Case Study: Who Is an “Employee” Under ESI When Work Is Done Through Contractors?

Case

C.E.S.C. Limited & Ors. v. Subhash Chandra Bose & Ors.
Civil Appeal Nos. 3197–98 of 1988

Court and Date

Supreme Court of India — Decided on 15 November 1991
Coram: Ranganath Misra, C.J.; M.M. Punchhi & K. Ramaswamy, JJ.

Relevant Law

• Employees’ State Insurance Act, 1948 — Section 2(9) (definition of “employee”)
• Contextual references to Indian Electricity Act, 1910 and Indian Electricity Rules, 1956 (licensing, competency, and supervisory obligations of electrical contractors)

Background

CESC engaged electrical contractors to excavate, convert overhead lines, lay underground cables, and maintain distribution assets. The ESIC asserted that workers engaged by these contractors were “employees” of CESC under Section 2(9), making CESC liable for ESI contributions. CESC began deducting amounts from contractor bills; contractors challenged the deductions. A Single Judge of the Calcutta High Court upheld ESIC’s stance; a Division Bench reversed, holding there was no supervision by CESC during execution—only post-completion checking. ESIC and CESC came to the Supreme Court.

Legal Issue

Whether workers engaged by independent contractors, working off the principal employer’s premises, fall within Section 2(9)(ii) as employees working “under the supervision of the principal employer or his agent”, when the principal employer only checks the work after completion.

Key Legal Findings (Majority: Misra, C.J. & Punchhi, J.)

1. Meaning of “Supervision” under §2(9):
   Supervision means oversight while work is in progress—the ability to notice errors and give timely corrective directions. Mere acceptance/rejection after completion is not supervision.
2. Contractors’ Supervision ≠ Agent of Principal Employer:
   Contractors had statutory/licence obligations (under Electricity Rules) to provide competent supervision and maintain registers. Fulfilling these own obligations does not make them agents of CESC for §2(9).
3. No Agency Created by Contract:
   The contracts required contractors to ensure quality and safety, but did not appoint them as CESC’s agents for supervising workers on CESC’s behalf.
4. Off-premises Work Not Decisive, But…
   Even though off-premises work can still be covered under §2(9), actual supervision by the principal employer or his agent during execution was not proved here.

The Dissent (Ramaswamy, J.)

• Advocated a purposive, welfare-oriented reading of §2(9).
• Considered the right to accept/reject work and statutory control as legal supervision, and viewed contractors as agents of the licensee for executing statutory duties.
• Would have allowed the appeals and brought the workers within ESI coverage.

Judgment

Appeals dismissed (2:1).
The Supreme Court affirmed the Division Bench of the Calcutta High Court: on these facts, workers engaged by the contractors were not “employees” of CESC under §2(9) because CESC did not supervise their work while it was being done, and the contractors were not CESC’s agents for that purpose. No order as to costs.

Conclusion

The decision narrows the reach of §2(9) in contractor scenarios by drawing a firm line between:

• Real-time supervision (brings workers within ESI), and
• Post-completion checking (does not).

It also emphasizes that a contractor’s statutory duty to supervise under the Electricity Rules doesn’t, by itself, create agency with the principal employer for ESI purposes.

Key Learning

• Supervision = contemporaneous oversight. Acceptance/rejection after completion isn’t enough for §2(9)(ii).
• Agency isn’t implied merely because contracts require quality/safety or because contractors have statutory supervisory duties.
• Contractor employees may still be covered if the principal employer (or its agent) actually oversees work as it happens.
• Documentation matters: To establish (or rebut) §2(9) coverage, maintain records showing who supervised, when, and how during execution.
• Policy tension remains: The strong welfare-oriented dissent signals that fact patterns showing more real-time control could tip future cases toward ESI coverage.

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