India: Directors Receiving Remuneration Are Employees Under The ESI Act, 1948

The Hon'ble Apex Court in the case of Employee's State Insurance Corporation V. Venus Alloy Pvt. Ltd.¹ on 5th February, 2019 held that Directors of Company, who are receive remuneration, shall come within the purview of "employee" under Section 2(9) of the Employee's State Insurance Act, 1948 (Hereinafter referred to as ESI Act, 1948).

Background

Venus Alloy Pvt. Ltd. (Hereinafter referred to as Respondent Company) which is covered under the Employee's State Insurance Act, 1948 had been depositing the amount of contribution with reference to the wages paid to its employees. However, Employees State Insurance Corporation had carried out an inspection and found out that the Respondent Company has not been depositing the amount of contribution with reference to the remuneration paid to the Directors of the Company. Therefore, the Deputy Director of Employees State Insurance Corporation vide order dated 06.04.2005 directed the Respondent Company to make payment of contribution with regards to the remuneration paid to the Directors of the Company. The Respondent Company questioned the Order passed by the Deputy Director of Employees State Insurance Corporation by submitting an application under Section 75 of the ESI Act, 1948 in Employee's State Insurance Court at Indore.

Issues involved

Whether the Directors of a Company, who are receiving remuneration, will come under the purview of "employee" under Section 2 (9) of the Employee's State Insurance Act, 1948?

Judgment:

Employee's State Insurance Court, Indore

The Employee's State Insurance Court, Indore while declaring the Order dated 06.04.2005 void and unfair observed that the Directors of a Company do not fall under the definition of "employee" under Section 2 (9) of the ESI Act, 1948. The Employee's State Insurance Court relied upon the decision of Supreme Court of India in the case of Employees' State Insurance Corporation V. Apex Engineering Pvt. Ltd.² which was cited by both the parties in this present case and has observed that in the Apex Engineering case, the Supreme Court has held that the provisions of the ESI Act, 1948 will be made applicable on the amount paid to the Managing Director for performing some additional or particular work but nothing was mentioned in the said judgment with regards to the applicability of the provisions of the ESI Act, 1948 on the amount received by the Directors of a Company which is a matter of dispute in this present case.

High Court of Madhya Pradesh

Being aggrieved by the Order passed by the Employee's State Insurance Court, the Appellant preferred an appeal before the Hon'ble Madhya Pradesh High Court under Section 82 of the ESI Act, 1948 against the Order dated 24.12.2005. The Hon'ble High Court relied upon two decisions of the Hon'ble Bombay High Court in the case of Shakal Papers Private Limited V. Employees' State Insurance Corporation³ and Employees' State Insurance Corporation V. Apex Engineering Pvt. Ltd.⁴ and has affirmed the decision of the Employee's State Insurance Court.

Supreme Court of India

The Bench comprising of Justice Abhay Manohar Sapre and Justice Dinesh Maheshwari while setting aside the orders passed by the Employee's State Insurance Court and the High Court of Madhya Pradesh has taken into consideration the judgment passed by the Supreme Court of India in Apex Engineering Case and has held that what has been decided in the aforementioned judgment in relation to the Managing Director of a Company also applies to the Director of a Company if he gets remuneration for discharge of any duty. The bench ruled that if a Director of a Company is receiving remuneration for discharge of any duty then the Director will come under the definition of "employee" under Section 2(9) of the ESI Act, 1948.

The Bench has observed that the Employee's State Insurance Court was incorrect in observing that the decision given in Apex Engineering Case  would not apply in this present case just because in the aforesaid judgment it was held that the Managing Director, who receive remuneration for the discharge of duty would come under the definition of "employees " under the ESI Act, 1948 and nothing was mentioned in the judgment with regards to applicability of the provisions of the ESI Act, 1948 on the amount received by the Directors of a Company.

The Bench has further observed that the Madhya Pradesh High Court has overlooked the decision Supreme Court of India in Apex Engineering Case and has relied on the Bombay High Court judgments which were overruled by the Supreme Court of India in the decision of Apex Engineering Case and has incorrectly concluded that the Directors of the Respondent Company do not come within the definition of "employee" under Section 2(9) of the ESI Act, 1948.

The Bench has also relied upon the decision of the Supreme Court in the case of Saraswath Films v. Regional Director, Employees' State Insurance Corporation, Trichur⁵where the Court has expounded on the amplitude of the definition of "employee" provided under the Act by observing that "It includes any person employed for wages in or in connection with work of the establishment to which the Act applies and also includes any person employed by or through immediate employer on the premises of the establishment or under the principal employer or his agent of work which is ordinarily a part of the work of establishment or which is preliminary to work carried on in or incidental to the purpose of the establishment."

The Court has further considered the interpretation of Section 2(9) of the ESI Act, 1948 as provided by the Hon'ble Karnataka High Court in the case of Regional Director, ESI Corpn. V. Margarine & Refined Oils Co. (P) Ltd.⁶ where it was held that a Company is a legal person and can employ one of its Directors as Managing Director, thus, the Managing Director of a Company shall fall under the definition of "employee" under Section 2(9) of the ESI Act, 1948 and the remuneration paid to the Director shall amount to wages under Section 2(22) of the ESI Act, 1948. 

Conclusion

Thus, from the aforementioned discussion, it can be concluded that the Apex Court has set-aside the orders passed by the Madhya Pradesh High Court and the Employee's State Insurance Court, Indore and has held that the Directors of a Company who receives remuneration shall come under the purview of "employee" under Section 2(9) of the ESI Act, 1948. The Court has further observed that the decision given in Apex Engineering case shall directly apply to the present case, where it was held that the Managing Director of a Company who receives remuneration for performing some specific work shall come under the definition of "employee". Hence, it has been well settled by the Apex Court in this judgment that the Companies which are covered under the ESI Act, 1948 shall make contribution with reference to the remuneration paid to its Directors.

Footnotes

1. Civil Appeal No. 1464 of 2019 arising out of SLP (Civil) No. 12812 of 2015

2. (1998) 1 SCC 86

3. MHLJ 1995 Vol. 2 Page 69

4. MHLR 1990 Vol. 2 Page 850

5. 2010 (11) SCC 553

6. 1984 Lab IC 844; (1983) 2 LLN 918 (Kant)

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