High Court upholds ESI coverage, rejects payroll restructuring attempt to avoid compliance

A High Court has ruled that establishments cannot evade coverage under the Employees’ State Insurance Act, 1948 by restructuring payroll records to appear below the statutory employee threshold.
The judgment came in a case involving the Diamond Silk Khadi Society, a khadi institution operating under Khadi and Village Industries Commission norms. The organisation had challenged orders issued by Employees’ State Insurance (ESI) authorities, which assessed contributions after determining that the establishment employed more than 10 workers.
The society contended that it had only nine employees and argued that several individuals associated with its operations were independent artisans rather than formal employees. It also claimed that, as part of the unorganised khadi sector, it should not fall under ESI coverage.
However, inspection of payroll records showed a different structure. Authorities identified a payment register listing 13 individuals. While nine were shown as employees, four others were recorded separately under the category “allowance.” Provident fund deductions were also found to have been made for these individuals.
The court examined the substance of employment records over their classification and observed that segregating payments under “allowances” while continuing statutory deductions indicated an attempt to avoid compliance obligations. It held that such classification could not override the actual nature of payments, which were consistent with wages.
While noting that artisans may, in certain circumstances, be treated as self-employed, the court found that even after excluding them, the total number of workers still exceeded the statutory threshold for coverage.
The ruling reinforced that the Employees’ State Insurance Act, 1948 is a social welfare legislation intended to protect workers, and attempts to artificially manipulate records to avoid its application would not be accepted. The court therefore upheld the orders issued by ESI authorities.

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