Supreme Court answers if Directors of a Company are ‘Employees’ under ESI Act?

Directors of a Company are employees under the provisions of the Employees State Insurance Act (ESI Act), the Supreme Court has held.

The Bench of Justices Abhay Manohar Sapre and Dinesh Maheshwari delivered this judgment while considering the question of whether or not Directors who receive remuneration from a Company fall within the purview of the definition of the term “employee” under the ESI Act.

The Respondent company in the case was covered under the ESI Act and made regular deposits of contributions with respect to wages of its employees. However, upon inspection, it was found that the Company did not make deposits for the remuneration paid to its Directors.

The Employees State Insurance Corporation (ESI Corporation/ appellant) by an order of April 2005, called upon the Respondent to make the deposit with respect to the remuneration disbursed to its Directors. This demand was opposed by the Respondent by way of an application in ESI Court at Indore.

The ESI Court observed that neither parties had adduced any evidence and had proceeded only on the basis of arguments. However, the ESI Court held in favour of the Respondent Company and held that the order passed by the ESI Corporation is void as Directors do not fall within the purview of “employees”.

This order was appealed against before the Madhya Pradesh High Court’s Indore Bench which dismissed the same. The High Court also held that the Directors do not fall within the purview of “employees” as defined under Section 2(9) of the ESI Act.

Aggrieved by the same, the ESI Corporation approached the Supreme Court.

The Supreme Court, in its judgment, placed reliance on its judgment in the Apex Engineering case wherein it had held that a Managing Director who is treated as a principal employer, could also be an employee and can carry out functions in such dual capacity. The judgment states,

“We are clearly of the view that what has been observed and held by this Court in Apex Engineering (supra), in relation to the 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.”

The Court also examined the scope and meaning of the definitions of the terms “employee” and wages” while also placing reliance on various precedents.

The Court noted that the ESI Corporation had mentioned the specific amount paid to the Directors as remuneration while demanding contribution in that regard from the Respondent. This fact was not challenged by the Respondent before the ESI Court. The only issue raised by the Respondent was the inclusion of Directors within the scope of the term “employee”, the Court noted.

Addressing this question, the Court noted that while “employee” includes a person employed for work and paid wages, the term “wages” itself includes any remuneration paid in terms of an employment agreement.

The Court, thus, held that the High Court erred in dismissing the appeal and holding that Directors who are paid remuneration are not employees.

Noting that there was no reason to interfere with the order passed by the E.S.I. Corporation demanding contribution for remuneration paid to the Directors, the Court allowed the appeal and set aside the High Court judgment.

Souce: Barandbench.

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