Retrospective Applicability of the ESI Act - Views of the Supreme Court

 

AN INTRODUCTION TO THE ESI ACT

 

The Employees’ State Insurance Act (ESI Act) was enacted in the year 1948 with the laudable objective of providing “benefits to employees in case of sickness, maternity and employment injury and to make provision for certain other matters in relation thereto.”

 

On 20.10.1989, a new sub-section (6) was inserted in Section 1 of the ESI Act. Sub-section (6) of Section 1 is the Applicability Clause of the ESI Act that provides that: -

 

“A factory or an establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below the limit specified by or under this Act or the manufacturing process therein ceases to be carried on with the aid of power.”

 

Thus, even if a factory lays off its employees drastically or its power-driven manufacturing process ceases, then also such factory or establishment could not get away from the clutches of the ESI Act. The rationale behind insertion of S. 1 (6) seems to be that the welfare of the employees must not suffer on account of reduction in the workforce or closing of manufacturing. Even when an employer is going through tough times, it must be made sure that its employees are insured. Such insurance is essential to hedge the risks that are associated with employment in industrial establishments. If an employer does not pay its contributions on time, then the ESI Act provides for appropriate liabilities and penalties in this regard.

 

FACTS

 

The discussion on S. 1 (6) becomes pertinent in light of a recent judicial pronouncement, namely, ESI Corporation v. Radhika Theatre, 2023 SCC OnLine SC 64, wherein the Respondent was running a Cinema Theatre since the year 1981. It paid ESI Contributions till September 1989 and after insertion of S. 1 (6) in the ESI Act on 20.10.1989, it stopped paying the contributions on the ground that its employees were less than 20 in number that is below the limit specified under the ESI Act. The Petitioner/ESI Department issued Demand Notices to the Respondent Theatre seeking payment of contributions post September 1989. The Respondent challenged such Demand Notices on the ground that since it was an establishment existing prior to 20.10.1989 i.e., the date on which S. 1 (6) was inserted; hence, the Respondent should be excluded from the ambit of S. 1 (6) as it has the number of employees that are below the limit specified under the ESI Act and S. 1 (6) cannot be applied retrospectively.

 

HELD BY THE COURT

 

According to the Court, the ESI Act is a social welfare legislation and “any interpretation which would lean in favour of the beneficiary should be given.” To elucidate, the Court observed that the primary rule of interpretation is to do literal construction first, but in case of beneficial legislations, the interpretation should be more liberal rather than literal, so that the noble objectives of the beneficial legislation get promoted. Further, the ESI Act is applicable to all the factories other than the seasonal ones and as far as possible, its provisions that confer benefits on the employees must be interpreted in consonance with the legislative purpose.

 

With respect to the question of retrospective application of S. 1 (6), the Court was of the view that any Demand Notice that deals with a period that is prior to insertion of S. 1 (6) would be hit by retrospectivity and would be invalid. However, if the demand is being made for a period subsequent to insertion of S. 1 (6) i.e., post 20.10.1989, then “the ESI Act shall be applicable irrespective of the number of persons employed or notwithstanding that the number of persons employed at any time falls below the limit specified by or under the ESI Act.” Hence, the Court upheld the Demand Notices that were issued by the ESI Corporation post 20.10.1989.

 

CONCLUDING REMARKS

 

I concur with the reasoning of the Court because if the plain words of S. 1 (6) are seen, then it would be manifest that “a factory or an establishment to which this [ESI] Act applies shall continue to be governed by this [ESI] Act.” Thus, even if an entity is established prior to insertion of S. 1 (6), then also it would continue to be governed by the ESI Act. Not only the rule of beneficial construction but also the rule of literal interpretation are pointing towards the same result that the date of creation of an establishment or a factory is immaterial for deciding the applicability of the ESI Act. Such was the conscious intention of the legislature reflected in the wordings of S. 1 (6).

 

I also agree with the Court on the question of retrospectivity. There cannot be any presumption with respect to retrospective application of a statutory provision. If retrospective application is to be made applicable, then it must be manifest in the words of the statute. For all other cases, the presumption is always in favour of prospectivity. Prospectivity for S. 1 (6) would mean that non-compliance of ESI Act prior to insertion of S. 1 (6) would not be governed by it and the caveat provided in the ESI Act would become applicable only after the insertion.