Supreme Court: ESI Act Applicable to Factory or Establishment Irrespective Of Number Of Persons Employed

Supreme Court: ESI Act Applicable to Factory or Establishment Irrespective Of Number Of Persons Employed

The Supreme Court while setting aside the judgment passed by Telangana High Court ruled that Section 1(6) of the Employees' State Insurance Act, 1948 (in short ESI Act) which stipulates 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.

The facts of the case were that the respondent- M/s. Radhika Theatre, established in 1981, paid ESI contributions up to September, 1989. Thereafter, as its employees were less than 20 in number, it did not pay the contributions. Therefore, the appellant – corporation issued demand notices. The respondent herein challenged the demand notices before the Employees Insurance Court (in short EI Court) containing, inter alia, that prior to the insertion of Sub-section (6) of Section 1 of the ESI Act, 1948 with effect from 20th October, 1989, it employed less than 20 persons and therefore, it was not liable to be covered under the provisions of the ESI Act.

The EI Court dismissed the case vide order dated 13 December, 2010. The order passed by the EI Court confirming the demand notices was the subject matter of appeal before the High Court. The High Court allowed the appeal preferred by the respondent herein taking the view that amendment to Section 1 of the ESI Act by which Subsection (6) of Section 1 came to be inserted with effect from 20th October, 1989, the same shall not be applicable retrospectively and the same shall not be made applicable to an establishment, established prior to 20th October, 1989/31st March 1989.

Feeling aggrieved and dissatisfied with the impugned judgment passed by the High Court, the ESI Corporation preferred the appeal before the Apex Court.

The Apex Court considered the object, purpose, and preamble of the ESI Act. The Court considered ESI Act being a social welfare legislation, any interpretation which would lean in favor of the beneficiary should be given and observed that 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.

The Apex Court stated, "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 20th October, 1989, and after 20th October, 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 20th October, 1989, irrespective of number of persons employed a factory or an establishment shall be governed by the ESI Act. Therefore, for the demand notices for the period after 20th October, 1989, there shall be liability of every factory or establishment irrespective of the number of persons employed therein."

With respect to notice the Apex Court was of the view that it cannot be said that amended Section 1 inserting Subsection (6) is applied retrospectively as observed and held by the High Court. 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.

Therefore, the Apex Court opined that the High Court had committed a very serious error in observing and holding that even for the demand notices for the period subsequent 20th October, 1989 i.e., after inserting Sub-section (6) of Section 1 the said provision is applied retrospectively and the High Court has erred in allowing the appeal and setting aside the demand notices even for the period after 20th October, 1989.

The Apex Court concluded that sub-section (6) of Section 1 therefore, shall be applicable even with respect to those establishments, established prior to 31 March 1989/20 October 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.