Flourishing ESIC

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.

The ESI Act was enacted only with the objective of providing a variety of benefits to the working population. The provisions for inspection mentioned in the statute are, therefore, not contradictory to this objective but only to ensure and further that objective. The perception that the inspection procedure in the ESI Act is intended to harass the employers is not correct and has been orchestrated by vested interests with ulterior motive. One may recall that when the Government of the UK had brought in many labour reforms through the Factories Act 1802 (also called the “Health and Morals of Apprentices Act”, which regulated factory conditions, especially in regard to child workers in cotton and woollen mills), provisions were made to impose fine between £2 to £25 on the factory owners for violation of law. But, the Act did not yield the desired results, as it failed to include any provision for supervision to make sure the law was being followed. It was in the year 1833 that the concept of inspection was born and the sufferings of the workmen at the hands of greedy employers came to be preventable.

But, in India, the importance of inspection is diluted again and again for the past seven years in the ESIC. Adding to the misery of the workforce is  the amendments in other labour laws and dilution in their implementation, All these have practically converted the entire labour force of India  into Slave Labour. The latest dilution in inspection of the factories and establishments, in the guise of mechanisation and centralisation, results in the sufferings of the honest and innocent workmen as the employers have come to know that they would not, in practice, face any penal action for non-payment of contribution on all items of ‘wages’ in respect of all ‘employees’. The drastic reduction in revenue that flows in, on its own, through Sec. 39 & 40 of the Act is a clear indicator of this fact. India is virtually sliding backwards to the pre-1833 era of the UK.

It is a fact that large number of employers try to avoid paying contribution in respect of “all” (as mandated by Sec. 38) the persons employed by them for wages. They resort to various methods of manipulations of their records to conceal the “employment of persons’ and “payment of wages”.

Such 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.

 You get only what you inspect.

Proper and in-depth inspections alone can ensure that all the coverable employees have been covered without being left out, and that contributions are paid on their behalf on all items of wages. Simply expecting that the employers would pay contribution on all items on which it is payable, just because there is a law to that effect would not work.”You don’t get what you expect. You get only what you inspect”. This is what the IAS officers are taught too.

Besides, when contribution is not paid on all items of wages, the benefits payable becomes only be a pittance and would not help sustenance of the family of the insured persons during the periods of sickness, maternity, etc.,

Sec. 45 (1) and (2) are there in the ESI Act is, therefore, intended to safeguard the benefit provisions and they are there in the Statute to protect the interest of the employees. (For more on the need for inspections: https://flourishingesic.info/2012/11/22/esic-inspection-procedure-and-its-impact-on-society/)

Voucher Verification

The most essential component of inspection is “voucher verification”. The inspectors (SSOs) of the ESIC and the officers who conduct test inspections are specially trained on this aspect, so that they can detect concealed employment and omitted wages. “The books of accounts would not be of much use without the vouchers, records, papers, etc., on the basis of which such books have been prepared” (Circular dated 27.06.1961 of the Department of Company Affairs).

Any expenditure without proper voucher is to be frowned upon. Instances are numerous when wages were hidden in a voucher pertaining to different kind of expenditure. Likewise, many employees were paid through a voucher created in the name of a single person. The inspector, therefore, goes through vouchers with adequate care and caution.

But, in the peculiar circumstances of our society, there are many instances where genuine expenditure on certain other items are booked in the ledger, without there being any supporting voucher. Such expenditure does not, actually, represent the wages paid by the employer to his employees. What should the inspecting authorities do, then? Can they treat all such voucher-less expenditure, automatically, as wages and claim contribution from the employer? Do they have discretion to ignore such vouchers in toto? Where, then, is the line that differentiates genuine or arbitrary exercise of such power of discretion?

A case of huge expenditure without vouchers

There was a hotel of repute in a prime locality in a city. A minimum of five thousand customers visit the hotel every day to take food. The inspecting authority of the ESIC was pouring through the ledger and vouchers. He found that a large chunk of money accounted for as expenditure in the ledger under a head of account without any voucher for any day. The amount was too huge to ignore. The head of the account was ‘Purchase of Vegetables’. An inspecting authority is not there just to report the expenditure to the Regional Office and believe that he has done his work. He must, being the man on the spot, make genuine efforts to collect all the relevant documents and evidences and arrive at his findings and report the details to the Regional Office for decision. What did he do, in this case?

The employer explained that as a caterer he had to buy vegetables from various vendors, both retail and wholesale, in the market early in the morning at about 3.00 am, every day, depending upon the price and quality. No vegetable vendor would give receipts for the transactions. Not every vegetable vendor is running his trade in an organised form. So, obtaining vouchers from vegetable vendors is simply impossible, practically, he said. And, what he said was true, the inspecting authority knew.

He, therefore, verified the expenditure incurred by the hotelier for purchase of Rice, Wheat, Rava and Maida. He prepared a chart comparing the total expenditure incurred for purchase of these items with the expenditure incurred for the purchase of vegetables. He went through the ledgers once again to ensure that the expenditure for purchase of vegetables had not been booked under any other head of account. He arrived at the fact the expenditure shown under the head ‘Purchase of Vegetables’ had been incurred only for purchase of vegetables although it was not supported by vouchers. He reported all these facts along with his findings that the expenditure on purchase of vegetables was not wages, although the expenditure every year on that count was very huge. His report was examined in depth at the Regional Office and the Regional Director accepted his findings. (Even if the Regional Director had differed, he cannot blame the inspecting authority for his findings. Because, the inspecting authority had given not only his findings / opinion but also all the relevant facts on which he based his opinion and had left the decision to the Regional Office. If the Inspecting authority had reported only the quantum of expenditure as per the ledger figure, he would have been guilty of non-exercise of the power vested in him and transferring his work to the Regional Office. If he had reported only his opinion that said item of expenditure was not wages, he would have made his position vulnerable, in the event of the higher authority taking a different stand. In this case, the inspecting authority had given a speaking and convincing report, the contents of which proved that the inspection had, really, been purposeful.)

Another case of huge but sporadic expenditure

There was an inspector of the ESIC, who was known among employers of the area for his sincerity, honesty and pleasing manners. (It is appropriate to mention in the context the fact that the employers do always collect information about the nature and disposition of the inspecting authorities of various departments, whenever a new incumbent assumes charge in their area). This inspector of the ESIC was conducting regular inspection of the factory of an employer who was employing around 40 employees in his factory, situated in a semi-urban area with a sufficiently large lawn and backyard with many trees all around.   The inspecting authority, while verifying the ledger, came across a head of account titled ‘Dog-feed Expenses’. He thought that the entries of expenditure under that head of account showed the cost of food and, possibly, other maintenance charges to rear the dogs in the premises of the factory. But, he found some peculiarity in the pattern of expenditure. The expenditure had not been incurred every month in a uniform pattern. There was some expenditure in a month. There was no expenditure at all next month. There was huge expenditure in the subsequent month. The inspector was puzzled.

He, therefore, asked for the vouchers. But, the clerk of the employer did not produce them. The inspector insisted on the production of those vouchers. Yet, no voucher was produced and no explanation offered. The inspector, therefore, completed the inspection otherwise and, then, wanted to meet the employer. It was around 3.00 pm, when he was ushered in to meet the employer. The inspector conveyed his findings to him. The employer was listening and was agreeing with him about the defects pointed out by the inspector.

The inspector, then, asked the employer about the expenditure shown as ‘Dog-feed expenses’. The employer said that it was not wages. But, he expressed his inability to produce vouchers for that expenditure. He was also not able to explain how and why the expenditure was sporadic and not uniform every month, if the amount was spent to feed the dogs.

The employer maintained silence. The inspector said that, because of the non-production of vouchers in spite of specific demand, all the items of expenditure under that head of account, could be presumed to be wages and contribution claimed on those omitted wages. The employer thought over for some time and said that he would pay contribution on those omitted wages. He was, still, not ready to explain what that expenditure was. The inspector said that he might have to pay interest and damages too on that expenditure. The employer said that he knew that.

The inspector recorded these facts and issued Visit Note and wound up the inspection. He did not receive the ‘cover’ repeatedly attempted to be given to him by the clerk of the employer, during the course of the day and at the time of leaving the factory. The employer was impressed as he had already heard of the reputation of that inspector. He, therefore, volunteered to walk along with the inspector to the front gate to see him off. The inspector could not see any dog anywhere in the factory precincts and asked the employer about it. The majestic-looking turbaned employer put his hand on the shoulders of the inspector, hugged him and replied, softly, with a smile, that the expenditure booked under that head of account was not the money spent to feed the real dogs. It represented the amount demanded by and paid to the officers of various departments as bribe and to the political parties as donations. That was the reason for the sporadicity of the expenditure, he said. Both of them burst into laughter.

The employer, then, asked the inspector to keep the information confidential and said that he was revealing it only to him, in appreciation of the commitment of the inspector to remain honest by choice.

If only all the employers follow suit ……

It is reported that “the labour ministry will soon extend its medical coverage benefits to on-site construction workers, a step in the direction to provide social security to a huge section of the unorganised workers”.

Read more at:
http://economictimes.indiatimes.com/articleshow/48123354.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Extending the ESI security-net wider is appreciable indeed.

But, when the Government itself agrees that the On-site construction workers are unorganised workers, it must move forward cautiously. It must keep in view the points discussed during the numerous tripartite talks in the Seventies, Eighties and Nineties. The records in this regard must be available in the Hqrs. Summary of those facts had been recorded in the Annual Standard Notes also upto the year 2000.

It must ensure proper actuarial calculations, especially when the ESIC does not have its own Actuary with the real knowledge about the working of the organisation. It is very essential.

ESI Act is essentially for organised workforce, in spite of the term “otherwise” in Sec. 1 (4). Payment of contributions, submission of returns, reporting accidents and many other formalities would show that the scheme is employer-centric. Yet, the ESIC could not extend the scheme to construction sector because of many practical considerations. That, precisely, was the reason for so many tripartite talks for decades.

So, if necessary, a separate structure may be evolved the way it was done in the later nineties for cashew workers of Kerala. The scheme was, ultimately, discontinued by the ESIC. The documents that show why that scheme meant for cashew workers had been dispensed with may also be gone through, in the present context.

Thereafter, let the authorities have some pilot projects regarding extension of ESI Coverage to the construction workers, experimented in one or two regions, one in the North (Rajastan)  and another in the East(Bengal)  or South(Andhra Pradesh). Let the experience gained be analysed before embarking on coverage nationwide. That will be a prudent, essential and reasonable precaution.

Formulate a system in such a way that it does not allow malingering and false claims.

The experience of the ESIC in respect of the TDB in Bihar and Gujarat must be taken into account with the seriousness it deserves.That will guide the authorities before venturing into the extension of the scheme to construction workers throughout the nation at the initial stage itself. Already, many construction agencies, undertaking Turn-key projects are abusing even the existing provisions, by covering the on-site construction workers, on the sly. The impact of such wrong coverage and the intention behind such voluntary coverage by the construction agencies must be studied with open mind and the facts that emerge out of such study must be accepted, before moving forward with such coverage.

Prof Adharkar, the visionary, has rightly said that when a scheme is proposed it must be workable in the “peculiar circumstances of Indian labour and industry”. Sage words !

Already, inadequate knowledge coupled with over-enthusiasm on the part of the people who count has played havoc with the system in certain areas. The Medical College matter is one such case where the authorities do not know what to do next. Let not this proposal to extend the provisions to the on-site construction workers also result in chaos and meet the same fate.

ESIC is not only meant for providing benefits to the deserving insured population. ESIC is also the custodian of funds contributed by honest workforce who believe that the funds would be used rightly, to provide benefits to the really needy. They believe that because the ESIC is a public organisation, it wold take every care to ensure that the funds are not misused by  dishonest employers and employees in connivance with greedy consultants and covetous  bureaucrats.

Proposed scheme must be on practical lines and there must be proper, effective and unambiguous checks and balances. Nebulous law and procedure for settling the claims of such on-site construction workers would result in honest officers and staff shying away from handling the subject.