New labour code to expand ESI coverage? Here’s what could change for employees

ESI coverage likely to expand under new labour codes

Social security is likely to see a major shift as the new labour code comes into force. One of the most consequential changes is the expansion of Employees’ State Insurance (ESI) coverage. The salary threshold for ESI eligibility may effectively widen once the definition of wages under the new codes is enforced, experts say.

At present, ESI covers only employees earning up to Rs 21,000 a month. Under the new wage definition, contributions will be calculated on 50 percent of cost to company (CTC), a change that experts say will pull many higher-paid workers into the ESI net for the first time.

Balasubramanian A, senior vice president at TeamLease Services, said, “ESI contribution was earlier calculated on 100 percent of gross pay. But now it looks like it will be on 50 percent of CTC. Hence, employees will get the same benefit at a much lower cost.

“Also, a wider net will be cast. If the capping of Rs 21,000 for ESI is applied on 50 percent of CTC, then even someone with a CTC of Rs 42,000 would be eligible. This means a much larger number of employees will be covered. While this is yet to be officially notified (by states), our estimates point in this direction.”

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The Employees’ State Insurance Corporation (ESIC), established under the ESI Act, 1948, is a statutory body responsible for administering the Employees’ State Insurance (ESI) Scheme.

The ESI Scheme is a self-funded comprehensive social security programme designed to protect eligible employees from financial hardship arising from sickness, disability, or death due to workplace injury. It applies to all factories and establishments covered under the Act that employ 10 or more persons (20 or more in some states). However, only employees earning monthly wages of up to Rs 21,000 (Rs 25,000 in the case of persons with disabilities) are eligible for coverage.

"The salary threshold for ESI will go up and more establishments may come under its scope. Earlier, even with the Rs 21,000 limit, there were debates because certain exclusions applied to the base salary, which affected who was included or excluded. With the new standardised wage definition, many more employees are likely to be covered. And this will have implications not only for ESI but also for PF,” said Kartik Narayan, CEO - Jobs Marketplace, Apna.

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The new wage definition could see millions of mid-level employees outside the Rs 21,000 limit finding themselves covered. For employers, this means more compliance obligations. But for employees, it could mean comprehensive, low-cost medical and social protection.

The potential shift also means employees may pay less for the same ESI benefits. Since contributions will be calculated on the redefined wage (50 percent of CTC) rather than the full gross salary, both employer and employee contributions may reduce.

"The larger point with ESIC is the notification that allows the government to include more industries from time to time. That is a significant development," Narayan added.