Clubbing different units together !

In the days of yore, inspections in the ESIC were programmed and conducted in such a manner that they would, really, detect concealed employment and be  beneficial to the insured persons. At that time the upper limit of wages for coverage was Rs. 1000 pm. If a factory employed 20 or more persons for wages, it became coverable under the ESI Act, even if the 19 persons received wages more than Rs. 1000. The remaining one person whose wages were 1000 or less became coverable. The intention was to ensure wider reach of the scheme.

There were many instances in which the middlemen worked hard to ‘help’ employers evade coverage. They followed variety of techniques for such evasion. One such technique that benefitted those employees was an ingenuous one that helped them evade not only the ESI Scheme but also the income tax and many other statutory provisions. That was the technique of splitting the unit and showing the single unit as various independent units owned by different persons. Usually, those ‘different’ persons happened to be  father, mother, wife, son, daughter, or other close relatives.

There would be a single premises in which 24 powerlooms would be functioning. It requires 6 persons for a single shift. There would, therefore, be 18 persons for three shifts. Besides, there would be two ‘khaandi’ machines to prepare shuttles. It required 2 persons per shift. In all there would have to be 6 persons for three shifts. In addition, the Folders, Clerks and others would carry the figure of total number of employees to 30. But, the employers would get the blue prints prepared showing that the 24 powerlooms belonged to four different owners. They would get factory licence also that way.

When the ESI Inspector visits the factory, they would claim that there were four different factories. There would also be four set of account books. But, when the account books are closely verified, one could see that the division was fake and the management and functioning of all the four units are integrated and there, really, is one one single homogenous  unit. The khaandi machines which would remain located in the area allotted only for one unit, as per the blueprint,  would supply shuttles to all the powerlooms. The motive power would be shown differently for different units, but electricity for lights for the entire factory would be supplied from only one unit. There cannot be reimbursement from other units, as it would provide clear evidence to the unlawful nature of such sharing. Finished products would be stored in a combined manner only in one room. The employees do not know the names of the other owners except the one who manages them every day and pays wages. In such cases, when the units showed functional, financial and managerial integrality, they would be clubbed together and covered under the ESI Act as a single unit.

There were lodges and restaurants in the same premises and the owners claimed that they were independent legal entities. But, the records would show that the employees of the lodge and restaurant were interchangeable and were paid the same wages that included the cash and food components. The restaurant was providing food to all the employees of the lodge but there was no reciprocal arrangement to reimburse the cost of food by the lodge. These instances would show more than the normal B2B relationship between the owner of the lodge and the owner of the hotel, who were just father and son, in real life. In such cases, the ESI Act was enforced against both of them, by clubbing both the lodge and hotel together.

There was a textile shop with a single brand name but,the premises of the establishment would show that it was a three-storey building housing three different units, one for mens wear, another for women and yet another for kids. The employers were not allowed to evade coverage under the ESI Act in such cases. All the three were clubbed together and covered as a single entity.

On the other hand, there were some major employers who opted for combined compliance in respect of ESI provisions, to facilitate their maintenance of records, in spite of the fact that each unit was employing more than 100 persons and were coverable independently.

While the present method, invented by the bureaucrats at the Centre, make the entire inspection procedure a tragicomedy leaving the inspectors (SSOs) to verify, at best, only the current compliance, it would be worth pondering over the manner in which surveys were conducted with adequate depth and different units were clubbed together to extend the security-net to the insured persons / employees of all those units.

Those employers who want to make right compliance under the ESI Act, may find it helpful to verify for themselves whether they meet the following parameters. That will help them to provide ESI Coverage to their employees by clubbing various units together under Reg. 38 of the ESI (General) Regulations, 1950. For more on this issue, please click on the following link:

Clubbing of units

There was a peanuts vendor who was employing three persons in his shop. His small shop was adjacent to that of a hotel. The hotel had, at that time, been covered as a factory and it had been complying with the provisions of the ESI Act. When the ESI Inspector visited the hotel for the purpose of inspection, he found that there were only 22 employees in the Attendance Register but the hotel owner was paying contribution for 25 persons every month. When asked, the hotel owner, the employer, clarified that the owner of the neighbouring peanut shop was paying money to him and he, in turn, was paying contribution in respect of three of his employees in the pea-nut shop. On investigation, the employees of the pea-nut shop were delinked.

That pea-nut vendor said that he had, earlier, been working in a textile mill in Maharashtra and that he knew the importance of and the benefits provided by the ESI Scheme.



1 Comment

Filed under Benefits, For Trainees, Inspections

One response to “Clubbing different units together !

  1. O Abdul Hameed

    At a time when the service of the scheme was poor or less known, the misuse was also less. As the medical service, particularly the superficiality facilities from non-ESI hospital became available and got publicity, misuse also started. I know of a case of a medium size hotel whose owner added his wife to the muster as a clerk to get herself operated in AIIMS within one month and MD of a company who got his domestic cook into muster when he needed a major operation. There is lots of potential for misuse.

    Coming to the issue of clubbing the principle is “Geographical proximity is not essential but functional integrity should be established”. Was the peanut an item of the menu, was it sold inside the restaurant and billed among other items?

    If you see section 2 (12), the emphasis is on” Premise” and it is the premises that is covered and include its precincts. There is no reference to ownership or unity of ownership., and manufacturing process need not be in all part of this premises or precinct but in any part of it. Thus the premise or precinct need not be under a particular ownership or singular ownership.

    Those who drafted this very long back had brain, and clarity of purpose to be achieved and not, regret to say, those who drafted some of the recent amendment.

    Coming to the example of power looms mentioned above there was practice of several loom in one big shed and one or more loom owned by single person. This was not always a ploy to avoid factory act and other legislation but at times, for genuine reasons as a commune like operation.. The ESI act would apply to the entire shed but Government of India, following industry pressure asked the ESIC not to cover them, a direction which the Government had no power to give but ESIC was perforce compelled to comply.

    Two illustration that I dealt-

    1. Three different manufacturing units within a city, each with distance of around 10 km from one another, one making the wooden part of sewing machine, another the metal and other parts and third where all these were brought together, assembled, packed and distributed, all three belonging to belonging to one family being brothers of a Hindu undivided family.. Though all had separate sheds, electric/water connection, etc I found that no single unit can exist alone and do not produce a marketable product and they essentialy complement one another and transaction among them were not sale but good transfer.

    2. Two unit within a compound, both separate sheds nearbyd by with separate electric connection, both same owner. One is printing Unit and another a binding Unity. All the printed material were bound by the second unit. I did not club them because binding Unit was charging the printing unit in the book and its income were treated to tax separately and they were also taking up binding for others and charging and printing unit was also taking up printing work without binding, though where binding was needed it was done only in the binding unit. I felt there is no functional integrity and dependence though owner is same and premises (in its broader literal sense, having been not defined) was same. Held not covered.

    There can be several example. One of the factories that I worked as GGM, we had set up a sophisticated machine shop with latest imported machine three of which can be supervised by one person. The machine shop was some distance away in separate premises and had just eight person which included two helpers. I insisted on covering them though my GM in charge f Administration felt it need not be covered, though only two helpers were to to be covered. This was because our foundry products are sold and exported after machining only.

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