Wage Ceiling For ESI Coverage Increased From INR 15,000 To INR 21,000

Starting 1 January 2017, employers will need to make contributions under the ESI Act for a larger pool of employees since the wage ceiling for applicability of this statute has been increased from INR 15,000 to INR 21,000.

Employees’ State Insurance Act, 1948 (ESI Act) is a social security legislation aimed at providing benefits to employees in case of sickness, maternity, employment injury and certain other related matters. Under this self-financing health insurance scheme, funds are primarily built out of contribution from employers and employees. On 22 December 2016, the Ministry of Labour and Employment issued a notification increasing the wage limit for coverage under the ESI Act to INR 21,000. This change will come into effect on 1 January 2017. The wage ceiling was last raised in May 2010, where the wage limit was increased from INR 10,000 to INR 15,000. With the current increase to INR 21,000, the wage limit for ESI Act has been brought in line with the wage limit under the Payment of Bonus Act, 1965 which was revised earlier this year.

Impact of increase in the wage ceiling:

– More employees will be covered: The increase in the wage ceiling from INR 15,000 to INR 21,000 means that an employer will now also be required to make contributions for employees earning between INR 15,000 and INR 21,000. Consequently, a greater portion of the workforce would now be covered under the ESI Act.

The important factor for determining whether an employee would be covered under the ESI Act is whether the employee’s monthly ‘wages’ exceed INR 21,000. Wage has a specific definition under the ESI Act with a list of components that need to be included and excluded. Therefore, as a first step, it is advisable for employers to assess which components of salary would fall within the definition of ‘wages’ for the purpose of the ESI Act and consequently determine which employees need to be covered.

– Impact on finances: As the ESI Scheme is financed by contributions from employers (4.75%) and employees (1.75%), the change will have a financial impact on companies as contributions will now have to be made for an additional set of employees. Similarly, the take home salary of employees earning between INR 15,000 to INR 21,000 will potentially decrease since the employee contribution of 1.75% will be deducted from their salaries.

Moreover, the cost impact may not just be limited to employees, but also extend to contract workers/agency workers. Under the ESI Act, the principal employer or the service recipient is primarily responsible for contributing for the contract workers as well. Even where it has been contractually agreed that the vendor will make the ESI contributions for its employees, it is quite likely that the vendors will try to renegotiate the commercials to factor in the additional cost.

– Additional Administrative Processes: For the employees who will now be covered under the ESI Act due to this change in the wage ceiling, employers will need to obtain their declaration forms, upload it on the online portal and also obtain the insured person number if not obtained previously. Employers will also be under an obligation to maintain returns and records in relation to the new pool of employees.

Initially, apart from enhancing the wage ceiling, there were discussions on providing an option to insured persons to continue their membership even after their wages exceed the threshold. However, the notification issued by the Government does not have any provision in this regard. Therefore, once an employee starts earning a wage of more than INR 21,000, contributions will need to be made only till the end of the contribution period, which is a 6-month period. Thereafter, no contributions will need to be made under the ESI Act.

Various reports suggest that with this rise in the wage threshold, about 3.5 million employees will now fall within the ambit of the ESI Act. From an organisation’s perspective, the key impact of this change would be a financial one, as starting 1 January 2017, a larger group of employees will need to be considered for contributions.