Employment under the garb of Consultation

A lot many employers, particularly in the IT industry and the service sector are in the practice of engaging consultants. This arrangement is mutually beneficial and is therefore successfully implemented by many. However, the Provident Fund Department, in their inspections have begun objecting to the appointment of personnel as consultants on the ground that such arrangements are effected essentially to defeat provisions of the PF Act. Even the ESI Department has expressed its objections to such appointments. There is sadly, a degree of relevance to both these Department’s reservations. It has been seen that the main purpose of association with a professional as a consultant is indeed to save costs on PF, ESI, Gratuity etc. There are organizations wherein up to 80% of the employee component is engaged under the consultant category. To add to this, neither are the employees very keen to pay their contribution under PF and ESI Act, therefore, except for the ESI and PF Depts. nobody really has objections.

Of late the PF Department has begun covering such consultants under the nomenclature of ‘employee’s. Though a person is tagged a ‘Consultant’, many a times his work shows that he is in reality, an employee performing routine activities like other employees. A consultant, among other things, may be expected to work at many locations, however, in the present context, the so called consultant works in the organization’s premises, his attendance is recorded and he is entitled to leaves.

Appointment letters of some organisations have clearly revealed that the position of a consultant is often just a nomenclature used to defeat relevant provisions of law. Therefore, if an employer has to face the PF Department and is unable to provide a justification about the number of consultants in his establishment, he may end up paying employer’s as well as employee’s contribution along with penalty and interest. In case of a genuine consultancy arrangement or an arrangement of consultancy, there should exist a fool-proof system; a consultant should file his IT returns as a professional and tax should be deducted at source. Furthermore, there should not be any terms and conditions apparent in the letter of engagement that show the nature of a consultant’s relationship with an organization as being that of employer-employee.

NOTE – This note is prepared solely to enlighten employers. Employers are expected to follow the law and engage consultants on genuine grounds and not play around with social legislations like EPF and ESI Acts.

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