Directors Receiving Remuneration Qualify as Employees for Determining Coverage Under the ESI Act

The respondent, Gopal Glass Works Pvt. Ltd., was ordered by the ESIC under Section 45A of the ESI Act to pay contributions based on a finding that it employed twenty persons (eighteen workers and two Directors)

The respondent challenged these orders (dated 14.11.1986, 10.09.1987, and 17.10.1988) before the ESI Court via Application No. 12 of 1990

The ESI Court allowed the application and quashed the ESI orders on the grounds that principles of natural justice were violated and that Directors do not qualify as "employees," thereby bringing the headcount below the statutory threshold of twenty

The ESIC appealed this decision under Section 82 of the ESI Act

1. Whether the ESI Court erred in holding that Directors of a company cannot be categorized as "employees" under the ESI Act

2. Whether the principles of natural justice were violated by the non-furnishing of the inspection report and denial of a hearing

Section 75 and Section 82 of the Employees’ State Insurance Act, 1948

Regarding the status of Directors, the Court applied the precedent set by the Hon’ble Supreme Court in ESI Corp. v. Apex Engineering Pvt. Ltd. and ESI Corp. v. Venus Alloy Pvt. Ltd., which established that Directors drawing remuneration or salary from a company fall within the definition of “employee” under the ESI Act

The High Court found that the ESI Court’s primary legal premise—that Directors are per-se excluded from the definition of employees—was erroneous in light of Supreme Court precedents

The Court noted that for Directors to be treated as employees, a factual determination is required to verify if they draw a salary or remuneration

While the respondent argued that the original Section 45A orders were void due to the violation of audi alteram partem (failure to provide the inspection report or a hearing), the High Court determined that the matter required a fresh factual inquiry

The Court reasoned that the ESI Court must re-evaluate the headcount by applying the correct legal standard to the remuneration status of the Directors while ensuring procedural fairness

The Court remanded E.S.I. Application No. 12 of 1990 to the ESI Court for fresh consideration. The ESI Court is directed to decide the matter within three months, allowing both parties to lead evidence specifically regarding whether the Directors received remuneration. The ESI Court must resolve the dispute in accordance with the law laid down by the Supreme Court regarding the status of Directors under the ESI Act