The Karnataka High Court (“High Court”) vide its judgement in Employees State Insurance Corporation v. Messrs Sansera Engineering Private Limited, MFA No. 3687 of 2016 (ESI), decided on July 30, 2025, dealt with the question of the inclusion of the contract labourers working in a factory on a contractual basis under the Employees State Insurance Act, 1948 (“ESI Act”).

Facts of the case

1. The Assistant Director, Employees State Insurance Corporation (“ESIC”/“Appellant”) filed a miscellaneous first appeal against the judgment of the ESI Court, Bengaluru (“Court”). Sansera Engineering Private Limited (“Respondent”), a private limited company engaged in manufacturing of automobile components and is a “factory” under Section 2(12) of the ESI Act.

2. During an inspection, the ESIC found that the Respondent had engaged contractors for various construction, maintenance, and repair works. However, no ESI contribution had been paid for the labour involved in these activities, nor were relevant wage records furnished to substantiate these contributions despite providing them with several opportunities.

3. Consequently, the ESIC concluded that the Respondent had failed to comply with its statutory obligations and hence, invoked Section 45-A of the ESI Act and determined a contribution payable of INR 13,52,825 (Rupees thirteen lacs fifty-two thousand eight hundred twenty-five). 

4. The Respondent challenged this demand before the Court, which partly allowed their application and reduced the demand made by the ESIC to INR 3,50,000 (Rupees three lacs fifty thousand). The ESIC appealed this reduction, arguing that there was lack of precise calculation or logic behind the decision given by the Court.

Issues framed by the High Court

The High Court framed the following issues for adjudication:

1. Whether labourers engaged through contractors for construction and repair works within the factory premises are to be treated as ‘employees’ within the meaning of Section 2(9) of the ESI Act?

2. Whether the order passed by the ESIC under Section 45-A of the Act was validly made in accordance with law, particularly in view of the Respondent's failure to furnish necessary records?

3. Whether the Court was justified in modifying the statutory demands in the absence of cogent evidentiary basis or alternative computation?

Appellant's contentions

The Appellant raised the following contentions before the High Court:

1. The Appellant contented that the Respondent had failed to comply with its statutory obligation by not paying contributions for contract labour or furnishing wage records.

2. The Appellant further contended that construction and maintenance work undertaken by the contract labourers for the factory were integral to its operations and continuity. Therefore, persons employed in such work, even though contractors, fall within the definition of “employee” under Section 2(9) of the ESI Act.

3. Section 45-A empowers the ESIC to determine contributions based on available information and reasonable estimates when an employer fails to submit records to substantiate the contributions. In this regard, the Appellant relied on the case of Messrs Group 4 Securitas Guarding Limited v. The Regional Director, MFA No. 7749/2013 (ESI) (decided on November 21, 2023) where it was held that in cases where no records are furnished during determination under Section 45-A, the ESIC can determine and demand the amount for such a contribution.

4. The Respondent was given sufficient opportunities to provide details, including the bifurcation of labour and material components, but failed to furnish such information. Hence, the Respondent cannot raise the point of speculative assessment after withholding records and the ESIC can accordingly determine and recover the contributions which must be accepted by the Court unless disproved by the employer.

5. The reduction of the ESIC’s demand by nearly 75% (seventy five percent) by the Court lacked legal justification, and was unsupported by any calculation, thus setting a dangerous precedent.

Respondent's contentions

The Respondent contended before the High Court that:

1. The Respondent argued that construction workers were engaged by independent contractors and were not under its control and supervision. The payments made to them largely covered material costs, making labour component uncertain. Since the ESIC’s assessment was ad hoc and irrational, such workers should be excluded as their work was not part of regular factory activity.

Verdict of the High Court

1. After due analysis, the High Court found the Court’s approach to be unjustifiable and irrational. It held that the ESI Act, being a social welfare law, should be interpreted broadly to benefit employees by providing coverage for sickness, maternity, and other issues, rather than narrowly in a way that defeats its purpose.

2. The High Court held that labourers engaged through contractors for construction and repair works within the factory premises are indeed employees under Section 2(9) of the ESI Act, as such individuals are involved in connection with such work that is integral to the factory's operations. In this case, the maintenance and construction for factory expansion or upkeep are not external to the factory's core function. These tasks are essential for the efficiency, safety, and continuity of operations, as works like building new sheds or remodelling existing structures are closely linked to the factory's effective operation. Therefore, they are considered part of the establishment's core activities. Therefore, under Section 2(9) of the ESI Act, those working in such jobs, even if they are contractors, fall under the term of “employee”.

3. Furthermore, the High Court found no infirmity in the method adopted by the ESIC under Section 45-A, stating that when an employer withholds material records, they cannot complain that the assessment was speculative. Moreover, it also relied on the case of Messrs Group 4 Securitas Guarding Limited v. The Regional Director, MFA No. 7749/2013 (ESI), which captured the same essence as mentioned above. The ESIC’s estimation of 25% (twenty-five percent) of contractor payments as the labour component was also deemed as valid.

4. The High Court found the Court's order legally unsustainable because it lacked precise calculations and was based on “conjectural quantification." Consequently, the appeal was allowed, and the Court's order was set aside. The original contribution demand of INR 13,52,825 (Rupees thirteen lacs fifty-two thousand eight hundred twenty-five) raised by the ESIC was restored, and the Respondent was ordered to pay this amount, along with the interest and other statutory consequences, within 8 (eight) weeks.

Significance of the Judgement

This judgment marks a significant advancement in the field of labour law as it expands the interpretation and enforcement procedures of the ESI Act as set out below:

1. This judgment upholds a broad definition of “employee” under the ESI Act, including contract labourers who perform construction, maintenance, and repair work within factory premises. The High Court declared that these tasks are “integral to the continuity, efficiency, and safety of the factory's operations” and are not “non-core or detached.” This interpretation ensures that more workers, particularly those employed by contractors for essential support services, are covered by the ESI Act's social security net, aligning with the principle that social welfare laws should be construed liberally to advance its beneficial purpose. Also, the term “employee” as defined under section 2(9)(ii) of the ESI Act means any person employed for wages in or in connection with the work of a factory or establishment, whether directly by or through an immediate employer, and whether on the premises or under the supervision of the principal employer or his agent. This wide definition expressly covers not only those directly engaged by the immediate employer but also those individuals who are engaged through the immediate employer. Therefore, contract labourers engaged through independent contractors also fall within this ambit, since they are employed “through an immediate employer” to perform work connected with the establishment.

2. This judgment reinforces the ESIC's power of estimated assessment, especially when employers fail to provide necessary records. The High Court upheld ESIC's method of estimating the labour component at 25% (twenty five percent) of contractor payments, finding “no infirmity” in the calculation, particularly since the employer had concealed records despite multiple opportunities to produce them. The ruling also deemed the Court’s “perverse” reduction of the demand as “conjectural quantification” that set a "dangerous precedent" potentially encouraging employers to tamper with documents. This decision strengthens the ESIC's enforcement capabilities by preventing employers from evading their statutory duties through a lack of cooperation.

3. Lastly, the Judgement also emphasises on the fact that the employer is ultimately responsible for ensuring ESI compliance and hence cannot avoid culpability by simply contracting out work to contractors.  The High Court has placed the onus of confirming contributions on the employer, regardless of whether contractors meet their responsibilities, by confirming that workers hired by contractors to do necessary industrial tasks are considered "employees." 

In the constantly evolving labour law arena, this ruling has upheld the welfare-centric principles of the ESI Act by expanding the ambit of the term “employee” and guaranteeing coverage for contract workers performing necessary manufacturing functions. It prevents employers from avoiding their statutory obligations by upholding the ESIC’s authority to make reasonable assumptions when they withhold records. It has brought forth a balance between upholding the Act's beneficial intent and enforcing severe compliance.

Please find attached a copy of the Judgement.

This update has been contributed by Aayush Kumar (Partner) and Pratikshya Mohanty (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.