Summary: The Labour Codes provide for a more uniform framework for director liability, harmonising the previously fragmented provisions under the erstwhile labour statutes. We have evaluated director liability under the Labour Codes, how the Courts have historically determined director liability, and outlined key safeguards and risk mitigation measures for organisations.
The implementation of the Labour Codes, namely, the Code on Wages, 2019 (“Wage Code”), the Occupational Safety, Health and Working Conditions Code, 2020 (“OSH Code”), the Industrial Relations Code, 2020, the Social Security Code, 2020 (collectively, the “Codes”), has significantly reshaped India’s labour law landscape.
The introduction of the Codes has brought renewed focus to the treatment of director liability. Beyond consolidation, the Codes reflect a move towards greater uniformity in enforcement standards and accountability across the subsumed labour laws. Under the earlier regime, the scope and basis of director liability varied across statutes, leading to fragmented and sometimes inconsistent exposure. The Codes seek to harmonise the approach to director liability across the subsumed laws, reducing ambiguity around thresholds for liability and circumstances in which enforcement action may be initiated. In this context, this article outlines the statutory framework governing director liability under the Codes and highlights certain practical considerations for managing exposure of board members and senior management.
Liability under the Codes
The Codes broadly place liability for non-compliance on the “employer” or “principal employer”, as the case may be. The definition of “employer” is largely uniform across the Codes and means a person who employs, whether directly or through any person, one or more employees in his establishment and includes (a) the occupier, in relation to a factory, and (b) the person or authority having ultimate control over the affairs of the establishment, and where said affairs are entrusted to a manager or managing director, such manager or managing director. A “principal employer” is defined to mean in a factory, the owner or occupier of the factory and where a person has been named as the manager of the factory, the person so named, and in relation to any other establishment, any person responsible for the supervision and control of the establishment.
In relation to factories, the occupier can be considered as an “employer” under the Codes. Occupier has been defined under the Codes to mean a person who has ultimate control over the affairs of a factory and in the case of a company, any one of the directors on the board of directors of the company (“Board”), similar to the definition under the erstwhile Factories Act regime. The Codes however clarify that independent directors (within the meaning of Section 149 (6) of the Companies Act, 2013) are excluded from being deemed an “occupier”. This is a significant and welcome clarification since independent directors by design do not exercise operational or managerial control and are appointed to provide objective oversight and governance, and their exemption from the deeming fiction aligns liability with actual decision-making authority.
As far as commercial establishments are concerned, if affairs of the establishment are entrusted to a manager or managing director, liability will befall on such manager or managing director.
The Codes contain specific provisions dealing with offences committed by companies. While similar provisions were present in some of the subsumed laws, such as the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Employees’ State Insurance Act, 1948, this has now been made applicable across subsumed laws. Under these provisions, if an offence has been committed by a company, the following persons may be prosecuted along with the company:
- every person who, at the time the offence was committed was in charge of, and was responsible to the company for the conduct of the business of the company, unless they prove that the contravention took place without their knowledge and that they had exercised all due diligence to prevent such a contravention.
- any director, manager, company secretary or other officer of the company, where it is proved that the contravention took place with the consent or connivance of or is attributable to any neglect on their part.
The emphasis under the Codes appears to be on placing liability for contraventions on the person having real and effective control or charge over the affairs of the establishment.
At the same time, the OSH Code and the Wage Code also recognise that offences may, in certain circumstances, be attributable to individuals other than the employer or occupier. These Codes provide an opportunity to the employer or occupier of a factory, charged with an offence punishable thereunder, to file a complaint with the prescribed authorities and call upon such person who, according to the employer or occupier, is the actual offender. In such cases, the person called upon as the actual offender will be convicted of the offence and punished, and the employer/ occupier shall be discharged from liability, if the employer/ occupier can establish that due diligence was exercised to ensure compliance and the offense was committed without the knowledge, consent or connivance of the occupier or manager.
The above dual requirement underscores that liability is not absolved merely because the person was not directly involved in committing the offence, unless it is also demonstrated that due diligence was exercised to ensure compliance. This assumes relevance across a range of organisational contexts, involving delegated compliance functions, legacy non-compliances, continuing defaults following a change of management, etc.
Historically, while interpreting similar provisions, courts have looked into various factors to determine liability. These include the duties assigned to an individual, whether those duties were exercised appropriately[1], testimonies of the parties involved to determine whether the individual had knowledge of / had consented to the contravention[2], if adequate efforts were made by the director to ensure that the company would comply with applicable laws, if they are able to demonstrate that they have satisfied their fiduciary duties in the decision making process and performed their duties in good faith, that despite acting with reasonable skill, care and diligence he could not have had knowledge of the offense and have generally used the reasonable person standard to determine this liability.
Safeguards to mitigate liability
With the framework on director liability now being harmonised across the Codes, a common theme that clearly emerges is that accountability is assessed by reference to control, knowledge, and diligence, rather than formal delegation frameworks alone. This consistency allows companies to move away from statute-specific compliance strategies and instead put in place standardised processes and governance structures that can help mitigate risks across the Codes. While questions of knowledge, consent, connivance and due diligence will always remain fact-specific and will be determined on a case-by-case basis, a well-structured set of internal processes can help narrow potential exposure. Set out below are some of the safeguards that can help manage regulatory exposure on companies and its directors and senior management.
Clear Delegation Matrix
If not already done, companies must evaluate the robustness of their delegation matrix in relation to operational matters such as safety, compliance, maintenance, health and welfare, wage payment, and statutory contributions and ensure that there are clearly mapped responsibilities, especially in light of the various additional obligations introduced under the Codes, particularly in relation to health, safety and welfare.
Strategic oversight and operational control must be easily distinguishable in the matrix. The rationale for delegation and scope of authority must be precisely recorded. Importantly, the delegation must be consistent with the statutory roles under the Codes. For example, in respect of factories operated by companies, a director must be notified as an occupier, failing which, there is heightened risk of all directors on the Board being deemed occupiers and held liable for contraventions.
Comprehensive Documentation
Organisations must ensure that there is appropriate documentation demonstrating effective delegation, and exercise of real and effective control by the designated persons. This typically includes appointment letters and job descriptions setting out roles and responsibilities, reporting lines, etc., safety and health records, inspection reports, and compliance registers, minutes of committee meetings chaired by designated individuals, regulatory filings reflecting the delegated authority, etc.
Periodic Review and Audits
Conduct periodic reviews and compliance audits to verify that the control framework continues to remain valid and effective and directors remain insulated from day-to-day management.
These mechanisms provide a practical framework for managing responsibilities under the Codes.
Facilitative compliance framework under the Codes:
The overall enforcement framework under the Codes reflects a shift towards facilitating compliance rather than penalising employers. Unlike the earlier regime, where even in case of minor contraventions there was a theoretical risk of imprisonment, the Codes reserve imprisonment as a penalty for only certain serious/ repeat offences, while increasing monetary penalties to up to INR 20,00,000. The Codes also allow employers to compound certain offenses by paying 50% to 75% of the maximum prescribed fine. Employers are also given an opportunity to rectify non-compliances, prior to initiation of any prosecution, except in cases of subsequent or repeat offenses.
From a governance perspective, this enforcement mechanism offers a degree of comfort to directors and senior management. It remains important to maintain a clear compliance and governance structure as indicated above, with documented allocation of responsibilities and evidence of exercise of due diligence, to ensure that potential exposure to liability is appropriately limited.
In summary, since the Codes adopt a more uniform approach, there is greater clarity and predictability in the treatment of director liability. This also presents organisations with the opportunity to implement structured internal processes and governance frameworks aimed at managing exposure.
[1] State of Gujarat v. Jethalal Ghelabhai Patel, (1964) 5 SCR 801.
[2] R. Banerjee and Others v. H.D. Dubey and Others, (1992) SCC OnLine SC 271.