Municipal Corporations Cannot Be Burdened With ESI Dues And Penal Damages Prior To Statutory Notification Under Section 1(5) ESI Act: Andhra Pradesh High Court

"Unless an establishment is brought within the purview of the ESI Act, in the manner prescribed under the Act, none of the provisions of the Act would extend or operate qua such establishment." Andhra Pradesh High Court, in a common judgment dated August 11, 2026, held that municipal corporations cannot be brought under the purview of the Employees' State Insurance Act, 1948, without a valid statutory notification issued under Section 1(5) of the Act.

A bench comprising Chief Justice Lisa Gill and Justice Challa Gunaranjan observed that internal administrative circulars directing urban local bodies to factor in ESI contributions for contract workers do not substitute the mandatory notification requirement under the statute.

The litigation arose after various municipal corporations across Andhra Pradesh challenged orders passed by the ESI Corporation levying heavy damages under Section 85-B of the ESI Act for delayed remittance of contributions. Although the municipal bodies engaged contract and casual workers through self-help groups and had voluntarily remitted ESI dues as a welfare measure, they contested the imposition of penal damages. The appellant corporations argued that they were not statutory "establishments" governed by the ESI Act during the relevant assessment period, as the State Government had not issued a notification under Section 1(5) of the ESI Act.

The primary question before the court was whether municipal corporations in Andhra Pradesh were covered by the ESI Act prior to the issuance of a formal notification under Section 1(5) of the Act. The court was also called upon to determine whether damages levied under Section 85-B for the period prior to such notification were wholly without jurisdiction, and whether writ petitions challenging the same were barred by the availability of an alternative remedy under Section 75 of the ESI Act.

Statutory Mandate Under Section 1(5) ESI Act

Analyzing the legislative scheme, the court emphasized that Section 1(5) of the ESI Act empowers the appropriate State Government, in consultation with the ESI Corporation and with the approval of the Central Government, to extend the provisions of the Act to any establishment or class of establishments by issuing a notification in the Official Gazette after giving one month's notice. The bench ruled that unless this rigorous statutory procedure is strictly followed, the provisions of the ESI Act do not get extended to such establishments.

"Internal Circulars Cannot Replace Statutory Notification"

The Court Rejected ESI Corporation's Reliance On Administrative Instructions

The ESI Corporation heavily relied on an administrative circular issued by the Commissioner and Director of Municipal Administration in April 2007, which instructed urban local bodies to ensure payments towards Provident Fund and ESI for municipal contract workers. Dismissing this contention, the bench held that the 2007 circular was merely an internal administrative instruction focusing on the implementation of minimum wages and did not qualify as a statutory notification under Section 1(5) of the ESI Act.

Formal Notification Issued Only In April 2023

Appellants Brought Under ESI Purview Only With Effect From April 19, 2023

The court noted that the State of Andhra Pradesh eventually issued a preliminary notification in November 2022, followed by a final notification vide G.O.Ms.No.2 on April 19, 2023, formally extending the ESI Act to municipal bodies and urban local bodies employing ten or more casual or contractual workers. Consequently, the bench concluded that the appellant corporations came under the legal purview of the ESI Act only from the date of this final notification and could not be subjected to statutory liabilities for prior periods.

Voluntary Compliance Does Not Attract Penal Damages Under Section 85-B

No Jurisdiction To Levy Penalties Without Statutory Coverage

Addressing the argument that the municipal corporations had voluntarily deducted and remitted ESI contributions earlier, the court held that mere voluntary compliance as a welfare measure does not create a statutory estoppel or confer jurisdiction on the ESI authorities to penalize the employer. The power to levy damages under Section 85-B flows exclusively from the statute and cannot be invoked against an entity that was not legally governed by the Act during the default period.

Alternative Remedy Bar Inapplicable When Impugned Orders Are Without Jurisdiction

The high court strongly criticized the learned Single Judge's decision to dismiss the writ petitions on the ground of an alternative remedy under Section 75 of the ESI Act. Invoking the well-settled principles laid down in Whirlpool Corporation v. Registrar of Trade Marks, the bench reiterated that the availability of an alternative remedy does not operate as a bar when the challenge is directed against orders passed wholly without jurisdiction. The judges noted that relegating the appellants to an alternative forum would be a futile exercise, particularly since a specialized ESI Court had already decided the identical issue in favor of municipal authorities in earlier litigation.

Allowing the batch of writ appeals, the high court set aside the common judgment of the learned Single Judge as well as the individual demand orders passed by the ESI Corporation for the recovery of damages. The bench further directed the ESI Corporation to refund any amounts already recovered pursuant to the invalidated demand orders to the respective municipal corporations within a period of eight weeks from the receipt of the judgment.

Date of Decision: 11 August 2026