Allowances forming part of wages and employee headcount manipulation to evade coverage under ESI Act is impermissible.

The Petitioner No. 1 is a certified 'Khadi Mark' institution governed by the Khadi and Village Industries Commission (KVIC).

The Respondents conducted an inspection of the Petitioner’s establishment on 22.03.2018 and recorded 14 individuals as employees, including 7 "artisans"

Based on this, the ESI Corporation issued an order under Section 45-A of the ESI Act (dated 02.05.2022) assessing a contribution of Rs. 6,12,150/-

The Petitioner challenged this, arguing that it never employed 10 or more persons and that "artisans" are "self-employed" individuals under KVIC bye-laws, not "employees"

An appeal under Section 45AA was dismissed on 07.01.2025

The Petitioner moved the High Court seeking to revoke its coverage under the ESI Act.

1. Whether "artisans" or weavers engaged by a Khadi institution qualify as "employees" for the purpose of mandatory coverage under the ESI Act

2. Whether the Petitioner’s establishment employed 10 or more persons so as to attract the provisions of the ESI Act

3. Whether "allowances" paid to certain staff members, featuring Provident Fund deductions, constitute "wages" under Section 2(22) of the ESI Act

The court primarily applied the Employees’ State Insurance Act, 1948, specifically Section 2(9) (definition of employee), Section 2(22) (definition of wages), and Sections 45-A/45-AA (determination of contributions and appeal)

It relied on The West Bengal Unorganized Sector Workers’ Welfare Act, 2007, which recognizes Khadi and Handloom weavers as the unorganized sector

The court applied the precedent from Regional Provident Fund Commissioner (II) West Bengal vs Vivekananda Vidyamandir & Ors. (2019), which established that allowances paid across the board, not linked to variable production or extra output, are essentially part of "basic wages" camouflaged to avoid statutory deductions

The Court observed that while "artisans" are generally unorganized, self-employed individuals and were erroneously labeled as "employees" by the ESI authorities

During inspection, the payment register revealed 13 employees; however, 4 were listed on a separate page under "allowances" with PF deductions

The Court found that the Petitioner failed to provide data showing these allowances were variable or linked to specific incentives

Applying the Vivekananda Vidyamandir test, the Court held that these 4 individuals were effectively employees whose wages were camouflaged as allowances to circumvent the ESI Act

Consequently, excluding the 7 debated artisans, the establishment still maintained 13 employees (9 regular + 4 under the allowance head), exceeding the statutory threshold of 10

It held that the Petitioner’s attempt to split the payment register into two pages was a motive to avoid social welfare schemes

While it agreed that artisans are generally self-employed, it concluded that the Petitioner nonetheless met the 10-employee threshold through its regular and "allowance-based" staff

The High Court upheld the orders dated 02.05.2022 and 07.01.2025 passed under Sections 45-A and 45-AA

WPA 21943 of 2025 was disposed of, and all interim orders were vacated