ESI qualifying wages under Social Security Code, 2020

 

Under the earlier rules, the ESI was contributed on gross salary. The only components which could be excluded were Travelling allowance and washing allowance (on condition that the employer has provided Uniform to the workers). Under the Social Security Code, only the Basic wages and Dearness allowance will qualify for ESI. Yes, if the employee’s salary includes allowances like house rent, amount paid for the special skill put in for the work or special allowance, commission, wages for overtime work performed, conveyance or travelling allowance or any amount payable following a settlement or award by Tribunals, bonus and contributions payable by the employer towards EPF, then that amount will also be taken for deciding the amount payable to ESI scheme. If the total amount payable as allowances listed above exceeds 50% of the total salary including Basic and DA, then the amount which exceeds 50% should be added to Basic and DA portion in order to decide the amount payable as ESI.

Therefore, there will be two parts in the salary, ie:

1.       Basic and DA

2.        Allowances

Suppose an employee’s salary is as follows:

Components	Amount
Basic Wages	18000
VDA (as per CPI)	2500
Retaining allowance	0
Sub Total (A)	20500
HRA	3000
Conveyance allowance	1000
EPF (Employer)	1800	12% on Rs 15000
Overtime allowance	1000
Commission	5000
Sub Total (B)	11800
Total Remuneration (A+B)	32300
1/2 of all remunerations	16150
Allowances which exceed 1/2 of total	0	Amount of allowance which exceeds 50% of total remuneration
Wages which will qualify for ESI	20500

 Since the total of allowances (subtotal (B)) is less than 50% of the total remuneration, we need not take anything of the allowances but just take the first part of the salary, ie, Subtotal (A) only for contribution to ESI. In such cases, the 50% principle will not be applicable.

 

Another example with the same fixed wages but with different variable allowances:

Components	Amount
Basic Wages	18000
VDA (as per CPI)	2500
Retaining allowance	0
Sub Total (A)	20500
HRA	3000
Conveyance allowance	1000
EPF (Employer)	1800	12% on Rs 15000
Overtime allowance	8000
Commission	12000
Sub Total (B)	25800
Total Remuneration (A+B)	46300
1/2 of all remunerations	23150
Allowances which exceed 1/2 of total	2650	Amount of allowance which exceeds 50% of total remuneration
Wages which will qualify for ESI	23150

Since the subtotal (B) exceeds 50% of the total wages by Rs 2650 (25800- 23150), that amount should be added to subtotal (A). Then the wages will become Rs 23150. Then he will become an excluded employee even though his fixed part of wages is within the threshold limits.

In another scenario where an employee whose First Part of wages (basic wages and dearness allowance) is Rs 16000 but whose second part of wages (allowances including commission and overtime wages) is Rs 34000 will be out of ESI coverage just because his wages as per the definition of the Code would become Rs 25000.

In short, the variable part of the salary will decide the coverage. An employee working for more overtime hours will be out of the scheme. This will prevent him from working overtime. Similarly, an employee earning more amounts by way of commission or incentive will lose the benefits of ESI. In majority of the cases, it is the benefits extended to the old parents which will keep the workers alive under ESI. When they lose it, naturally, they will rethink, whether to work hard and earn commission or to lose the benefits under the ESI Scheme……..!!

Threat for Personnel Officer/ HR Officer:

The variables will decide the coverage of workers under ESI Scheme. Earlier, it was the fixed part of salary which would decide whether an employee should be covered or not. But under the new Rule, we cannot just give coverage based on the fixed part of salary, the First part in the above examples. Whereas an employee has to be covered in the first day of his joining, and at the same time, we cannot foresee how much would be the variables, the only thing that we can do is to cover the employee just on the basis of the first part of wages.  

Since the allowances will keep on changing every month, you have to find the contribution payable every month using this formula. For establishments which pay PF on actual salary instead of Rs 15000, the contribution to PF will also influence the calculation of ESI.

It is accepted that an employee once covered will continue to be covered till the end of the contribution period. Again, in the month of October or April, if the employee’s salary comes under the threshold limit of Rs 21000 on account of lesser amount of overtime wages or commission, then he cannot be excluded. Coverage shall also take place in any month in which the allowances is short of 50% of the total remuneration.

The existing theory of allowances which are paid in an interval of more than two months will not apply under the SS Code. Similarly, the treatment of overtime wages for coverage and contribution has come to an end.

Madhu T K

Principal Consultant 

DefusIR Solutions Pvt Ltd

Kannur

www.defusir.com

Mail: madhu@defusir.com

Phone: 0497 3570162, 9847583239, 9400683239