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A Guide to Employee Compensation

Employee compensation is the compensation received by an employee in certain circumstances from their employer. In this article, let us focus on the applicability of the Employee Compensation Act, 1923, the procedure of claiming the compensation and consequence for non-payment of compensation amount.
Written by:
Swati Shalini
Published on

The compensation paid to the employee is governed by the Employee’s Compensation Act, 1923. The Act was originally enacted as the Workmen's Compensation Act, 1923. Workmen’s Compensation (Amendment) Act, 2009 which came into force on 18-01-2010, replaced the word ‘Workmen’ by the word ‘Employee’. The purpose of the Act is to provide for payment of compensation to the employee by employers for injury due to an accident. The Act imposes liability upon the employee to pay compensation to the employee or his dependents in cases of accidents that occur during work. The act was amended in the year 2017 to bring about certain changes in the penalties and other aspects.

Who is an Employee?

The Employee’s Compensation Act applies to the following people(who are covered under Section 2(dd) of the Act):  

  1. A railway servant

  2. Members of  a ship crew

  3. Members of an aircraft crew

  4. People working in a motor vehicle 

  5. A person working abroad

  6. Employed as per Schedule II[1] of the Act. Schedule II contains a detailed list of people who are included in the definition of an employee 

Exceptions: Employee does not include the following:

  1.  Members of the Armed Forces 

  2. Employees whose employment is of a casual nature and his/her  work is not connected with the employer’s trade or business 

Who is an Employer? 

The term ‘employer’ is defined in Section 2(1)(e) of the Act, and  includes the following:

  1. A body of persons incorporated or not

  2. An agent of the employer

  3. Legal representative, in case the employer is deceased 

  4. Person to whom the employee provides services as per the contract of service or apprenticeship

The definition of the employer has a wide scope to include a contract employer in the ambit of the Act. Also, in the case of Railways, the General Manager was held to be an employer as per the act.

Eligibility of the Employees Compensation Act, 1923 

The Employee’s Compensation Act, 1923 extends to the whole of India and applies to the following:- 

  • Employees working in 

  1. Factories

  2. Mines 

  3. Docks

  4. Construction establishments 

  5. Plantations

  6. Oilfields

  7. Establishments listed in Schedule II of the Employee’s Compensation Act

  • People employed for working in foreign countries

  • People employed for work in newspaper establishments

  • Persons employed for working agricultural operations, harvesting and threshing of crops, horticultural operations and doing other machine-related jobs

  • Employed through a contractor, except casual employees

  • The act does not apply to the members of the armed forces of the Union & Workmen who are covered under ESI (Employee State Insurance) Act


When is an Employer Liable to Pay Compensation?

The liability of an employer to pay compensation to the employee arises in the following circumstances or situations: -

Personal Injury by Accident

There is a liability of the employer to pay compensation in a case of personal injury caused to the employee. Such personal injury should have been caused by an accident which arises out of employment or it has taken place in the course of his employment. 

The personal injury by accident covers two aspects, i.e. out of employment and course of employment.

  • An accident which arises out of employment –  Accidents that arise out of employment are referred to the situation as follows-

  1. At the time when the injury took place, the employee was engaged in the business of the employer. It does not cover the injury which is caused when doing something for his personal benefit  

  2. The accident should have occurred at the place where the employee is performing his duties 

  3. The injury should be a result of some risk which has been incidental to his duties or it is inherent in the nature of the condition of employment

  • Accident arising in the course of employment – It refers to the situation where the accident should take place when the employee is on duty at or about the place of his/her work. 

Occupational Diseases - Occupational diseases are those which are inherent in the occupation in which the workers are employed. Schedule III of the Act contains a list of diseases and the nature of employment. Some of the examples are:

  1. Occupational Asthma

  2. Occupational Cataract

  3. Lung cancer due to asbestos

  4. Disease caused due to heat in extreme hot climate

  5. Disease caused due to cold in an extremely cold climate

When is an Employer not Liable to Pay the Compensation

An employer is not liable for paying compensation to the employees under the following conditions:

  • Less than 3 Days – If the injury caused by accident causes disablement for a period of fewer than 3 days.

  • Accident causing injury, which does not result in death or permanent total disablement, and is due to the following causes:

  1. Intoxication - The workman was intoxicated by alcohol or drugs at the time of the accident

  2. Disobedience – The workman intentionally disobeys the orders or rules, which are established to ensure the safety of workers

  3. Removal of safety guard – The workman willfully removes or disregards safety equipment, which has been provided for the safety of the workers

Procedure to Claim Compensation

Procedure to claim compensation has been dealt with under Section 10 of the Act. The following procedure is to be fulfilled for filing claims for compensation: - 

  1. Notice has to be given by the applicant. It can be given to the employer or may be entered in the notice book 

  2. Notice submitted so must include the name and address of the applicant, date and the cause of the injury

  3. Thereafter, the application has to be submitted to the commissioner within two years after the date of the accident

  4. If an occupational disease has occurred, it is deemed that the accident occurred on the first day of illness

  5. There is power with the Commissioner to entertain claim even if the notice has not been given or the claim has not been submitted in mandated time if there is a sufficient cause

  6. After the matter is referred, there is a period of three months with the Commissioner to dispose of the matter and inform the decision to the employee

  7. The application shall not be rejected if there is any defect in the notice or there has been a delay 

Determining  the Amount of Compensation

The amount of compensation that is required to be paid to the employee is dependent upon the two factors which include: -   

  1. Average monthly wages  

  2. Age of the workers 


Amount of Compensation

When an injury results in Death

The amount of compensation to be paid is equal to fifty (50%) of the monthly salaries of the deceased employee which is multiplied by the appropriate factor or with the amount of one lakh twenty thousand (1,20,000) whichever is more.

When an injury results in permanent total disablement

The amount of compensation to be paid is equal to sixty percent (60%) of the monthly wages of the workmen which multiplied by the relevant factor or an amount of one lakh forty thousand (1,40,000), whichever is more.

When an injury occurs in permanent partial disablement

Schedule I Injuries - the percentage of the compensation payable is the percentage of the lack of earning capacity caused by that injury.

Injury other than schedule I - the percentage is proportionate to the lack of earning capacity which has been caused by the injury.

If the injuries caused are more than one during the same accident, there shall be an aggregation of the amount of compensation. But it must not exceed the amount payable in case of permanent total disablement.

When an injury results in temporary disablement.

Temporary disablement, (it may be total or partial) resulted from the injury, a half-monthly payment at the monthly wages or sum equivalent to Rs. 25,000 to be paid. 


Important terms in the table –

  • Temporary Partial Disablement [Section 2 (1)(g)]  

  1. When the disablement caused by the injury is of such a nature that it reduces the earning capacity of the employee pertaining to the work in which he/she was engaged during the accident

  2. It covers injuries which have been specified in Schedule I of the Act 

  • Permanent Partial Disablement [Section 2 (1)(g)] 

Accident causes injury of a nature that it results in the loss of the earning capacity of the employee in all the works which he could undertake when the accident took place.

  • Total Disablement [Section 2(1)(I)] 

Disablement (whether temporary or permanent) which incapacitates the worker from all work which he could perform at the time of the accident. Thus, the employee can no longer continue the work.

  • Permanent Total Disablement [Section 2(1)(I)] 

  1.  Injuries that have been specified in Part I of Schedule I.

  2. A combination of injuries, when the total percentage of loss of earning capacity against those injuries is 100% or more. 

  • Wages [Section 2(1)(m)]

Wages, under the act, includes any privilege or benefit which can be estimated in terms of money. The expression being estimated in money is a wide expression. 

Wages, however, does not include the following:

  1. Traveling allowance

  2. Contribution paid towards any pension or provident fund

  3. Amount of money paid to cover special expenses 

Procedure to Receive Half-monthly Payments

The right to receive half-monthly payments may, by agreement between the parties or it shall be determined by the Commissioner. 

Review of Half-Monthly Payment

  1. Commissioner will review any half-monthly payment upon receiving the application by the employer or employee

  2. Such application shall be accompanied by a certificate of a qualified medical practitioner that there has been a change in the condition of the employee or rules

  3. The review of half-monthly payment shall be on account of being continued, increased, decreased or ended

  4. In case the accident results in permanent disablement, there shall be the conversion of half-monthly payment into the lump sum 

Time of Payment

The employer becomes liable to pay compensation at the time when the personal injury occurs to the employee by accident during the work. The calculation of the amount to be paid for compensation begins from the date when the accident took place.

The amount is to be paid within a month after the date of the accident, if not, the Commissioner may impose a penalty in the form of simple interest at the rate of 12% per annum or as prevailing in any scheduled bank, paid along with the compensation amount.

In case, the employer does not have any justification for the delay, the Commissioner may order the employer to apologize. Further, he may impose a penalty not exceeding 50% of the compensation amount after giving an opportunity of being heard. 

Penalties under the Act

  • Penalty for non-payment of compensation 

If the employer does not pay compensation within one month after the due date, the commissioner may: - 

  1. Direct the employer to pay compensation and 12% p.a. simple interest on the amount in arrears

  2. If, there is no justification for the delay, the Commissioner may direct to pay amount due, interest and penalties not exceeding 50% 

  • Other penalties for default  

The Employee’s Compensation Act, 1923 (pdf) contains penal provisions in section 18A. The penalty is attracted in the following cases:

  1. Failure in maintaining a notice-book  

  2. Failure in sending the Commissioner a statement 

  3. Failure in sending the report under Sec. 10B, or 

  4. Failure in making a return under Sec. 16 or 

  5. Failure in informing the employee of his rights to compensation which is mandated under section 17A shall be punishable with fine which shall not be less than 50,000 rupees but which may extend to 1,00,000 rupees. (penalty prior to the 2017 amendment was a maximum of Rs. 5000)

Appeal from Order of Commissioner

The applicant can appeal from the order of the commissioner before the High Court as per Section 30 of the Act. Following are the orders, against which an appeal may lie -

  1. An order which awards compensation in a lump sum (redemption of a half-monthly payment or refusing a claim in full or in part in lieu of a payment in a lump sum)

  2. An order which awards interest or penalty as per Sec. 4A

  3. An order disallowing redemption of a half-monthly payment

  4. An order which provides for the distributing the compensation among the dependants (in case an employee is deceased)

  5. An order which allows or refuses any claim for indemnity amount under the provisions of sec. 12 (2) 

  6. An order which refuses to register an agreement memorandum

 Other Conditions: -

  1. The appeal shall lie against any order only when a substantial question of law is involved 

  2. Amount in dispute in the appeal must not be less than 10,000 rupees or the higher amount specified the Central Government through a gazette notification

  3. There shall be an appeal in a case where the parties agree to follow the decision of the Commissioner, or an agreement takes place between the parties which affected by Commissioner Order 

  4. 60 days Limitation period for an appeal 

  5. Section 5 of the Limitation Act, 1963 is applicable to appeals


External Links:

[1] Section 2(1)(DD): List of people included in the definition of employees