ESIC Issuing Demands Without Proper Inquiry Violates Principles Of Natural Justice: Kerala HC

Background

KSEB, a public sector undertaking, faced multiple notices from the ESIC, mandating ESI contributions amounting to ₹23.5 crore. KSEB contested these demands, asserting that its regular employees earned salaries well above the statutory limit for ESI applicability and received benefits equivalent or superior to those offered under the Act. Moreover, KSEB argued that the alleged contract workers were engaged by independent petty contractors and that KSEB exercised no control over them.

Arguments

KSEB, represented by Sri. C. Joseph Antony and Sri. Raju Joseph, contended that their employees' high wages exempted them from ESI coverage. They argued that contract workers were hired and supervised by third-party contractors, absolving KSEB of any responsibility as a principal employer under the ESI Act. Further, KSEB emphasized that ESIC had not examined contractual terms to establish liability or gathered details from the immediate employers.

On the other hand, the respondents maintained that KSEB operated commercial activities and thus fell under the ESI Act's scope. They argued that KSEB employed a significant number of contract workers, whose welfare and statutory rights needed safeguarding. The respondents highlighted KSEB's primary obligation as a government entity to uphold labor laws.

Court's Reasoning

Firstly, the court considered the nature of KSEB's operations and noted that while the regular employees were indeed exempt due to high salaries, this exemption did not automatically extend to contract workers. The court emphasized that the ESI Act's definition of an establishment is broad and includes commercial activities.

Secondly, the court scrutinized the procedural irregularities in ESIC's assessment. It found that ESIC failed to conduct a thorough investigation into the employment terms of the contract workers and did not engage with the immediate employers for relevant details, as mandated by Section 41 of the ESI Act. This failure to gather information violated the principles of natural justice.

The court also highlighted the dual responsibility for contributions. While the immediate employer must maintain records and pay ESI dues, the principal employer, KSEB in this case, holds secondary liability if the immediate employer defaults. However, without adequate inquiry, ESIC's imposition of liability on KSEB was deemed arbitrary. Thus, the court set aside the orders.

Decided on: 11-11-2024

Neutral Citation: 2024:KER:83428, Kerala State Electricity Board Ltd. v. Employees State Insurance Corporation

Counsel for the Petitioner: Sri. C. Joseph Antony, Sri. Raju Joseph

Counsel for the Respondents: Adarsh Kumar, Ashok Shenoy, Shashank Devan, P.S. Gireesh, Salih P.A., Thejalakshmi R.S., Umasanker U.U.

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