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Critical Analysis of Employee's State Insurance Scheme and Changes Brought Under the Code on Social Security, 2020.

Employees' State Insurance Scheme (ESI Scheme) is a social security scheme implemented through Employees' State Insurance Act, 1948 and it is designed to accomplish the task of protecting 'employees' and their dependents, covered under it, against contingencies or incidences of sickness, maternity, death, disablement or injury caused due to employment.

"The ESI Scheme applies to factories and other establishment's wherein 10 or more persons are employed. However, in some States threshold limit for coverage of establishments is still 20. Employees of factories and establishments, drawing wages upto Rs.15,000/- a month, are entitled to social security cover under the ESI Act. ESI corporation has also decided to enhance wage ceiling limit for coverage of employees under the ESI Act from Rs.15,000/- to Rs.21,000/-."[1]

The ESI Scheme is based on the principle of 'amalgamating of resources and risks', wherein that section of the employees' population, which is exposed to risks of the same nature, comes together to mitigate the physical and financial suffering arising out of such risks.[2]

The Code on Social Security, 2020 ("the Code") repealed 9 legislations which includes Employees' State Insurance Act, 1948. Currently, the ESI Act does not operate across India at national level and is being implemented district-wise through notification. However, ESI scheme under the Code has been made applicable to the whole country, subject to the specified minimum threshold of 10 employees in an establishment.

Further, a provision has been introduced in the 1st Schedule to enable the Central Government to notify applicability of ESI Act on those categories of establishment, which engage in hazardous or risky activities. In these categories of establishment, ESI will be applicable even if only one worker is employed.

There are provisions for voluntary inclusion under the ESI Scheme have also been introduced. An employer of a plantation establishment may opt for ESI under the Code by giving willingness to the ESI Corporation. Further, Section 1(7) enables voluntary membership under ESI even if the number of employees in an establishment is less than the minimum requirement of 10. In case an employer and a majority of the employees agree to be covered by ESI, then on an application made by the either employer or employees, the Director General of ESIC may allow the applicability of ESI to such establishment.

These measures, of voluntary membership, reduced threshold of 10 employees and applicability to establishments carrying out hazardous and life-threatening activities, will help in broadening the applicability of ESI under the Code at all India level. Presently, 3.5 crore families are covered under the ESI Scheme. It is likely that the coverage will increase to 10 crore families under the new Code.[3] The ESI Scheme is incorporated under Chapter IV of the Code and it has undergone some changes. This will discuss the general provisions and analyse some of these major changes.

Wide Definition of 'Employee'

The objective of the code is to cover the maximum number of employees and workers from various establishments. It provides a wide definition of 'employee', which includes employees in managerial, supervisory, and administrative capacities as well as contract labour. However, the Code distinguishes employees based on wage ceiling and/or their nature of employment for determining their eligibility to various social security benefits. Therefore, even though the Code seeks to provide social security to a large number of employees, but all benefits may not be available to every employee.

Registration of Establishments under the Code

Section 2(29)[4] of the Code defines the term 'establishments' in a wider connotation which includes; factories, motor transport undertakings, and newspaper establishments, where an industry, trade, business, manufacture, or occupation is carried on. Except, in case the establishment is already under any other Central labour law, registration is necessary to be obtain for all such establishments covered by the Code.

Grandparent as Dependant

Now, the definition of 'dependant' under Section 24(c)(viii)[5] of the Code includes the grandparent of the employee in case they are dependent on the earnings of the employee at the time of their death and if no parent of the employee is alive. The ESI Act did not provide for this. This is a welcome addition towards recognizing and providing for the welfare of senior citizens.

Social Security Contribution towards Inter-state Migrant Workers

Under Section 2(24)[6] of the Code, the scope of 'inter-state migrant workers' has been widened to include those workers who move from one State to other and within the other for employment. A wage ceiling limit of Rupees 18,000/- per month has been prescribed for such workers to qualify as inter-state migrant workers. Further, inter-state migrant workers have also been included in the definition of 'contract labour'. Thus, employers may need to provide social security to inter-state migrant workers at par with their other employees.

Increase in Social Security Contributions

The definition of 'wages' under the Code as per section 2(88)[7] elaborately lists the various included and excluded components which consists of wages. Further, it provides that if the aggregate of the excluded components exceeds 50% (or such other percentage as notified by the Central Government) of an employee's total pay, the amount that exceeds the 50% (or such percentage as prescribed) will be deemed to be 'wages'. Finally, such amount calculated would need to be considered as 'wages' for purposes of calculating social security contributions.

Statutory Recognition to Gig Workers and Platform Workers

The Code is the first in kind legislation to formally recognize the gig workers and extend social security coverage to them. It gives statutory recognition to paid work arrangements outside the traditional employer-employee relationships by introducing the concept of 'gig workers' or 'platform workers' under Section 2(35)[8] and Section 2(60)[9] respectively which includes individuals using online platforms of medium to access organizations/individuals to solve problems or to provide services in exchange for payment.

These platforms include digital intermediaries connecting consumer and service provider. They have been classified under various categories such as cab services, food and grocery delivery services, logistic services, digital market for sale of goods and services, travel, hospitality and etc.

Social Security Coverage for Gig Workers

The Code provides for the registration of gig workers, a specific social security fund for them, and the formulation of social security schemes related to life and disability cover, health and maternity benefits, old age protection, education, housing, provident fund, etc through Section 2(78)[10] tailored to their needs. It also provides coverage of gig workers and their families under the ESI scheme. By implementing these measures, the Code seeks to provide social security coverage to a significant number of workers who form part of the gig economy which is blooming.

Aggregators need to make Social Security Contributions for Gig Workers

According to Section 114(4)[11] of the Code mandates an aggregator falling within the specified categories to contribute towards the social security fund for gig workers. "Such contributions will be at a rate of 1-2% of the aggregator's annual turnover (excluding of any tax, cess paid or payable to the Central Government), as notified by the Central Government, but not exceeding 5% of the annual amount paid or payable by him to his gig workers.

The Code also provides for the regulation of aggregators who engage gig workers. Therefore, gig and platform workers engaged aggregators as "independent contractors" enjoys the benefits of social security under the Code."

ESIC Authorized to Pay Benefit to Employees and Recover from Employer in Certain Situations

Under Section 68[12] of the ESI Act, if a principal employer fails or neglects to pay contributions to employees and thereby disentitles them to certain benefits, or an appropriate scale of benefits, the ESI Corporation may pay the aggrieved employees the benefits they are rightly entitled to and recover such amount from the employer.

Under Section 42[13] of the Code expands the scope of this provision to include the employer's failure or neglect to insure:
  1. An employee at the time of his appointment, which deprives him of entitled benefits and
  2. Employee on/after the date of accident resulting in personal injury, which disentitles him to receive dependent benefit or disablement benefit.

In such cases, ESIC is empowered to provide the entitled benefits to the concerned employees and recover from the employer the capitalised value of such benefits which includes any contribution/interest/damages that the employer is liable to pay for non-payment or delayed payment of requisite contributions.

Limitation Period for Initiating Proceedings under EPF and ESI

Under the EPF Act and ESI Act, no limitation period is prescribed for recovery of past dues from employers towards employees. Further, no formal direction or guidance has been provided by the EPF/ESI authorities with regard to the period of assessment for non-compliance during previous years. This creates financial hardship for employers against whom the respective authorities initiate recovery proceedings for any retrospective inactions, as per their discretion. However, the Code provides a period of limitation upto five years for initiating such proceedings and thereby safeguards the employer's interest such that employers will be able to estimate the potential maximum liability for past non-compliance under Section 125(1)[14] of the Code.

Digitization of Procedures related to ESI scheme

The Draft Code on Social Security (Central) Rules, 2020 provides for digitization of procedures through a centralized web-based portal, the Shram Suvidha Portal, is likely to simplify compliance processes for employees as well as employers such as registration of establishments and employees, updating of information, cancellation of registration. Further, digitization also helps in maintaining a database of information related to operations of ESI scheme that is easily accessible for availing of benefits.[15]

Strengthening Of Enforcement Mechanism Of ESI Under Code On Social Security

Though the Code was comprehensive but there is one of the main concerns during drafting of the Code was the implementation of the ESI Scheme. The Code and Draft Rules introduce several provisions to strengthen enforcement.

The Code provides for centralized inspection through the web portal. Additionally, under Section 122(6)(c)[16] of the Code, the Inspector-cum-Facilitator has the power of search and seizure in respect of any offence been committed by the employer. Earlier, there was no provision in the ESI Act for search and seizure, but now this search and seizure can be exercised to ensure compliance related to ESI under the Code.

The Code aims to provide wider social security coverage to a large number of workers and employees by including gig workers, platform workers and grandparents as dependents. Further, by bringing the ESI scheme under centralised system which is applicable across India. Also, it seeks to provide meaningful social security cover for beneficiaries and to make hassle free procedure for both employers and employees. Further, by prescribing a limitation period and proper dispute resolution mechanism the Code seeks to ensure the corruption-free enforcement of the scheme.

  1. (National Portal of India), Employees' State Insurance Scheme, (Last visited 19th Nov, 2022)
  2. Employees State Insurance Corporation (Ministry of Labour & Employment, Government of India), About us, (Last visited 19th Nov, 2022)
  3. Simpliance, ESI-Background, (Last visited 19th Nov, 2022)
  4. The Code on Social Security, 2020, � 2(29), No. 36, Codes of parliament, 2020 (India).
  5. The Code on Social Security, 2020, � 24(c)(viii), No. 36, Codes of parliament, 2020 (India).
  6. The Code on Social Security, 2020, � 2(24), No. 36, Codes of parliament, 2020 (India).
  7. The Code on Social Security, 2020, � 2(88), No. 36, Codes of parliament, 2020 (India).
  8. The Code on Social Security, 2020, � 2(35), No. 36, Codes of parliament, 2020 (India).
  9. The Code on Social Security, 2020, � 2(60), No. 36, Codes of parliament, 2020 (India).
  10. The Code on Social Security, 2020, � 2(78), No. 36, Codes of parliament, 2020 (India).
  11. The Code on Social Security, 2020, � 114(4), No. 36, Codes of parliament, 2020 (India).
  12. Employees' State Insurance Act, 1948, � 68, No. 34, Acts of Parliament, 1948 (India).
  13. The Code on Social Security, 2020, � 42, No. 36, Codes of parliament, 2020 (India).
  14. The Code on Social Security, 2020, � 125(1), No. 36, Codes of parliament, 2020 (India).
  15. Simpliance, ESI-Background, (Last visited 19th Nov, 2022)
  16. The Code on Social Security, 2020, � 122(6), No. 36, Codes of parliament, 2020 (India).

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