Kerala High Court clarifies ESI coverage: Pre-Operational Fit-Out workers not ‘Employees’ under the Act

Introduction:

The Kerala High Court’s recent decision dated 11 September 2025 in The Regional Director, ESI Corporation & Anr. v. M/s L & T Tech Park Ltd. & Anr., has quietly but decisively redrawn the contours of who qualifies as an “employee” under the Employees’ State Insurance Act, 1948 (“ESI Act”). In a ruling that balances statutory interpretation with economic realism, the Court held that workers engaged in pre-operative interior fit-out works activities that take place before an establishment actually begins functioning do not fall within the scope of “employees” under Section 2(9)(ii) of the Act. The verdict marks an important precedent for developers, contractors, and employers who routinely engage labour for construction and interior works prior to the commencement of operations.

Case Background

The dispute arose when Larsen & Toubro Tech Park Limited (“L&T Tech Park”) carried out interior fit-out works at its Infopark premises in Kochi, before Tata Consultancy Services (“TCS”) began its IT operations there. The Employees’ State Insurance Corporation (“ESIC”) demanded additional ESI contributions from L&T Tech Park, treating the fit-out workers as employees under the Act.

L&T contested the demand, arguing that such work was purely pre-operational and hence beyond the coverage of ESI. After the Employees’ Insurance Court ruled in L&T’s favour, ESIC appealed before the High Court, contending that the workers’ activities were “preliminary or incidental” to the operations of the establishment and therefore attracted ESI liability.

Court’s Observations and Ruling

Justice M.A. Abdul Hakhim, presiding over the Kerala High Court bench, dismissed the Corporation’s appeal and affirmed the lower court’s view. The Court reasoned that for Section 2(9)(ii) of the ESI Act to apply, the establishment must already be in operation and the work performed must be closely linked to its ongoing business. In this case, the interior fit-out works were executed well before TCS commenced its IT operations. The establishment, therefore, did not yet exist as a functioning unit. The Court further observed that such fit-out or construction activities are not part of the employer’s core business and cannot be deemed “incidental” to its operations merely because they are a necessary precondition for occupation.

Reliance on Administrative Guidance

Crucially, the Court noted that the ESIC’s own administrative circulars recognize that construction site workers and those engaged in similar preparatory activities are generally outside the ESI coverage framework. By overlooking its own guidance, the Corporation had extended the law beyond its intended limits. Moreover, the Court found that the contributions collected from L&T were not legally due and that retaining them would amount to unjust enrichment. The Corporation was therefore directed to refund over ₹26 lakh, along with applicable interest.

Implications for Employers and Contractors

The judgment carries significant implications for employers and contractors across industries. It reinforces that the ESI Act’s reach is not limitless and that its definitions must be applied in the context of the establishment’s actual operational state. The ruling ensures that ESI compliance obligations are triggered only once an establishment becomes functional, thereby preventing premature and unwarranted financial burdens on employers engaged in construction or pre-launch setup activities. Equally, the decision emphasizes that statutory bodies like ESIC cannot retain contributions not legally eligible, re-affirming the principle that legality, not administrative convenience, governs statutory collections.

Policy Perspective

From a policy perspective, the decision reflects a pragmatic judicial approach recognizing the distinction between setting up and running an establishment. It shields employers from arbitrary compliance demands during the pre-operative phase while preserving the integrity of the ESI framework for genuine employees engaged in ongoing operations.

Much like the EPFO’s recent move to extend the deadline for revamped ECR filings, this judgment underscores the importance of responsive regulation one that acknowledges on-ground realities without diluting statutory purpose. Together, these developments suggest a maturing regulatory ecosystem, where modernization and legal certainty evolve hand in hand.