2019 (2) TMI 2127 - SC - Indian Laws

Company directors receiving remuneration qualify as employees under Section 2(9) of ESI Act 1948

Employees' State Insurance Corporation Versus Alloy Pvt. Ltd.

The SC held that company directors receiving remuneration fall within the definition of 'employee' under Section 2(9) of the Employees State Insurance ... Scope of “employee” under sub-section (9) of Section 2 of the Employees' State Insurance Act, 1948 - whether the Directors of respondent-Company, who are receiving remuneration, come within the purview of “employee” or not - HELD THAT:- It is noticed that in the present case, the appellant-Corporation in its impugned order dated 06.04.2005 specifically asserted that the Directors of the Company were paid remuneration at the rate of Rs. 3,000/- p.m. and they were falling within the definition of 'employee' under the ESI Act and hence, contribution was payable in regard to the amount paid to them. Interestingly, even while seeking to challenge the aforesaid order dated 06.04.2005 by way of proceedings under Section 75 of the ESI Act, the respondent-Company chose not to lead any evidence before the Court. Hence, there was nothing on record to displace the facts asserted on behalf of the appellant-Corporation in its order dated 06.04.2005; rather the factual assertions in the said order remained uncontroverted. The order dated 06.04.2005 had been questioned by the respondent-Company only on the contention that the Directors do not fall within the category of 'employee' but no attempt was made to show as to how and why the remuneration paid to its Directors would not fall within the purview of 'wages' as per the meaning assigned by sub-section (22) of Section 2 of the ESI Act? There are no hesitation in concluding that the High Court in the present case has been in error in assuming that the Director of a Company, who had been receiving remuneration for discharge of duties assigned to him, may not fall within the definition of an employee for the purpose of the ESI Act. There had been no reason to interfere with the order dated 06.04.2005 as issued by the appellant-Corporation. Conclusion - The Directors receiving remuneration for their duties can be considered employees under the ESI Act. The impugned orders are set-aside and the application filed by the respondent-Company under Section 75 of the ESI Act is dismissed - Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment is whether the Directors of a company, who receive remuneration, qualify as 'employees' under sub-section (9) of Section 2 of the Employees' State Insurance Act, 1948 ('the ESI Act'). This determination affects the applicability of the ESI Act to the remuneration paid to such Directors and the consequent liability for contributions under the Act.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe ESI Act defines 'employee' under Section 2(9) as any person employed for wages in connection with the work of a factory or establishment covered by the Act. The definition includes those employed directly by the principal employer or through an immediate employer, and those whose services are lent or hired to the principal employer. The term 'wages' under Section 2(22) includes all remuneration paid to an employee, excluding specific allowances and contributions.The Court considered precedents, particularly the case of Employees' State Insurance Corporation Vs. Apex Engineering Pvt. Ltd., where it was held that a Managing Director could be considered an employee under the ESI Act, even if he also holds the position of principal employer.Court's Interpretation and ReasoningThe Court emphasized the comprehensive nature of the definition of 'employee' under the ESI Act, noting that it includes any person employed for wages in connection with the work of the establishment. The Court highlighted the precedent set in Apex Engineering, where it was established that a Managing Director could hold dual capacities as both an employee and principal employer.Key Evidence and FindingsThe appellant-Corporation asserted that the Directors were paid remuneration and thus fell within the definition of 'employee' under the ESI Act. The respondent-Company did not present evidence to counter this assertion, and the factual basis of the Corporation's order remained unchallenged.Application of Law to FactsApplying the legal framework, the Court found that the Directors receiving remuneration for their duties fit the definition of 'employee' under the ESI Act. The Court rejected the distinction made by lower courts between a Managing Director and other Directors, concluding that the rationale in Apex Engineering applied equally to Directors receiving remuneration.Treatment of Competing ArgumentsThe respondent-Company argued that the Directors did not fall within the definition of 'employee' as they were not employed for wages in connection with the work of the establishment. The Court dismissed this argument, noting the lack of evidence to support it and the broader interpretation of 'employee' established in Apex Engineering.ConclusionsThe Court concluded that the Directors of the respondent-Company, who received remuneration, were indeed employees under the ESI Act. Consequently, the Corporation's demand for contributions based on their remuneration was justified.SIGNIFICANT HOLDINGSThe Court established the principle that Directors receiving remuneration for their duties can be considered employees under the ESI Act. This holding aligns with the precedent set in Apex Engineering, affirming that individuals can hold dual capacities as both employees and principal employers.In its final determination, the Court allowed the appeal, set aside the impugned orders, and dismissed the application filed by the respondent-Company under Section 75 of the ESI Act. The Court emphasized that the High Court erred in concluding that the Directors did not fall within the definition of 'employee' for the purposes of the ESI Act.