Case Note & Summary
The case involves an appeal by the Employees' State Insurance Corporation (ESIC) against a judgment of the Madhya Pradesh High Court, which had upheld the ESI Court's order setting aside a demand for ESI contributions on remuneration paid to Directors of Venus Alloy Pvt. Ltd. The respondent-company was covered under the ESI Act and had been depositing contributions for some employees, but an inspection revealed that no contributions were made on Directors' remuneration. After correspondence, the Deputy Director of ESIC issued a demand on 06.04.2005, which the company challenged under Section 75 of the ESI Act. The ESI Court, relying on ESIC v. Apex Engineering Pvt. Ltd., held that Directors do not fall under the category of employees, declaring the demand void. The High Court affirmed this, relying on Bombay High Court decisions. The Supreme Court, however, reversed the lower courts' decisions. The Court analyzed the definitions of 'employee' under Section 2(9) and 'wages' under Section 2(22) of the ESI Act, noting that the definition of employee is wide and includes any person employed for wages in or in connection with the work of the establishment. The Court cited its earlier decisions in Saraswath Films v. Regional Director, ESIC and ESIC v. Apex Engineering Pvt. Ltd., where it was held that a Managing Director receiving remuneration can be both a principal employer and an employee. The Court concluded that Directors who receive remuneration for services rendered to the company are employees under Section 2(9), and contributions are payable on such remuneration. The impugned orders were set aside, and the company's application under Section 75 was dismissed.
Headnote
A) Employees' State Insurance Act, 1948 - Definition of Employee - Section 2(9) - Directors receiving remuneration - The definition of 'employee' under Section 2(9) is wide and comprehensive, including any person employed for wages in or in connection with the work of the establishment. Directors who receive remuneration for services rendered to the company are covered under this definition, and contributions under the ESI Act are payable on such remuneration. (Paras 8-10) B) Employees' State Insurance Act, 1948 - Wages - Section 2(22) - Remuneration paid to Directors - Remuneration paid to Directors for discharge of work assigned to them falls within the definition of 'wages' under Section 2(22) of the ESI Act, as it is remuneration paid in cash to an employee for fulfilling the terms of employment. (Para 9) C) Employees' State Insurance Act, 1948 - Dual Capacity - Managing Director as Principal Employer and Employee - A Managing Director, even if treated as a principal employer, can also be an employee under Section 2(9) of the ESI Act if he receives remuneration for services rendered, as held in ESI Corporation v. Apex Engineering Pvt. Ltd. (1998) 1 SCC 86. (Para 11)
Issue of Consideration
Whether Directors of a company who receive remuneration come within the purview of 'employee' under Section 2(9) of the Employees' State Insurance Act, 1948?
Final Decision
The Supreme Court allowed the appeal, set aside the impugned orders of the High Court and ESI Court, and dismissed the application filed by the respondent-company under Section 75 of the ESI Act. The Court held that Directors receiving remuneration for services rendered are 'employees' under Section 2(9) of the ESI Act, and contributions are payable on such remuneration.
Law Points
- Definition of employee under Section 2(9) of ESI Act is wide and includes any person employed for wages in or in connection with the work of the establishment
- Directors receiving remuneration for services rendered are employees
- Managing Director can be both principal employer and employee
- Remuneration paid to Directors for work assigned constitutes wages under Section 2(22) of ESI Act
