ESI eligibility when variable allowances cross ₹21,000

Labour, HR & Safeguarding
1

We wish to highlight that allowances like Overtime, Conveyance etc. are variables and thus there will be cases when overtime, for example, in one particular month could make the allowance cap beyond 50%; in such cases, as per the New Rules, the additional earning above 50% is to be added as wages for the purposes of PF & ESI.

We request you to kindly clarify that in cases in which by virtue of variable allowances when added to wages of individual goes beyond the statutory limit of Rs. 21000/- does the employees go out of purview of ESI. Additionally, such variable allowances would vary from month to month due to which eligibility of individual would also change.

We request a clarification on ESI contribution is not to be calculated on Overtime

2

Thanks for your query.

  1. Please note that OT and conveyance allowance are exclusions as per definition of Wages in the Code on Wages.
  2. As these may vary as per your query, the total remuneration also will vary each month. If they exceed the amount which was considered while arriving at total remuneration, exclusions and inclusions in the first place based on definition of Wages, there will be need for adding commensurate incremental amount as conditional inclusion to fulfil the 50% rule. Suppose your total remuneration was Rs.42k (included a certain amount of OT, conveyance) and the Wages (inclusion) was Rs.21k such that the employee is covered in ESI, if due to higher OT and conveyance the monthly remuneration becomes say Rs.43k, Wages (inclusion) will be Rs.21.5k and ESI coverage would continue on increased Wages until the end of current 6 months contribution period (Sep 30/March 31 as the case may be). The six-month contribution period will always be a net for coverability into ESI if the employee is on margin due to changes in OT and conveyance.
  3. If the OT and conveyance were to decrease, ESI coverage will anyways continue.
  4. Monitoring and removing employees from ESI coverage will be cumbersome and the six month contribution period rule will likely ensure coverage for such employees who are on margin.

Hope it clarifies.

CS Sharad Bhargava