Holding

A partner of a firm is not an employee under Section 2(9) of the Employees State Insurance Act, 1948; therefore the Act does not apply to the establishment.

Issues considered

Whether a partner of a firm qualifies as an “employee” within the meaning of Section 2(9) of the Employees State Insurance Act, 1948.

Legislation cited

Employees' State Insurance Act, 1948s. 22, s. 2(9)
Indian Partnership Act, 1931s. 18, s. 19, s. 30(1), s. 4
Industrial Disputes Act, 1947s. 2(g)

Subjects

employee definitionpartnership lawEmployees State Insurance Actstatutory interpretationbeneficial legislationemployer-employee relationshiplabour lawstatutory threshold

Judgment

119
' i

; j

REGIONAL DIRECTOR EMPLOYEES
A
' STATE INSURANCE CORPORATION
TRICHUR

v.
• RAMANUJA MATCH INDUSTRIES B

November 27, 1984
(AMARENDRA NATH SEN AND RANGANATH MISRA, JJ.)

Employees ~ate Insurance Act 1948 section 2(9) 'employee'-Mean1'ng of
c
partners of a firm receiving salary or other remuneration - Whetlitr employee.

Indian Pa!"tnership Act 1931 sections 4 and 30(1) 'partner' .. •partMrs in a
firm' - Not employees.
Interpretation of statutes : Beneficient legislation to receive liberal inter- D
pretation - However Court not to travel ~yonti scheme of statute and extend
scope of statute on pretext of extending statutory benefit to these not covered by
the scheme of the statute.

The Respondent-firm was engaged in the manufacturing of matches.
The Inspector of the Employees State Insurance Corporation who E
inspected the firm found that there were 18 regular employees and three
of the partners worked regularly for wages. As the number of emplo·
yees were over 20 he held that the Respondcnt~firm incurred liability for
contribution under the Employees State Insurance Act 1948.
F
The Respondent challenged its liability before the Employees
Insu ranee Court by contending that partners were not employees and
that when the three partners were excluded, the total number of emplo-
yees did not exceed the statutory minimum. The Insurance Court found
in favour of the respondent. The Employees State Insurance Corpora.. G
tion appealed to. The High Court, which held following its earlier
decision in Regional Director of E.S.I. Corporation v. M/s. Oosman}a Tiite
Works, Alwaye. I.L.R. 1975(2) Kerala 207 that partners were not emp-
ployees. In the appeal to this Court on the question whether a partner
of a firm is an "employee" within the meaning of section 2(9) of the
Employees State Insurance Act 1948, H
120 SUPREME COURT REPORTS iI985] 1 S.C.R
A Dismissinhe Appeal, I f

HELD: 1. The three partners were not employees. On this ad-
n1itted fact the total number of en1ployees would be less than 20. The
Employees State Insurance Act 1948 would not therefore oe applicable
to the respondent-establishment. [128C]

B 2. The term 'employee' has been defined in section 2(9) of the
Employees State Insurance Act 1948 to mean "any person employed for
wages in or in connection with the work of a factory or establishment to
which the Act applies ... ". "WagesJ' has been defined in sub-section
(22) of that section to mean "all remuneration paid or payable, in cash
to an employee, if the terms of the contract of employment, express or
implied, were fulfilled ... n. In order that some one may be an employee
c within the meaning of the Act, he has to be employed for wages. The
concept of wages would bring in the contract of ·employment, and the
concept of employee would take with it the correlation of the employer.
The term •employer' has not been defined in the Act. In the absence of
an employer who would provide the employment, there would be no
employee. [122D-F]

D 3. A partnership firm is not a legal entity. In a partnership each
partner acts ·as an agent of the other. The position of a partner qua
the firm is thus not that a master and a servant or Cmployer and employee
which concept involves an element of subordination but that of equality.
The partnership business belongs to the partners and each one of them is
an owner thereof. In common parlance the status of a partner qua the
firm is thus different from en1ployees working under the firm, it. may be
E that a partner is being paid some remuneration for any special attention
which he devotes but that would not involve any change of status and bring
him within the definition of employee.
Seth Hira Lal & Anr-v. Sheikh Jammaluddin and anr. (1946] 224 Indian Cases
106 & Regional Directer of E.S. I. C0rporation v. Mjs. Osmanja Tile Works,
Alwaye, I.L.R. 1975 (2) Kerala 207 approved.
F
Regional Director of E.S.I. Corporation, Jaipur v. P.C. Kasliwal and Anr.
(1931) Labour & Industrial Cases 671 reversed. •
4. In the United States, Great Britain and Australia, a partner is
not treated as an employee of his firm merely because he receives a wage
or remuneration for work done for the firm, which is in complete accord
G with the jurisprudential approach. [127D-E]
Dube v. Robinson 92 NIL 312. United States Fidelity & Guarantee Com-
pany v. Neal, 188 Ga. 105 Le Cltar v. Smith 202 N.Y.S. 514 & Berger v. Fidi-
lity Union Casualty Co., Tayes, 293 S.W. 235 & Weaver v. Weinberger 392 F.
Suppl. 721 Crooks v. Glena Falls Indemnity Co , 262 P. 2d. 203 & Morici Cor-
poration v. US.D.C. California, 500 F. Suppl. 714 & Burker v. Friedman, 556
H F. 2d 687 & Wright v. Deare/tr 442 P. 2d 888 Ellies v. Joseph & Co. [1905] I
It. s. I. c. v. RAMANtliA MATCH INDUSTRIES (Ranganath Misra, J.) 1:21

~ I KB. 324 & Rose v. Fedtral Commissioner of Taxation [1951] 84 C.L R. 118 A
referred to.

5. Beneficial legislation should have liberal construction with a view
to implementing the legislative intent but where such beneficial legislation
has a scheme of its own there is no warrant for the Court to travel beyond
the scheme and extend the scope of the statute on the pretext of extending
the statutory benefit to those who are not covered by the scheme. [l27F-G] B

6. The Employees State Insurance Act 1948 covers an factories or
establishment with 20 or more employees and the denefit is intended to be
given to institutions with more than that number. Because the legislation is
beneficial it should also apply to factories or estabiishments w:th less than
20 employees is not the contention on behalf of the appellant. If that be
not so, in finding out whether a partner would be an employee a liberal c
construction is not warranted. [ 12 7H, 128A]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3500 of
1984.
Appeal by Special leave from the Judgment and Order dated
D.
the 3rd August, 1981 of the Kerala High Court in M.F.A. No.
442 of 1979.

M.K. Banerjee, Addi. Sol. General, Girish Chandra and R.N.
Poddar for the Appellant.

The Judgment of the Court was delivered by E

RANGANATH MISRA, J. The short point which arises for
determination in this appeal by special leave is as to whether a
partner of a firm is an "employee" within the meaning of Section
2(9) of the Employees State Insurance Act, 1948 (hereinafter called
'the Act'). Respondent Ramanuja Match Industries which is a F
• firm is engaged in manufacturing of matches within the Trichur
area of Kerala State and the question as to whether it is covered
under the provisions of the Act fell for consideration. The
Insprctor found that there were I 8 regular employees and three of
the partners who worked regularly for wages were to be put
G
together. Thus the number of 20 employees as required by the Act
was satisfied and the respondent did incur liability for contribution.
The respondent challenged its liability before the Employees
Insurance Court at Calicut by contending that partners were not
employees at)d when the three partners were excluded, the total
number of employees did not exceed the statutory minimum. The H
122 SUPREME COURT REPORTS ll98SJ i s.c.I!..
A Insurance Court found in favour of the respondent and an appeal
I r
under the Act was carried to the High Court by the appellant and
a Division Bench of that Court following its earlier decision in
Regional Director of E.S.I. Corporation v. M/s. Oosmanja Tile
Works, Alwaye,(1) held that partners were not employees. It is
against this decision that the present appeal has been carried.
B
There is no dispute that under the Act, liability to pay con- l
tribution arises only when 20 or more persons are employed for
wages. It is also not disputed that in the case of the respondent
unless the three partners are included, the basic number of 20 is
not reached and no liability under the Act accrues.
c
The term 'employee' has been defined in s. 2(9) of the Act to
mean "any person employed for wages in or in connection with
the work of a factory or establishment to which the Act applies
and-"one of the <tlternative in clauses (i), (ii) or (iii). 'Wages'
D has been defined in sub-s. (22) of that sec\ion to mean "all remu-
neration paid or payable, in cash to an employee, if the terms of
the contract of employment, express or implied, were fulfilled ...... "
It is thus clear that in order that some one may be an employee
within the meaning of the Act, he has to be employed for wages.
The concept of wages would bring in the contract of employment.
E The Shorter Oxford English Dictionary gives the meaning of
'employ' to be "to use the services of for some special business; to
have or maintain in one's service". In common parlance the
concept of employee would take with it the correlation of the
employer. The term 'employer' had not been defined in the Act
F but in the absence of an employer who would provide the employ-
ment, there would indeed be no employee. In fact, that concept
is clear in the scheme of the Industrial Disputes Act of 1947 and
the definition of the term 'employer' in s. 2(g) of that Act makes
the position clear.

G It is appropriate that at this stage we refer to the position of
a partner qua the firm. Section 4 of the Partnership Act, 1932
defines 'partnership' and one of the essential requisites of a partner-
ship is that there must be mutual agency between the partners. A

. H (1) l.L.R. 1975 (2) Kerala 207.
I!. s. t. c. v. RAMANUJA MATCH INDUSTRIES (Ranganath Misra, J.) U3
• I
Full Bench of the Patna High Court in Seth Hira Lal & Anr. v. A
Sheikh Jamaluddin and Anr.,( 1) rightly emphasised upon the posi-
tion that an important element in the definition of partnership is
that it must be carried on by all or any one of the partners acting
I j
for all. Section 18 of the Partnership Act statutorily declares
every partner to be an agent of the firm for the purposes of the
B
business of the firm and Section 19 states that an act of a partner
which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm. A partnership firm is not
a legal entity. This Court in Champaran Cane Concern v. State
of Bihar and Anr.,(') pointed out that in a partnership each partner
•' acts an agent of the other. The position of a partner qua the firm is c
thus not that of a master and a servant or employee which concept
involves an element of subordination but that of equality. The
partnership business belongs to the partners and each one of them
is an owner thereof. In common parlance the status of a partner
qua the firm is thus different from employees working under the
firm. it may be that a partner is being paid some remuneration for D
any special attention which he devotes but that would not involve
any change of status and bring him within the definition of
employee.

Learned counsel for the appellant strongly relied on a case of
the Rajasthan High Court in Regional Director of E.S./. Corpora- E
tion, Jaipur v. P.C. Kasliwal and Anr.,(8) The learned Single Judge
has taken the view that a partner can be employed by the firm and
if he draws emoluments within the prescribed limits for the work
of the factory, he would be an employee under s. 2(9) of the Act.
In the same decision it has also been held that a sleeping partner F
drawing a monthly allowance merely because he is a partner would
not come within the ambit of the Act as an employee and contribu-
tion in respect of such partner would not be payable. As against
this view there is a Division Bench decision of the Kerala High
Court in Regional Director of E.S.l. Corporation v. M/s. Oosmanja
Ti/( Works, Alwaye (supra), where it has been held that a manag- G
ing partner of a firm is not an employee if merely he receives
salary or other remuneration. Strong reliance has been placed by

(1) (1946] 224 Indian Cases 106.
(1) (1964] 2 S.C.R. 921.
(2) (1981) Labour & Industrial Casea671. H
1i4 . SPREME COURT REPORS . tI985] i s.c.k..

A the Kerala High Court on the position that such managing partner
is not an employee who is working under a contract of service.
In fact, in the present case support has been drawn from this dc~i
sio:i of the High Court as a precedent and following the ratio . of
that decision, the High Court has decided against the appellant.
The Rajasthan High Court has obviously . not been alive to the
B
definition of the term 'employee' in s. 2(9) of the Act though the
definition has been extracted in extenso. The status of a partner
qua the. firm with ·reference to the provisions of the Partnership Act
the concept 'Or "employer" and "employee" and the importance of
the definition of."wages" have also been lost sight of in adjudica-
/ c ting whether a pariner is an employee. We are, therefore, not
inclined to accept the view of the Rajasthan High Court. On the
other hand, the view taken by the Kerala· High Court seems to be
. the correct one and fits in with the positi_on of a partner qua his
firm and the jurisprudential approach to the matter.
(
I
D The respondent did not choose to appear in this Court to
support the order of the High Court. We have, however, come
across several judicial opinions of American and English Courts
taking the view that a person cannot be the employee of the firm
of which he is a partner. In Words and Phrases Permanent Edi-
tion Vols. 14 and 14A (1974 reprint), several such decisions of the
E
American State Courts have been referred to in support of the view
that a partner cannot be an employee of his firm and we propose
to refer to some of the more apt ones .. In Dube v. Robinson(') it
has been held that in a partnership each partner is an agent of the
others as well as a principal; but he is not in hire as an employee
F and that he may perform Jabour even with the employees of the
. partnership and of the same kind as they perform does not make
him an employee of the other partners or of the partner;hip, and
hence such partner cannot be counted to constitute one of the
workmen' necessary for application of the Employers' Liability
and Workman's Compensation Act to the partnership business.
G In United States Fidelity &' Guarantee Company v. Neal(') it has
been held that a partner ls not . an employee of the partnership
within the Compensation Act though at the lime of the injury he
was performing special services under contract with his partner,

(1) 92 N.H. 312.
H (2) 188 Ga. !OS. 'f
E. s. I. c. v. RAMANU1A MATCH INDUSTRIES (Rangnath Misra, J.) 125

separate and independent from the articles of partnership, and· is A
being paid compensation therefor in addition to his ·share in profits.
Again, in Le Clear v. Smith.(') it was held that a partner, though
he received a salary in addition to his share of the profits, was an
employer and an not employee entitled to . compensation
under the Workman's Compensation Law, where the insurer did
B
not insure the employers. In B;rger Fidelity Union Casualty Co., v.
Texas,(') it has been held that a member of an employer firm cannot
be an employee thereof. · In Weal'er v. Weinberger,(•) it was held
that "employee" is aperson who renders service to another, usually
for wages, salary or ·other financial consideration, and who, in
performance of such service, is entifely ·subject to the ·direction c
and control of the other,. such other being the employer. Crooks
v. Glena Falls Indemnity Co.,(') is an authority for the view that an
employee is one who is subject to the absolute control and direc-
tion of the employer in regard to any act, labour or work .to be
done in course and scope of his employment. In Morici Corpora-
tion v. U.S.D.C. California.,(') the Court held . that the test to D
determine whether one person is another's employee, is whether or
not he is subject to control of the other person. In Burker v.
Friedman,(') it was held that partners cannot be regarded as em-
ployees rather than as employers who own and manage operation
of business, and, hence, cannot be included as employees. Wright E
v. Deareter(') took the view that partners were not employees for
purposes of requirement that compensation law be complied with
when there are three . or more employees. Though we have not
come across any decision of the U.S. Supreme Court on the point,
these authorities under various legislations are clearly indicative of
the principle that a partner who belongs to the class of employer F
cannot rank as employee because he also works for wages for the
partnership. Undoubtedly the term employee is the co-relative of
employer.

(1) 202 N.Y.S. 514.
(2) . 293 s.w. 235. G
(3) 392 F. Suppl. 721.
(4) 268 P .. 2d. 203.
(S) SOO F.' Suppl. 714;
(6) SS6 F. 2d 827.
(7) 442 p, 2d 888.
ff
126 SUPREME COURT REPORTS (1985) 2 s.c.R.

A We may usefully refer here to an English decision. The Court
of Appeal in Ellis v. Joseph Ellis & Co.,(1) was called upon to
decide whether a partner of a firm could be its employee. The
short facts relevant for our purpose available in the judgment of
Collins M.R. are :
"The deceased appears to have been a skilled workman
B
and, by agreement with his partners, he worked at the
mine, sometimes on the surface and sometimes under- ,.
ground, for wages; and, while working underground, he
met with an accident.~ which occasioned his death. His
repr.esentative thereupon claimed compensation under the
G Workman's Compensation Act, 1897, on behalf of her-
self and his children. The question is whether, having
regard to his position as one of the partners, he can be
regarded as a workman in the employ of the partnership,
and the partners as his employers within the meaning of
the Act. When one looks at the provisions of the Act,
D they do not appear to be applicable to a case like the
present. The supposition that the deceased man was
employed, within the meaning of that term as used in the
Act (not very different from the definition here), would
appear to involve that he, as one of the partners, must be
looked upon as occupying the. position of being one of
E his own employers. It seems to me that, when one comes
to analyse an arrangement of this kind, namely, one by
which a partner himself works, and receives sums which
are called wages, it really does not create the relation of
employers adjusting the amount that must be taken to
have been contributed to the partnership assets by a
F
partner who has made what is really a contribution in
kind, and does not affect his relation to the other partners
which is that of co-adventurer and not employee".
Lord Justice Mathew pithily but with emphasis added :
G "The argument on behalf of the applicant in this appeal
appears to involve a legal impossibility, namely, that the
same person can occupy the position of being both master
and servant, employer and employed."

H (1) [1905] 1 K.B. 324.
E. ~.I. c. v. RAMANUJA MATCH INDUSTRIES (Ranganath Misra, J.) 127
A
Lord Justice Cozens-Hardy also spoke in the same strain :
"All that our decision in this case amounts to, I think,
is that the Act only applies where there is on one side an
employer, and on the other side a workman, who are
different persons."
B
This is in complete accord with our view.
F.C. Bock and F.F. Manix in their book, the Australian
Income Tax Law and Practice (1960 Edn., Vol. 3, page 3092) have
said :
"The decision of the High Court in Rose v. Federal Com-
c
missioner of Taxation(') established that there is nothing
in the relevant income-tax legislation to warrant treating a
partnership as a distinct legal entity. A partner cannot
therefore, also be an employee of the ·partnership, for a
man cannot be his own employer ...... " D
It is thus clear tbat in the United States, Great Britain and
Australia, a partner is not treated as an employee of his firm
merely because he receives a wage or remuneration for work done
for the firm. This view is in complete accord with the jurispruden-
tial approach. In the absence of any statutory mandate, we do E
not think there is any scope for accepting the view of the Rajasthan
High Court.

Counsel for the appellant emphasised on the feature that the
statute is a beneficial one and the Court should not interpret a
provision occurring therein in such a way that the benefit would F
be withheld from employees. We do not doubt that beneficial
legislations should have liberal construction with a view to imple-
menting the legislative intent but where such beneficial legislation
I has a scheme of its own there is no warrant for the Court to travel
beyond the scheme and extend the scope of the statute on the
pretext of extending the statutory benefit to those who are not G
covered by the scheme. The Act covers all factories or establish-
meht with 20 or more employees and the benefit is intended to be
given to institutions with more than that number. It is not the

(1) (1951) 84 C.L.R. 118. H
128 SUPREME COURT REPORTS [1985) 2 S.C.R.

A contention of counsel that because the legislation is beneficial it
should also apply to factories or establishments with less than 20
employees. If that be not so, in finding out whether a partner
would be an employee a liberal construction is not warranted. A
person who ·would not answer the definition cannot be taken into
I '
account for the purpose of fixing the statutory minimum. We
B are therefore, not inclined to accept the contention of counsel I

that on the basis of the statute being beneficial, a partner should r
also count as an employee.

Once we hold that the three partners were not employees, on
c the admitted fact the total number of employees would be less
than 20, the Act would not be applicable to the establishment in
question. There is no meril in the appeal and the same is, there-
fore, to be dismissed. At the hearing the respondent was not
represented; we, therefore, make no direction for costs.

N.V.K. Appeal dismissed.

r-

''