Introduction:

In a significant judgment, the Kerala High Court, in PN Uma Shanker, Secretary, Kerala Electrical Wiremen and Supervisors Association v. The Deputy Director (In Charge) ESI Corporation and Others (Insurance Appeal No. 12/2023 and 2/2024), ruled that an entity is not automatically entitled to coverage under the Employees’ State Insurance Act, 1948 (ESI Act), merely because it is registered under the Kerala Shops and Commercial Establishments Act. The Court also held that members of an employee association, who are self-employed, would not come under the ESI Act unless it is established that the association employs them. The case stemmed from a dispute over the revocation of the ESI Code allotted to the Kerala Electrical Wiremen and Supervisors Association, which had voluntarily registered under the ESI Act. Upon inspection, ESI authorities found that the members were self-employed electricians and not employees of the association, leading to the cancellation of the ESI Code. The Employees’ Insurance (EI) Court later reversed the cancellation, ruling that self-employed members could not be covered under the Act, but the Association could register its employees. Both the Association and the ESI Corporation appealed against this decision before the Kerala High Court. Justice Syam Kumar VM examined three key legal questions, ultimately upholding the revocation of the ESI Code and ruling that ESI benefits should not be extended to those who do not meet the statutory criteria.

Arguments of Both Sides:

The Association argued that its voluntary registration under the ESI Act conferred coverage on its members, as they performed work similar to employees in commercial establishments. They contended that self-employed persons should be treated as employees under Section 2(9) of the ESI Act. The Association relied on its registration under the Kerala Shops and Commercial Establishments Act, asserting that this entitled it to continue ESI coverage. Furthermore, it challenged the ESI Corporation’s power to revoke the ESI Code after voluntary registration, arguing that such revocation was arbitrary and without proper justification. The Association also claimed that the EI Court erred in holding that self-employed members could not be considered employees under the Act.

On the other hand, the ESI Corporation argued that mere voluntary registration under the ESI Act did not grant automatic entitlement to benefits, especially when eligibility conditions were not met. It maintained that the ESI Act only covers employees in an establishment and that self-employed persons do not qualify. The Corporation emphasized that the term “employee” under Section 2(9) requires an employer-employee relationship, which was absent in this case. It further contended that registration under the Kerala Shops and Commercial Establishments Act does not automatically extend to coverage under the ESI Act, as an entity must engage in systematic economic activity and employ workers. The ESI Corporation justified its revocation of the ESI Code, arguing that upon inspection, it found that the Association’s members were not employees but independent contractors, making them ineligible for ESI coverage.

Court’s Judgment:

The Kerala High Court addressed three fundamental legal questions. First, on whether the EI Court erred in interpreting “employee” under Section 2(9) of the ESI Act, the Court ruled that self-employed members of the Association could not be treated as employees. The Court noted that there was no evidence to establish an employer-employee relationship between the Association and its members. It upheld the EI Court’s view that individuals working under a self-employment scheme and earning remuneration independently could not be considered employees under the Act. Citing precedents, the Court affirmed that merely forming an association does not convert self-employed persons into employees.

On the second issue, regarding whether registration under the Shops and Commercial Establishments Act automatically entitled an entity to ESI coverage, the Court rejected this argument. It referred to the Supreme Court judgment in Board of Control for Cricket in India v. Regional Director, Employees’ State Insurance Corp. & Anr (2022), which established that a business must engage in systematic, organized commercial activity involving employees to qualify as an establishment under the ESI Act. The High Court observed that the production of a registration certificate under the Shops Act does not suffice to retain ESI registration if statutory conditions are not met.

Finally, the Court upheld the ESI Corporation’s authority to revoke voluntary registration if the eligibility criteria were not satisfied. It held that the ESI Corporation has the power to verify the legitimacy of an entity’s ESI registration and revoke it if it finds that the conditions required for coverage are not met. The Court underscored that ESI benefits should be reserved for those genuinely covered under the law and should not be extended to undeserving claimants. It emphasized that just as some employers attempt to evade ESI obligations by keeping employees off their rolls, others may misuse the scheme to claim unwarranted benefits. The Court concluded that ESI benefits should be strictly regulated to prevent abuse.

In light of these findings, the Kerala High Court dismissed the Association’s appeal and allowed the ESI Corporation’s appeal in part, overturning the EI Court’s decision to reinstate the ESI Code. The ruling reinforced that voluntary registration does not confer automatic entitlement to ESI benefits and that self-employed individuals do not qualify as employees under the ESI Act unless a clear employer-employee relationship exists.