In a significant interpretation of the Employees’ State Insurance Act, 1948 (ESI Act), the Andhra Pradesh High Court has ruled that establishments employing fewer than 10 workers do not fall within the ambit of the ESI Act, unless already covered. The court clarified that Section 1(6) of the Act cannot be used to newly rope in establishments that have never met the statutory employee threshold.
The judgment was passed by a division bench comprising Justice Ravi Nath Tilhari and Justice Challa Gunaranjan in Civil Miscellaneous Appeal No. 801 of 2008, filed by the Regional Director of the Employees’ State Insurance Corporation (ESIC), challenging the order of the Principal Senior Civil Judge, Nellore, in ESI O.P. No. 75 of 2005.
Background of the Case
The appellant, Regional Director, ESI Corporation, represented by Sri Venna Kalyan Chakravarthi on behalf of Sri U.R.P. Srinivas, contended that M/s. Sri Ramakrishna Rice Mill, a registered partnership firm, was liable under the ESI Act for employing more than the required number of workers.
The rice mill, in operation since 1980, had challenged the ESIC’s orders demanding payment of contributions, claiming it never employed more than nine workers at any given time — all of whom were either daily wagers or contract labour. The respondents argued that since the establishment never met the minimum threshold of 10 workers, the Act was not applicable to them.
The Principal Senior Civil Judge, Nellore, agreed with the rice mill’s position and ordered the ESIC to refund the sum of ₹88,657 collected from the firm. The ESIC appealed this decision to the High Court.
Legal Issue Before the Court
The key legal question was:
Does Section 1(6) of the ESI Act, introduced via the 1989 amendment, render the number of employees irrelevant for coverage under the Act — even for factories being covered for the first time?
Court’s Analysis and Findings
The court referred to Section 2(12) of the ESI Act, which defines a “factory” as a premises employing 10 or more persons where manufacturing occurs. The judges noted that this threshold must be met before a factory can be covered under the ESI Act for the first time.
The bench rejected the ESIC’s contention that Section 1(6) overrides this threshold. In a critical passage, the court observed:
“Sub-section (6) of Section 1 provides for continuation of the applicability of the Act. It does not mean that a factory not previously governed by the Act can now be included even if it never employed 10 or more persons.”
The judges distinguished the facts from the Supreme Court decision in ESIC v. Radhika Theatre (AIR Online 2023 SC 52), explaining that in that case, the theatre was already covered under the Act before the 1989 amendment. Hence, Section 1(6) ensured continued applicability despite a later reduction in employee count.
“Section 1(6) of the Act is not relevant at all in the present case,” the bench asserted, adding that it “applies only to a factory which was under the purview of the ESI Act and subsequently witnessed a reduction in workforce.”
Final Verdict
Dismissing the ESIC’s appeal, the High Court upheld the lower court’s order and declared:
“There is no illegality in the order under challenge. The appeal does not involve any substantial question of law and is dismissed.”
The court directed the ESIC to refund the amount collected from M/s. Sri Ramakrishna Rice Mill, while clarifying that Section 1(6) could not be stretched to cover factories never eligible under the original criteria.
