg. 102 of the ESI (General) Regulations, 1950 was found adequate for conducting Test Inspections. There was no problem on this issue until some employer went to court and got an interpretation that there was no provision for test inspection in the ESI Act. But, there were many Courts, which did not find fault with the system of such test-inspection. Moreover, the matter was not taken up with higher judiciary for any final verdict on the issue. The legitimacy of test inspections can be explained and justified by the ESIC by citing the practice followed in other departments. That would have protected the interests of the organization. However, it was not considered so essential at that time as the test inspections were continued to be done everywhere by calling them only as inspections (although they were done by the officers who were superior in rank to that of the inspectors).

But, all of a sudden Test Inspections were stopped describing them, strangely, as ‘harassment of employers’. This kind of phraseology in official communication puzzled the readers, as the test inspection was intended to monitor the quality of inspections conducted by the inspectors. That the employer had to pay, sometimes, additional contribution was only a consequential effect.

Yet, the Hqrs. Office which called the test inspections as ‘harassment of employers’, did not say what other methods they were going to follow to check the quality of the inspections done by the inspectors. The Administration had, consciously, overlooked an essential principle of public administration when it stopped the test inspections thus. The Accountability factor was thus watered down, without there being any legal or practical compulsion. The concept of Preventive and Surveillance Vigilance was given a merry go-by. For quite some time, everybody knew that what inspector had reported was the final version.

An Amendment that is of no use

The concept of Test Inspection was, thereafter, re-introduced through an Amendment in 2010, which came into effect from 01.06.2010. But, of what use? That aspect alone is examined below:

The amended Act contains Sec. 45(4), which runs thus:

“Any officer of the Corporation authorised in this behalf by it may, carry out re-inspection or test inspection of the records and returns submitted under section 44 for the purpose of verifying the correctness and quality of the inspection carried out by a Social Security Officer.”

This single-sentence provision deals with two aspects of test inspection:

1. The purpose of the re-inspection / test inspection.

2. The records to be seen by the officer conducting such inspection.

The avowed purpose is to verify “the correctness and quality of the inspection carried out by a Social Security Officer”. The need for checks and balances has, thus, been reiterated here. But, the records to be seen have also been, unnecessarily, specified here. And, that too, in specific terms without any scope for expansion through interpretation.

The legal imperative of this Section is that that the re-inspection or test inspection by an officer should be confined only to the “records and returns submitted under section 44”. The Re-inspecting Officer or the Test-inspecting Officer, will not be able to call for all the records inspected by the Social Security Officer.

Reg. 102 will not and cannot override Sec.45 (4) of the Principal Act. Sec. 45(4) lays stress on Sec. 44. So, Sec. 44 alone assumes importance in the circumstances. This Section discusses three things which are mandatory for the Principal and Immediate Employers. They are:

1. Submission of Returns (which are prescribed by the Regulations).
2. Furnishing of particulars,
3. Maintenance of registers and records (which are prescribed by the Regulations).

The employers are required to maintain only the following Registers as per the ESI Act,1948:

1. Register of Employees (Form -6) under Reg. 32 ;
2. Accident Book (Form-11) under Reg. 66;
3. Inspection Book under Reg. 102-A.

In Sec. 45 (4), the phrase “submitted under section 44” qualifies the word “records” as well as “returns”. There is no reference, in the newly inserted Section, to the “furnishing of particulars”

This provision drastically restricts the powers of the Test Inspecting Officer / Re-inspecting Officer. He is prevented from going beyond inspecting the records and returns submitted by the employer under section 44. He cannot even call for the other records, books of accounts, agreement between the employer and various parties, the documents pertaining to the commencement of the factories / establishments, etc. The employer can lawfully and rightfully refuse to produce those records before the Test Inspecting Officer / Re-inspecting Officer.

Such Test-inspecting or Re-inspecting Officers cannot exercise any of the all encompassing five kinds of powers enumerated in Sec. 45(2) of the ESI Act. An officer conducting Inspections, Re-inspections or Test Inspections is required verify all the records that are relevant to examine the facts pertaining to the employment of persons and payment of wages. He can, therefore, call for the Books of Accounts mentioned in Sec. 45 (2) (b) and many other related documents also even though they are not prescribed to be maintained by Sec. 44 of the ESI Act, 1948. These powers were exercised by them so far. But, the newly inserted Sec. 45 (4) took away those powers, literally. Test-Inspections will, hereafter, be a pretense.

Revenue Manual is oblivious of Facts

The Revenue Manual, Chapter XVI, as available on the internet, has, simply, turned a blind eye to these facts. Sec. 45(4) has been loosely drafted in this manner

• either deliberately with mala fide intention to nullify the steps intended for the essential preventive and surveillance vigilance actions
• or through total ignorance of the intricacies of inspections.

Anyway, the Sec.45 (4) has, now, become a meaningless provision and will, in no way, help the Administration to monitor the quality of inspections.

Hope for salvaging the situation

In the circumstances, there are only two options left for the ESIC Administration:

• To bring an amendment to delete the phrase “of the records and returns submitted under section 44”, from Sec. 45(4).
• In the alternative, not to invoke Sec. 45 (4) at all and to conduct only ‘inspections’ by higher officers as was done during the pre-amendment period by invoking Reg. 102 which confers, on such officers, all the powers of the SSOs.

While there is such a faint hope to salvage the situation on this front, instead of making use of such an opportunity, the Hqrs, has given one more direction in its letter dated 20.12.2012. This direction restricts, in a different way, even more the powers of the authorities to detect the existence of concealed employment and concealed wages.

‘Spirit’ should flow only if the ‘Letter’ permits it

This letter says that the period of Test Inspection should be limited to five years only (even though it is only with reference to the earlier inspection and even as per Sec. 149 of the Income Tax Act and Sec. 209 of the Companies Act, the employer has to keep the records including vouchers, at least, for the last seven complete financial years). Moreover, it says that if the employer pays, on his own, the amount detected during the test inspection, it would imply that the demand raised would become “open-ended” and that it would lead to the position where the dues detected cannot be determined and shall have to be left at the discretion of the authorized officers which shall be against the spirit of the amended provisions of Sec. 45 A of the Act.

This instruction dated 20.12.2012 (involving financial outgo), which has been issued without the knowledge and approval of the Director General, raises more questions than what it attempts to clarify. The issues that arise because of the clarification in Para (b) therein will be examined separately in the interest of all stakeholders of the ESIC.

As things stand, the test inspecting authorities have also been forbidden from seeing records of all the years seen by the SSO, if there is a gap of more than five years. But, in fact, there is no provision, at all, in the ESI Act that the authorities should not even call for and verify the records of the employer for more than five years. The proviso to Sec. 45A, bars only the action of ‘passing’ the order for a period more than five years. Literally, there is no bar for inspection, test-inspection, or for calling for the records of earlier years and examining them or even for assessing the contribution due. Yet, administrative instructions were issued on 24.06.2010 barring all these administrative actions, by going beyond what the Legislature had, in theory, mandated.

Now the latest instructions dated 20.12.2012 goes the extra-mile to apply the five-years limitation to the orders that may have to be issued on the basis of the subsequent Test Inspection Reports / Re-inspection Reports.

This self-abnegation on the part of the ESIC Administration is totally against the interests of the insured and insurable population, and will encourage dubious activities on various fronts to abet evading coverage and compliance.

Reward System based on recognition and praise

There have been and are many honest, sincere, knowledgeable and hard-working Inspectors (SSOs)  in the ESI Corporation everywhere. Their inspection reports showed that, except in exceptional cases, there had been omissions on the part of the employers both in coverage and compliance, inadvertently and also intentionally. The importance of proper, periodical and timely inspections were brought out through such reports.  Such inspections help the employers avoid errors and extend timely security-net to the insured  persons and the insurable persons. “Creating proper Rewards System that recognizes strong employee performance and achievement through recognition and praise” is one of the basic Principles of Management. The existence of efficient monitoring system in the ESIC through proper Test Inspection can alone pave way for that System and  motivate the SSOs to learn things and do better job which, in turn, will ensure all round happiness in the society.