Accountability beyond designation: Supreme Court upholds Managerial Liability under the ESI Act

The major issue surrounding the case involved, the appellant being convicted for non-remittance of contributions under the Employees’ State Insurance Act, 1948 (“ESI Act”), consequently he was sentenced to imprisonment for six months along with a fine of Rs. 5000. The appellant claimed that he was merely a “Technical Coordinator” and not the “Principal Employer” or “General Manager,” as asserted by the authority under the ESI Act. In this regard the court observed that that the definition of principal employer under the Factories Act, 1948 also includes a ‘managing agent’ of the Owner/Occupier. Principal employer would include any person responsible for the supervision and control of the establishment. Therefore, designation of a person can be immaterial if such person otherwise is an agent of the Owner/Occupier or supervises and controls the establishment in question.

Considering this, the Court upheld his conviction under ESI Act, as the appellant exercised sufficient supervision and control to fall within the definition of a principal employer. The liability under the ESI Act is determined by functional responsibility, not merely formal title.

The Court found no reason to interfere with the decision of the trial court, as the trial court had already imposed a lesser sentence under Section 85(i)(b) of the ESI Act, and declined to reduce it further, clarifying that courts have discretion to reduce imprisonment under the proviso to Section 85(i), but not the statutory fine.

From the standpoint of labour social security jurisprudence in India, the Supreme Court’s ruling in Ajay Raj Shetty v. Director and Anr., SPECIAL LEAVE PETITION (CRIMINAL) NO.3743 OF 2024, affirms the principle that the managerial personnel can be held personally liable for statutory defaults under the ESI Act, regardless of their formal designation. The case concerned the non-remittance of Rs. 8.26 lakhs in ESI contributions that had already been deducted from employees’ wages by M/s Electriex (India) Ltd., a company classified as a sick industrial undertaking.

The ruling underscores that officers in supervisory roles must ensure strict adherence to statutory contribution obligations, especially in distressed companies. It sends a strong signal that courts will prioritize the protection of employee rights under welfare laws over procedural or hierarchical defences.