Holding

A director who receives remuneration for the discharge of duties is an “employee” under Section 2(9) and the remuneration is “wages” under Section 2(22), making the contribution payable.

Summary

The Employees’ State Insurance Corporation (ESIC) observed that Venus Alloy Pvt. Ltd., though covered under the Employees’ State Insurance Act, 1948, had not paid ESI contributions on the remuneration paid to its directors. ESIC issued an order on 6 April 2005 directing the company to make the contribution, which the company challenged under Section 75 of the Act. The ESI Court declared the order void, relying on earlier High Court decisions that directors are not “employees”. On appeal, the Supreme Court examined the statutory definitions of “employee” (Section 2(9)) and “wages” (Section 2(22)) and held that a director receiving remuneration for duties performed falls within these definitions. The Court noted that the respondent offered no evidence to contradict ESIC’s factual findings, rendering the earlier order uncontroverted. Consequently, the Supreme Court set aside the lower courts’ orders and dismissed the company’s application, allowing ESIC’s contribution demand.

Issues considered

Whether directors receiving remuneration fall within the definition of “employee” under Section 2(9) of the Employees’ State Insurance Act, 1948.
Whether such remuneration constitutes “wages” under Section 2(22) of the Act, thereby attracting ESI contribution liability.

Legislation cited

Employees' State Insurance Act, 1948s. 2(22), s. 2(9), s. 75, s. 82

Subjects

employee definitionESI contributiondirectors as employeeswages under ESI Actstatutory interpretationdual capacity

Judgment

[2019] 3 S.C.R. 673 673

EMPLOYEES’ STATE INSURANCE CORPORATION A
v.
VENUS ALLOY PVT. LTD.
(Civil Appeal No. 1464 of 2019)
FEBRUARY 05, 2019 B
[ABHAY MANOHAR SAPRE AND
DINESH MAHESHWARI, JJ.]
Employees’ State Insurance Act, 1948 – ss.2(9), 75 and 82 –
Respondent-Company, covered under the ESI Act had been
depositing the amount of contribution with reference to the wages C
paid to some of its employees, however, did not make the contribution
in respect of the remuneration paid to the Directors – By order dated
06.04.2005, the Deputy Director of the appellant-Corporation called
upon the respondent to make payment of contribution in relation to
the remuneration paid to the Directors – Challenged by the D
respondent u/s.75 – ESI Court declared the said order as void – In
appeal by the appellant, the High Court concluded that the Directors
of the respondent establishment do not come within the purview of
the “employees”, as defined u/sub-sec. (9) of s.2 of the ESI Act and
dismissed the appeal – Held: Appellant in order dated 06.04.2005
asserted that the Directors of the Company were paid remuneration E
@ 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 – However, while challenging
the said order, the respondent chose not to lead any evidence before
the Court – Hence, there was nothing on record to displace the F
facts asserted on behalf of the appellant in its order dated
06.04.2005, rather the factual assertions in the said order remained
uncontroverted – 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 G
– No reason to interfere with the order dated 06.04.2005 issued by
the appellant – Impugned order set-aside and the application filed
by the respondent-Company u/s.75 of the ESI Act is dismissed.

H
673
674 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Allowing the appeal, the Court
Held: 1.1 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
B “employee” under the Employees’ State Insurance Act, 1948 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
C 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 only
on the contention that the Directors do not fall within the
D 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? [Para 13][682-C-E]
1.2 The High Court in the present case has been in error
E 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. The application
filed by the respondent under Section 75 of the ESI Act is
F dismissed. [Paras 14, 15][682-H; 683-A-B]
Employees’ State Insurance Corporation v. Apex
Engineering Pvt. Ltd. (1998) 1 SCC 86 : [1997] 5 Suppl.
SCR 57 – held applicable.

G Sakal Papers Private Limited v. Employees’ State
Insurance Corporation MHLJ 1995 Vol. 2 Page 69;
Employees’ State Insurance Corporation v. Apex
Engineering Pvt. Ltd. MHLR 1990 Vol. 2 Page 850;
Saraswath Films v. Regional Director, Employees’ State
Insurance Corporation, Trichur (2010) 11 SCC 553 –
H referred to.
EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUS 675
ALLOY PVT. LTD.

Case Law Reference A
[1997] 5 Suppl. SCR 57 held applicable Para 6
(2010) 11 SCC 553 referred to Para 6
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1464
of 2019. B
From the Judgment and Order dated 17.02.2014 of the High Court
of Madhya Pradesh Bench, Indore in Civil Miscellaneous Appeal No.
1213 of 2006.
Mahesh Srivastava, Vaibhav Manu Srivastava, P. N. Puri, Advs.
for the Appellant. C
Dushyant Parashar, Adv. for the Respondent.
The Judgment of the Court was delivered by
DINESH MAHESHWARI, J. 1. Leave granted.
2. The short question calling for determination in this appeal by D
special leave against the judgment dated 17.02.2014 passed by the High
Court of Madhya Pradesh, Bench at Indore in Miscellaneous Appeal
No. 1213 of 2006 is as to whether the Directors of respondent-Company,
who are receiving remuneration, come within the purview of “employee”
under sub-section (9) of Section 2 of the Employees’ State Insurance E
Act, 1948 (‘the ESI Act’)?
3. Put in brief, the relevant background aspects of the matter are
that the respondent-Company had been covered under the ESI Act and
had been depositing the amount of contribution with reference to the
wages paid to some of its employees. However, in an inspection carried F
out by the Appellant-Employees’ State Insurance Corporation (‘the
Corporation’), it was observed that the respondent-Company had not
made the contribution in respect of the remuneration paid to the Directors.
There had been exchange of communications in regard to the liability of
the respondent–Company and ultimately, by the order dated 06.04.2005,
the Deputy Director of the appellant-Corporation called upon the G
respondent to make payment of contribution in relation to the remuneration
paid to the Directors. Such a demand was questioned by the respondent-
Company by way of an application under Section 75 of the ESI Act
(Case No. 171 of 2005) that was considered and decided by the
H
676 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Employees State Insurance Court at Indore (‘the ESI Court’) by its
order dated 24.12.2005.
4. The ESI Court noted that both the parties had not adduced any
evidence and sought disposal of the case only on the basis of arguments.
The parties referred to a few citations but in essence, both the parties
B relied upon the decision of this Court in the case of Employees’ State
Insurance Corporation Vs. Apex Engineering Pvt. Ltd., as reported
in 1997 (77) F.L.R. 8781. The ESI Court observed that in the said
case, the Managing Director was found performing some particular work
but there was no illustration that the provisions of the ESI Act were
applicable on the amount received by the Directors; and rather took the
C view that the illustrations produced by the respondent-Company were to
the effect that Directors do not fall under the category of the employees.
The ESI Court, therefore, declared the aforesaid order dated 06.04.2005
void and unfair, while observing as under:-
“5....I viewed the above judicial illustration produced in case.
D The illustration on which both parties put their faith according
to their view, has been adjudicated by Hon’ble Supreme Court.
It seems by its perusal that managing director performs some
particular works. The provisions of ESI Act are applicable
on the payment that is made to him for those particular and
E additional works. There is no dispute in relation to the amount
receiving by managing director in this case but there is dispute
in relation to the amount receiving by directors. There has no
judicial principle been established in any of judicial
illustration produced in the case that the provisions of ESI
Act are applicable on the amount receiving by the directors
F on the other hand judicial illustration produced by the
plaintiff reveals that neither amount receiving by the directors
fall under the category of pay nor directors fall under the
category of employee. Hence in the right (sic) of above judicial
illustration the order dated 06.04.05 passed by defendant is
G proved void and unfair.”
5. In the appeal preferred by the appellant-Corporation under
Section 82 of the ESI Act against the aforesaid order dated 24.12.2005,
the High Court of Madhya Pradesh at Indore Bench, while relying on
1
Equivalent citation (1998) 1 SCC 86
H
EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUS 677
ALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

the decision of the Bombay High Court in the case of Sakal Papers A
Private Limited Vs. Employees’ State Insurance Corporation reported
in MHLJ 1995 Vol. 2 Page 69 and another decision of the Bombay
High Court in the case of Employees’ State Insurance Corporation
Vs. Apex Engineering Pvt. Ltd. reported in MHLR 1990 Vol. 2 Page
850, concluded that the Directors of the respondent establishment do
B
not come within the purview of the “employees”, as defined under sub-
section (9) of Section 2 of the ESI Act and dismissed the appeal with the
following observations:-
“10. On due consideration of the aforesaid and in view of
the law laid down by the Bombay High Court, I am of the
view that the Directors of the respondent establishment does C
not come within the purview of the employee as defined under
section 2(9) of the ESI Act. The learned court has not
committed any legal error in setting aside the order dated
06.04.2005”
6. Assailing the judgment aforesaid, learned counsel for the D
appellant-Corporation, while strongly relying on the decision of this Court
in Employees’ State Insurance Corporation Vs. Apex Engineering
Pvt. Ltd.: (1998) 1 SCC 86, has argued that if remuneration is paid to
a person who satisfies the definition of “employee” as per Section 2(9)
of the ESI Act for discharge of the work assigned to him, such E
remuneration would be covered under the definition of “wages” as per
Section 2 (22) of the ESI Act and, therefore, necessary contribution for
that employee is to be paid. Learned counsel has also relied upon the
decision in Saraswath Films Vs. Regional Director, Employees’ State
Insurance Corporation, Trichur: 2010(11) SCC 553. Per contra,
learned Counsel for the respondent has duly supported the judgment F
impugned with the submissions that the facts of the present case are
different from the facts in the case of Apex Engineering (supra),
inasmuch as therein, one of the Directors of the company was entrusted
with the work of Managing Director on remuneration of Rs. 1,000/- per
month and in view of this remuneration, he had to discharge extra duties, G
apart from his function as an ordinary Director. According to the learned
counsel, the said Managing Director fell within the definition of
“employee” under Section 2(9) of the ESI Act but in the present case,
the Directors of the respondent-Company were not employed for wages
in or in connection with the work of factory or establishment and hence,
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678 SUPREME COURT REPORTS [2019] 3 S.C.R.

A they do not fall within the essential ingredients of Section 2(9) of the ESI
Act.
7. Having given anxious consideration to the rival submissions
and having examined the record with reference to the law applicable,
we are clearly of the view that the impugned orders cannot be sustained
B and the application filed by the respondent-Company under Section 75
of the ESI Act deserves to be dismissed.
8. For determination of the question involved, appropriate it would
be to take note of the exhaustive definition of “employee” as contained
in sub-section (9) of Section 2 of the ESI Act that reads as under:-
C “2(9). “employee” means any person employed from wages
in or in connection with the work of a factory or establishment
to which this Act applies and-
(i) who is directly employed by the principal employer, on any
work of, or incidental or preliminary to or connected with
D the work of, the factory or establishment, whether such work
is done by the employee in the factory or establishment or
elsewhere; or
(ii) who is employed by or through an immediate employer, on
the premises of the factory or establishment or under the
E supervision of the principal employer or his agent on work
which is ordinarily part of the work of the factory or
establishment or which is preliminary to the work carried on
in or incidental to the purposes of the factory or
establishment; or
F (iii) whose services are temporarily lent or let on hire to the
principal employer by the person with whom the person whose
services are so lent or let on hire has entered into a contract
of service;
and includes any person employed for wages on any work
G connected with the administration of the factory or
establishment or any part, department or branch thereof or
with the purchase of raw materials for, or the distribution or
sale of the products of, the factory or establishment, or any
person engaged as apprentice, not being an apprentice
engaged under the Apprentices Act, 1961 (52 of 1961), [and
H
EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUS 679
ALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

includes such person engaged as apprentice whose training A
period is extended to any length of time] 2 but does not include-
(a) any member of the Indian naval, military or air forces; or
(b) any person so employed whose wages (excluding
remuneration for overtime work) exceed such wages as may
be prescribed by the Central Government a month: B

Provided that an employee whose wages (excluding
remuneration for overtime work) exceed such wages as may
be prescribed by the Central Government at any time after
(and not before) the beginning of the contribution period,
shall continue to be an employee until the end of that period;” C

9. The expression “wages” is defined in sub-section (22) of Section
2 of the ESI Act in the following terms:-
“2(22). “wages” means all remuneration paid or payable in
cash to an employee, if the terms of the contract of D
employment, express or implied, were fulfilled and includes
any payment to an employee in respect of any period of
authorised leave, lock-out, strike which is not illegal or lay-
off and other additional remuneration, if any, paid at intervals
not exceeding two months, but does not include-
E
(a) any contribution paid by the employer to any pension fund
or provident fund, or under this Act;
(b) any travelling allowances or the value of any travelling
concession;
(c) any sum paid to the person employed to defray special F
expenses entailed on him by the nature of his employment; or
(d) any gratuity payable on discharge;”
10. This Court, in the case of Saraswath Films (supra), has
expounded on the amplitude of the definition of “employee”, as contained
in sub-section (9) of Section 2 of the ESI Act in the following:- G

“6. From the provision in Section 2(9) it is clear that the
definition is wide and of comprehensive nature. It includes
2
Note: the expressions in parenthesis were substituted by Act No. 18 of 2010 w.e.f.
01.06.2010 in place of the expressions “or under the standing orders of the
establishment”. H
680 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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
B
carried on in or incidental to the purpose of the establishment.
In clause (iii) the position is further clarified; a person whose
services are temporarily lent or let on hire to the principal
employer by the person with whom the person whose services
are so lent or let on hire has entered into a contract of service
C is also brought within the purview of the statute. On a plain
reading of the definitions of the expressions “principal
employer” and “immediate employer” the position is manifest
that the appellant is the principal employer of the security
guards in the case. It may be that their immediate employer is
the security agency with whom there has been a contract either
D
by the lessor or the lessee of the cinema hall for purpose of
the service. On a fair reading of relevant statutory provisions
and keeping in view the object and purpose for which the
legislation was enacted it is clear to us that in this case the
security guards come within the purview of the expression
E “employee” as defined in Section 2(9) of the Act. “
11. In the case of Apex Engineering (supra), the Board of
Directors of respondent-Company resolved to elect one of its Directors
as Managing Director of the Company and to grant him annual
remuneration of Rs. 12,000/- for rendering services as Managing Director.
F The question was as to whether the said Managing Director was an
“employee” within the meaning of Section 2(9) of the ESI Act? Though
the High Court and the ESI Court had answered this question against
the Corporation, but this Court allowed the appeal and, inter alia, held
that the Managing Director, even when to be treated as principal
employer, could also be an employee and could carry such dual capacity.
G This Court said,-
“8. But even assuming that the High Court was right that
Shri Dhanwate could be said to be principal employer there
is nothing in the Act to indicate that a managing director being
the principal employer cannot also be an employee. In other
H words he can have dual capacity….”
EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUS 681
ALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

This Court also approved the interpretation of relevant provisions A
of the ESI Act by the Karnataka High Court in the following:-
“13. A Division Bench of the Karnataka High Court in
the case of Regional Director, ESI Corpn. v. Margarine &
Refined Oils Co. (P) Ltd. [1984 Lab IC 844; (1983) 2 LLN
918 (Kant)] took the view which has commanded (sic B
commended) to us in the present proceedings. It was held by
the High Court that the Managing Director of a private limited
company was an employee as defined by Section 2 sub-section
(9) of the Act. In this connection it was observed by the High
Court that a company is a legal person and a corporate entity
and as such it can employ one of its directors as Managing C
Director. The Managing Director of the company covered by
the Act becomes an employee of the company within the
meaning of Section 2(9) of the Act and the remuneration paid
to him for the functions he discharges as Managing Director
would amount to wages as defined under Section 2(22) of D
the Act for the purpose of calculating employees’ contribution.
The aforesaid decision of the High Court correctly interprets
the relevant provisions of the Act.”
After a survey of the other cited decisions, this Court held as
under:- E
“19. As a result of the aforesaid discussion it must be
held that the Division Bench of the High Court in the impugned
judgment had erred in taking the view, on the facts of the
present case, that Shri Dhanwate as Managing Director of
the company was not an employee within the meaning of F
Section 2 sub-section (9) of the Act. On the other hand it
must be held that he was an employee of the company and as
such could be added to the list of the remaining 19 employees
so as to make a total of 20 for covering the establishment
under Section 2 sub-section (12) of the Act which defines
“factory” to mean, “ any premises including the precincts G
thereof-
(a)........., or
(b) whereon twenty or more persons are employed
or were employed for wages on any day of the preceding
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682 SUPREME COURT REPORTS [2019] 3 S.C.R.

A twelve months, and in any part of which a manufacturing
process is being carried on without the aid of power or is
ordinarily so carried on”.
12. We are clearly of the view that what has been observed and
held by this Court in Apex Engineering (supra), in relation to the
B Managing Director of a Company, applies with greater force in relation
to a Director of the Company, if he is paid the remuneration for discharge
of the duties entrusted to him.
13. It is noticed that in the present case, the appellant-Corporation
in its impugned order dated 06.04.2005 specifically asserted that the
C 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
D 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
E 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?
14. The ESI Court cursorily attempted to distinguish the decision
F of this Court in Apex Engineering (supra) only with reference to the
fact that therein, the amount was being received by the Managing Director.
The High Court, on the other hand, overlooked the said decision of this
Court and relied only on the decisions of the Bombay High Court though
the propositions in the referred decisions of the Bombay High Court
stood effectively overruled by the decision in Apex Engineering (supra)
G where this Court held in no uncertain terms that the High Court was in
error in taking the view that the Managing Director of the Company
was not an employee within the meaning of Section 2 (9) of the ESI Act.
The said decision directly applies to the present case and we have no
hesitation in concluding that the High Court in the present case has been
H in error in assuming that the Director of a Company, who had been
EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUS 683
ALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

receiving remuneration for discharge of duties assigned to him, may not A
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.
15. In view of above, this appeal is allowed; the impugned orders
are set-aside and the application filed by the respondent-Company under B
Section 75 of the ESI Act is dismissed.

Divya Pandey Appeal allowed.

C

D

E

F

G

H