Supreme Court Clarifies ESI Act Applicability for Establishments Post 1989: ESI Corporation vs. Radhika Theatre (2023) INSC 602 (20 January 2023)

Introduction

Date of the Judgment: 20 January 2023

Citation: 2023 INSC 602

Judges: M. R. Shah, J., C.T. Ravikumar, J.

Can an establishment that initially had more than 20 employees and was covered under the Employees’ State Insurance (ESI) Act, 1948, continue to be covered even when its employee count falls below 20? This question was at the heart of a recent case before the Supreme Court of India. The Court examined the retrospective application of a 1989 amendment to the ESI Act, which significantly altered the criteria for coverage. The bench, composed of Justices M. R. Shah and C.T. Ravikumar, delivered the judgment.

Case Background

M/s. Radhika Theatre, the respondent, had been operating a cinema theatre since 1981. Initially, it made contributions to the ESI Corporation until September 1989. Subsequently, the theatre stopped payments, claiming that its employee count had fallen below 20, which was the threshold for ESI coverage at the time.

The ESI Corporation issued demand notices to Radhika Theatre for non-payment of contributions. The theatre challenged these notices in the Employees Insurance Court (EI Court), arguing that it was not liable under the ESI Act since it employed less than 20 persons before the insertion of Sub-section (6) of Section 1 of the ESI Act on 20.10.1989. The EI Court dismissed the theatre’s case on 13.12.2010, upholding the demand notices.

Radhika Theatre then appealed to the High Court of Telangana at Hyderabad. The High Court ruled in favor of the theatre, stating that the 1989 amendment (Sub-section (6) of Section 1) should not apply retrospectively. The High Court set aside the EI Court’s order, leading the ESI Corporation to appeal to the Supreme Court.

Timeline:

Course of Proceedings

The Employees Insurance Court (EI Court) initially dismissed the case filed by M/s. Radhika Theatre, thereby confirming the demand notices issued by the ESI Corporation. The EI Court held that the theatre was liable to pay ESI contributions. However, the High Court for the State of Telangana at Hyderabad overturned this decision. The High Court ruled that the amendment to Section 1 of the ESI Act, specifically the insertion of Sub-section (6) on 20.10.1989, should not be applied retrospectively. This meant that establishments set up before this date, like Radhika Theatre, would not be covered if their employee count fell below 20.

Legal Framework

The core of this case revolves around Section 1 of the Employees’ State Insurance Act, 1948. Before the amendment on 20.10.1989, the ESI Act primarily applied to factories and establishments employing 20 or more persons. The amendment introduced Sub-section (6) to Section 1, which states:

“a factory or an establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below the limit specified by or under this Act or the manufacturing process therein ceases to be carried on with the aid of power.”

This amendment meant that once an establishment was covered under the ESI Act, it would remain covered even if the number of employees fell below 20. The key issue was whether this amendment applied retrospectively to establishments already in existence before 20.10.1989.

Arguments

Appellant (ESI Corporation) Arguments:

• The ESI Corporation argued that the High Court erred in not applying Sub-section (6) of Section 1 of the ESI Act to the period after 20.10.1989.
• It emphasized that the ESI Act is a social welfare legislation aimed at benefiting workers. Therefore, it should be interpreted liberally to extend its benefits to as many employees as possible.
• The corporation contended that the insertion of Sub-section (6) was intended to ensure that once an establishment is covered by the ESI Act, it remains covered irrespective of fluctuations in the number of employees.
• The ESI Corporation argued that applying Sub-section (6) of Section 1 from 20.10.1989 onwards does not amount to retrospective application. It would only be retrospective if applied to the period before 20.10.1989.
• The ESI Corporation cited the Supreme Court’s decision in Bangalore Turf Club Limited Vs. Regional Director, ESIC; (2014) 9 SCC 657, to support its argument for a liberal interpretation of the ESI Act.

Respondent (M/s. Radhika Theatre) Arguments:

• The respondent did not appear before the Supreme Court. However, their argument before the High Court was that Sub-section (6) of Section 1 of the ESI Act, which came into effect on 20.10.1989, should not be applied retrospectively.
• They argued that the amendment should only apply to establishments set up after 20.10.1989, not to those already in existence.

Arguments Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether a factory or establishment, established before 20.10.1989, is governed by the ESI Act after 20.10.1989, even if the number of employees falls below the specified limit?
2. Whether applying the amended Section 1 of the ESI Act from 20.10.1989 onwards constitutes retrospective application?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Cases:

• Bangalore Turf Club Limited Vs. Regional Director, ESIC; (2014) 9 SCC 657 – Supreme Court of India: This case was cited to emphasize the need for a liberal interpretation of the ESI Act as a social welfare legislation.
• ESI Corpn. v. Francis De Costa [1993 Supp (4) SCC 100 : 1994 SCC (L&S) 195] – Supreme Court of India: This case was referenced to highlight that the ESI Act is a social security legislation that should be interpreted broadly to prevent injustice and promote social justice.
• Transport Corpn. of India v. ESI Corpn. [(2000) 1 SCC 332 : 2000 SCC (L&S) 121] – Supreme Court of India: This case was cited to reinforce that beneficial legislation should be construed in a manner that furthers legislative intent.
• Buckingham and Carnatic Co. Ltd. v. Venkatiah [AIR 1964 SC 1272] – Supreme Court of India: This case was used to support the principle that while a liberal construction is necessary for social legislation, it must still be based on the words used in the statute.
• Bombay Anand Bhavan Restaurant v. ESI Corpn. [(2009) 9 SCC 61 : (2009) 2 SCC (L&S) 573] – Supreme Court of India: This case was cited to emphasize that courts should not allow subterfuges that defeat the purpose of social legislation and should interpret the law liberally to promote its objectives.

Legal Provisions:

• Section 1(6) of the Employees’ State Insurance Act, 1948: This provision, inserted on 20.10.1989, states that once an establishment is covered under the ESI Act, it remains covered irrespective of the number of employees.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed the precedent set in Bangalore Turf Club Limited Vs. Regional Director, ESIC; (2014) 9 SCC 657*, emphasizing the need for a liberal interpretation of the ESI Act.
• The Court reiterated the principles laid down in ESI Corpn. v. Francis De Costa [1993 Supp (4) SCC 100 : 1994 SCC (L&S) 195]*, that the ESI Act is a social security legislation that should be interpreted broadly to prevent injustice and promote social justice.
• The Court relied on Transport Corpn. of India v. ESI Corpn. [(2000) 1 SCC 332 : 2000 SCC (L&S) 121]* to reinforce that beneficial legislation should be construed in a manner that furthers legislative intent.
• The Court applied the principle in Buckingham and Carnatic Co. Ltd. v. Venkatiah [AIR 1964 SC 1272]* that while a liberal construction is necessary for social legislation, it must still be based on the words used in the statute.
• The Court reiterated the principle in Bombay Anand Bhavan Restaurant v. ESI Corpn. [(2009) 9 SCC 61 : (2009) 2 SCC (L&S) 573]* that courts should not allow subterfuges that defeat the purpose of social legislation and should interpret the law liberally to promote its objectives.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the social welfare nature of the ESI Act. The Court emphasized that the Act is intended to provide benefits to employees in cases of sickness, maternity, and employment injury. This was a primary consideration in the Court’s interpretation of Section 1(6) of the ESI Act. The Court also focused on ensuring that the benefits of the ESI Act reach as many workers as possible, aligning with the legislative intent behind the Act.

Fact:Law Ratio

Logical Reasoning

Decision

The Supreme Court allowed the appeal filed by the ESI Corporation. The Court set aside the High Court’s judgment and restored the demand notices issued by the ESI Corporation for the period after 20.10.1989. The Court held that the amendment to Section 1 of the ESI Act, specifically the insertion of Sub-section (6), was intended to ensure that once an establishment is covered under the ESI Act, it remains covered even if the number of employees falls below the specified limit. The Court clarified that applying this provision from 20.10.1989 onwards does not constitute retrospective application.

The Court stated, “Therefore, on and after 20.10.1989, irrespective of number of persons employed a factory or an establishment shall be governed by the ESI Act.” and “With respect to such a notice it cannot be said that amended Section 1 inserting Sub-section (6) is applied retrospectively as observed and held by the High Court.”

The Court further added, “Sub-section (6) of Section 1 therefore, shall be applicable even with respect to those establishments, established prior to 31.03.1989/20.10.1989 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.”

Key Takeaways

• Establishments covered under the ESI Act before 20.10.1989, continue to be covered even if the number of employees falls below 20 after that date.
• The 1989 amendment to Section 1 of the ESI Act (insertion of Sub-section (6)) applies prospectively from 20.10.1989, and not retrospectively.
• The ESI Act, being a social welfare legislation, is to be interpreted liberally to ensure maximum benefit to employees.
• Employers must ensure compliance with the ESI Act, irrespective of fluctuations in employee numbers, once they are covered under the Act.

Directions

No specific directions were given by the Supreme Court in this judgment, other than setting aside the High Court’s order and restoring the demand notices for the period post 20.10.1989.

Specific Amendments Analysis

This judgment primarily focuses on the interpretation and application of the amendment inserting Sub-section (6) to Section 1 of the ESI Act, 1948, which was introduced on 20.10.1989. The amendment aimed to ensure continuous coverage under the ESI Act for establishments once they are brought under its purview, irrespective of any subsequent decrease in the number of employees. This amendment was crucial in addressing the issue of establishments exiting the ESI scheme due to fluctuations in their workforce.

Development of Law

The ratio decidendi of this case is that the amendment to Section 1 of the ESI Act, 1948, by inserting Sub-section (6) on 20.10.1989, applies prospectively from that date. This means that any establishment covered under the ESI Act before 20.10.1989 remains covered even if its employee count falls below 20 after that date. This clarifies that the amendment is not retrospective, but it does create a continuous obligation for establishments once they are brought under the ambit of the ESI Act.

Conclusion

In conclusion, the Supreme Court’s judgment in The ESI Corporation vs. M/s. Radhika Theatre clarifies the applicability of the ESI Act post the 1989 amendment. The Court held that the amendment applies prospectively from 20.10.1989, ensuring continuous coverage for establishments once they are under the ambit of the ESI Act, irrespective of fluctuations in employee numbers. This judgment reinforces the social welfare objective of the ESI Act and provides clarity on its application, particularly for establishments set up before 1989.

Category

Parent Category: Employees’ State Insurance Act, 1948

Child Categories:

• Section 1, Employees’ State Insurance Act, 1948
• Social Security Legislation
• Employee Benefits
• ESI Coverage
• Retrospective Application

FAQ

Q: What does the Supreme Court’s judgment mean for my business?

A: If your establishment was covered under the ESI Act before 20.10.1989, it remains covered even if your employee count has fallen below 20 since then. You must continue to comply with the ESI Act.

Q: Does this judgment mean the ESI Act applies retrospectively?

A: No, the judgment clarifies that the 1989 amendment applies prospectively from 20.10.1989. It does not apply to periods before this date.

Q: What if my establishment was set up after 20.10.1989?

A: If your establishment was set up after 20.10.1989 and was covered under the ESI Act, it remains covered even if your employee count falls below the specified limit.

Q: Why is this judgment important?

A: This judgment provides clarity on the applicability of the ESI Act, ensuring that social security benefits reach employees even in establishments with fluctuating employee numbers. It also reinforces the social welfare nature of the ESI Act.

Q: What should I do if I am unsure about my establishment’s ESI coverage?

A: It is advisable to consult with a legal professional or the ESI Corporation to determine your specific obligations under the ESI Act.