ESI Act Applicable To Factory Or Establishment Irrespective Of Number Of Persons Employed : Supreme Court

The Supreme Court, on Friday, held that Section 1(6) of the Employees’ State Insurance Act, 1948 (ESI Act), which contemplates that an establishment would be governed by the Act even if the number of employees fall below the specified limit at any time, shall be applicable to establishments established prior to the provision coming into existence.

While setting aside the judgment of Telangana High Court, whereby the demand notices issued by ESI Corporation was quashed, a Bench comprising Justice M.R. Shah and Justice C.T. Ravikumar held -

“Sub-section (6) of Section 1…shall be applicable even with respect to those establishments, established prior to 31.03.1989/20.10.1989 and the ESI Act shall be applicable irrespective of the number of persons employed or notwithstanding that the number of persons employed at any time falls below the limit specified by or under the ESI Act.”

Factual Background

Radhika Theatre, established in 1981, paid ESI contributions up to September, 1989. After that, since the number of employees went below the prescribed number i.e. 20, it stopped making contributions. The ESI Corporation issued demand notices. The same were challenged by the Theatre before the EI Court, which was dismissed. An appeal was moved before the Telangana High Court. The Theatre argued that the insertion of Section 1(6) of the ESI Act, which contemplated that all establishments shall be governed by the ESA Act, notwithstanding the fact that the number of persons engaged therein is less than the prescribed number, came into effect on 20.10.1989, and  should not be applied retrospectively. It is pertinent to note that prior to insertion of Section 1(6) of the ESI Act, only those establishments/factories engaging more than 20 employees were governed by the ESI Act. The Corporation contended that being a social welfare legislation that envisages welfare of the workmen, greater amplitude be imputed to it. Accepting the argument put forth by the Threatre, the High Court allowed its appeal. It noted that -

“...amendment to Section 1 of the ESI Act by which Sub-section (6) of Section 1 came to be inserted w.e.f. 20.10.1989, the same shall not be applicable retrospectively and the same shall not be made applicable to an establishment, established prior to 20.10.1989/31.03.1989.”

Analysis by the Supreme Court

At the outset, the Court considered the object, purpose and preamble of the ESI Act. The preamble envisages benefits to employees in case of sickness, maternity and employment injury and to make provisions for certain other matters in relation thereto. Considering that ESI is a social welfare legislation, the Court noted that the ESI Act be given liberal interpretation; one that leans in favour of the beneficiary. However, the Court observed that the High Court had erred to the extent that it had quashed the demand notices even for the period subsequent to 20.10.1989. Thus, the High Court’s order was set aside and the demand notice for the period post 20.10.1989 was restored.

Case Details:

The ESI Corporation v. M/s . Radhika Theatre | 2023 LiveLaw (SC) 53 | CA 312 OF 2023 | 20 Jan 2023 | Justice M.R. Shah and Justice C.T. Ravikumar

For Appellant(s) Mr. Mahesh Srivastava, Adv. Mr. Vaibhav Manu Srivastava, AOR Ms. Niharika Gupta, Adv. Mr. Abhishek Gupta, Adv.

Employees' State Insurance Act, 1948- Section 1(6) - Prior to insertion of Sub-section (6) of Section 1 of the ESI Act, only those establishments/factories engaging more than 20 employees were governed by the ESI Act. However, thereafter, Sub-section (6) of Section 1 of the ESI Act has been inserted on 20.10.1989, and after 20.10.1989 there is a radical change and under the amended provision a factory or establishment to which ESI Act applies would be governed by the ESI Act notwithstanding that the number of persons employed therein at any time falls below the limit specified by or under the ESI Act. Therefore, on and after 20.10.1989, irrespective of number of persons employed a factory or an establishment shall be governed by the ESI Act (Para 7)

Employees' State Insurance Act, 1948 - ESI Act should be given liberal interpretation and should be interpreted in such a manner so that social security can be given to the employees - Referred to Bangalore Turf Club Limited Vs. Regional Director, ESIC; (2014) 9 SCC 657. (Para 6,6.1)

Employees' State Insurance Act, 1948 ; Section 1 (6) - Sub-section (6) of Section 1 shall be applicable even with respect to those establishments, established prior to 31.03.1989/20.10.1989 and the ESI Act shall be applicable irrespective of the number of persons employed or notwithstanding that the number of persons employed at any time falls below the limit specified by or under the ESI Act - Only in case of demand notice for the period prior to inserting Sub-section (6) of Section 1 of the Act, it can be said that the same provision has been applied retrospectively. (Para 7)

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