India: Supreme Court Revisits the Scope of the Definition of 'Employee'

​The scope of the definition of an "employee" under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) has come up time and again before the courts in India. This issue often arises in situations wherein workers engaged by an establishment are working from home or are being paid on a piece-rate basis.  

The courts have developed certain criteria to examine the nature and scope of work being carried out and the relationship that is developed by such engagement. The control and supervision principle, ultimate authority principle and integration principle are common tests that are applied by courts while examining such fact situations.  

Recently, the Supreme Court of India in Officer in Charge, Sub Regional Provident Fund Office and Another v. M/s Godavari Garments Limited dealt with a similar situation and was asked to decide whether the women workers engaged by M/s Godavari Garments Limited (Godavari Garments), who used their own sewing machines and worked from home to prepare garments, would qualify as employees under the EPF Act.  

Background

The Officer in Charge, Sub Regional Provident Fund Office (PF Authority) through an order had held that female workers engaged for stitching garments were covered by the definition of employee under Section 2(f) of the EPF Act. 

On appeal to the Bombay High Court, the Aurangabad bench of the Bombay High Court held that Godavari Garments had no direct or indirect control over the female workers. It observed that, "The conversion of cloth into garment could be done by any person on behalf of the women workers. Hence, the respondent company did not exercise any supervisory control over the women workers." 

This was appealed to the Supreme Court by the PF Authority.  

Godavari Garments' Arguments 

It was contended that there was no employer-employee relationship between Godavari Garments and the female workers as Godavari Garments did not exercise any supervisory control over them. In arriving at this finding, reliance was placed on the below factual points:  

• Sewing machines used by the female workers were not provided by Godavari Garments but were rather owned by the workers themselves.
• The women worked from their homes and not at the production centers of Godavari Garments.
• Work to be performed by the workers could be done by their relatives, or any other person on their behalf. 
• The workers were not bound to report to the production centers regularly, nor were they required to work at the production centers. 

Decision of the Supreme Court and Judicial Reasoning

A division bench of the Supreme Court speaking through Justice Indu Malhotra observed that the definition of an employee under the EPF Act was wide enough to include any person engaged, either directly or indirectly, in connection with the work of the establishment.  

The Supreme Court further relied upon its decision in Silver Jubilee Tailoring House and Others v. Chief Inspector of Shops and Establishments, 3 SCC 498 (1974), where it had held that when the employer had the right to reject the end product if it did not conform to the instruction of the employer and direct the worker to rework it, the element of control and supervision could be said to be present. 

In this scenario, Godavari Garments had the absolute right to reject the garments, in case of any defects and thus, it was held that the control and supervision test was met. Accordingly, the female workers were construed to be employees of Godavari Garments. The fact that the workers stitched garments at home or were paid wages by Godavari Garments on a per-piece basis was held to not result in any difference to the arrangement.  

Key Takeaways

Given that the EPF Act is social welfare legislation, the Supreme Court gave a beneficial interpretation in favor of the female workers.  

This is likely to be the judicial trend and thus, employers need to be careful when they engage independent workers for getting work done. This becomes important from the perspective of employers as they invariably engage independent workers and/or contract labor for carrying out part of their business activities or for housekeeping and security.  

The documentation that the employers enter while engaging independent workers and/or contract labor needs to be well drafted. It should provide that the engagement is on a principal-to-principal and nonexclusive basis.  

It must also be specified that the arrangement does not create a relationship of employment between the parties and that the worker understands that he or she shall not be an employee of the employer. It should state that the worker has agreed to voluntarily render services as an independent worker in lieu of the consideration that is agreed for in the contract. In case of contract labor, the employees of the contractors should be directly covered under the provident fund code of the contractor so as to ensure that the primary liability for such employees is not fastened upon the employer as the principal employer in terms of the EPF Act.  

Most importantly, employers must be careful that the arrangement does not result in the employer controlling the manner in which independent workers carry out their work and should specify the work that is expected to be undertaken and that the ultimate authority over the independent worker in the performance of his or her work does not specifically lie with the employer.  

The outlined practices, if properly followed, will help an employer defend its position properly in the event a Section 7A proceeding is initiated against the employer under the EPF Act.  

Jeevan Ballav Panda and Satish Padhi are attorneys with Khaitan & Co. in New Delhi. © 2019 Khaitan & Co. All rights reserved. Reposted with permission of Lexology. The contents of this document do not necessarily reflect the views/position of Khaitan & Co. but remain solely those of the author(s).