ESI CONTRIBUTION ON PAYMENTS TO CONTRACTORS: COMPLIANCE & WAGE SEGREGATION GUIDELINES: The Employees' State Insurance Corporation (ESIC) mandates contributions on wages paid to employees, including those engaged through contractors or immediate employers. However, complications arise when payments to contractors include both labour and material costs. This article outlines the compliance requirements and contribution determination guidelines as per the ESIC Revenue Manual. 1. COMPLIANCE WHEN CONTRACTORS HAVE AN ESIC CODE If the contractor/immediate employer is independently covered under ESIC (has a code number), they are responsible for compliance. The principal employer does not need to pay ESI contributions on such payments. During inspections, the Social Security Officer (SSO) verifies whether records are properly maintained as per Section 41(1A) and Regulation 32(1)(a). The inspection findings are forwarded to the Revenue Branch Officer, who cross-verifies compliance with the executed work order. 2. COMPLIANCE WHEN CONTRACTORS ARE NOT INDEPENDENTLY COVERED If a contractor is not registered under ESIC and leaves after completing work without keeping records of employees or wage payments, it becomes difficult to segregate labour and material costs. This can create challenges for the principal employer in determining the wage element for ESIC contribution. 3. ONE-TIME EXCEPTIONAL MEASURE FOR CONTRIBUTION DETERMINATION If the principal employer faces difficulty in separating labour costs from total expenditure, a special provision applies. If the Regional Director is satisfied that material costs are included in the lump-sum payment: ESI contribution may be determined on 25% of the total amount as an exceptional case. This provision applies only once and should not be extended to the same employer routinely. 4. KEY TAKEAWAYS FOR PRINCIPAL EMPLOYERS Maintain proper records of contractors and their compliance status. Ensure contractors have an ESIC code to avoid additional compliance burdens. If segregation is difficult, seek approval from the Regional Director for a one-time 25% wage estimation for ESIC contribution. Routine reliance on the 25% estimation should be avoided.