Liability of Directors Under India's New Labour Codes

I. Introduction

The implementation of the four labour codes with effect from 21 November 2025 has consolidated twenty-nine central labour statutes into the Code on Wages, 2019 (the "Wages Code"), the Industrial Relations Code, 2020 (the "IR Code"), the Code on Social Security, 2020 (the "SS Code") and the Occupational Safety, Health and Working Conditions Code, 2020 (the "OSH Code").¹ While early commentary has focused on the redefinition of wages and the expansion of social security, less attention has been paid to a structural feature that runs across all four codes and carries significant consequence for corporate governance. Each code contains a provision imposing deemed criminal liability on persons who were, at the time of the offence, in charge of and responsible for the conduct of the business of the company. For directors of companies operating in India, these provisions represent a liability architecture that demands careful understanding.

II. The Statutory Framework of Deemed Liability

All four codes follow a substantially identical formula for fixing liability on individuals when the offender is a company. Section 55 of the Wages Code,² Section 109 of the OSH Code,³ Section 149 of the SS Code⁴ and Section 89 of the IR Code⁵ each contain two operative limbs. The first sub-section provides that where the person committing an offence under the relevant code is a 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 shall be deemed guilty of the offence and shall be liable to be proceeded against and punished accordingly. A proviso qualifies this by exempting any such person who proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent its commission.

The second sub-section operates independently, in the sense that liability may arise even where the person is not otherwise in charge of the company's affairs, provided the requisite consent, connivance or neglect is established. It provides that where an offence has been committed by a company and it is proved that the offence was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such person shall also be deemed guilty and liable to punishment accordingly. The distinction between the two limbs is significant. The first creates a presumptive liability attaching to persons functionally responsible for the company's business, subject to a statutory defence. The second extends liability to any director or officer whose personal consent, connivance or neglect is independently established, regardless of whether that person was formally in charge of the company's affairs.

Deemed Liability Provisions Across the Four Codes

III. The Occupier Under the OSH Code

The OSH Code introduces a further and distinct layer of personal liability through the concept of the "occupier" of a factory. Section 2(zs) defines the occupier as the person who has ultimate control over the affairs of the factory.⁶ In the case of a company, the proviso deems any one of the directors to be the occupier, with one express exception that did not exist under the repealed Factories Act, 1948. Independent directors within the meaning of Section 149(6) of the Companies Act, 2013 are excluded from the deeming provision.⁷ This exclusion represents a deliberate legislative choice. The Standing Committee on Labour, in its Fourth Report on the then OSH Code Bill in 2020, observed that the insertion of "ultimate control" following the 1984 Bhopal gas tragedy was intended to fix accountability at the level of senior management, and that the director concerned would be held responsible in the case of a public sector undertaking while any one of the directors, so nominated by the Board, would be made responsible in the private sector.⁸

The Supreme Court's decision in J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers, (1996) 6 SCC 665, which construed the predecessor provision in Section 2(n) of the Factories Act, remains relevant.⁹ The Court held that in the case of a company owning a factory, only a director could be notified as occupier and the company could not substitute an employee in the director's stead.¹⁰ The reasoning was that a company acts through its board and that fixing responsibility at board level advances the statute's safety objectives. While the OSH Code preserves this structural premise, the express exclusion of independent directors narrows the pool of eligible persons and aligns the occupier concept more closely with the functional governance architecture of the Companies Act, 2013.

IV. Who Is "In Charge Of" and "Responsible For"

The phrase "in charge of, and was responsible to the company for the conduct of the business of the company" is common to all four codes and has generated extensive judicial interpretation under pari materia provisions in other statutes. The Supreme Court's analysis in K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48, though rendered in the context of Section 141 of the Negotiable Instruments Act, 1881, supplies the functional test that applies across these cognate provisions, and the Court's reasoning has been consistently applied to analogous offences by companies provisions.¹¹ The Court identified the categories of persons who may be regarded as responsible to the company for the conduct of its business by reference to the governance structure of the then Companies Act. These include a) the managing director, b) whole-time directors, c) the manager, d) the secretary, e) any person in accordance with whose directions or instructions the board is accustomed to act, f) any person charged by the board with the responsibility of complying with the relevant provision who has consented to that responsibility, and g) where the company has none of the officers specified in the foregoing categories, any director or directors specified by the board, or where none is specified, all the directors.

The practical significance of this taxonomy is considerable. A managing director or whole-time director carries a presumptive exposure. In the Court's formulation, if the accused is the managing director or a joint managing director, it is not necessary to make an averment in the complaint that he is in charge of and responsible for the conduct of the business of the company. For other directors, however, the position is materially different. The mere fact that a person holds the office of director is not, by itself, sufficient to attract deemed liability under the first limb. What must be established is that the director was in fact in charge of and responsible for the conduct of the company's business at the relevant time when the offence was committed. The distinction between a director who participates in the management and conduct of the company's business and one who does not is central to the operation of the deemed liability provisions across all four codes.

V. Non-Executive and Independent Directors

The position of non-executive directors under the labour codes requires careful disaggregation. A non-executive director who is also an independent director within the meaning of Section 149(6) of the Companies Act, 2013 stands on different footing from a non-executive director who is not independent. As regards the occupier designation under the OSH Code, the independent director is expressly excluded from the deeming provision. This statutory carve-out is consistent with the broader policy of the Companies Act, which recognises that independent directors serve a supervisory and advisory function and are not ordinarily involved in the day-to-day management or operational control of the company's affairs.

A non-executive, non-independent director, however, remains within the pool of persons who may lawfully be designated as the occupier of a factory. The statutory gateway requires only that the person be a director and that such director have, or be entrusted with, ultimate control over factory affairs. The question is ultimately one of fact. Where such a director has been duly nominated by the board, has consented to assume responsibility and has been entrusted with effective control over factory operations, the designation is legally permissible.

As regards the deemed liability provisions in all four codes, the position of non-executive directors, whether independent or otherwise, is governed by the functional test. A non-executive director who was not in charge of and not responsible for the conduct of the company's business at the relevant time will not attract liability under the first limb. The second limb, however, remains available as a separate avenue. If it can be proved that the offence was committed with the consent or connivance of, or is attributable to the neglect of, a non-executive director, that director may be proceeded against regardless of whether he was formally in charge of the company's affairs.

VI. The Defence of Due Diligence

The proviso to the first sub-section of each deemed liability provision affords two grounds of defence. The person proceeded against may establish either that the offence was committed without his knowledge or that he exercised all due diligence to prevent its commission. The burden of proof rests on the accused, representing a calibrated departure from the general rule in criminal jurisprudence, consistent with the regulatory character of the codes. The deemed liability provisions reverse the onus in a manner consistent with the regulatory purpose of the codes. The legislature's intent is to ensure that persons occupying positions of responsibility within corporate structures cannot shelter behind formal designations or claim ignorance of contraventions occurring within the sphere of operations for which they bear responsibility.

What constitutes due diligence will depend on the facts of each case. The existence of documented compliance systems, the appointment of competent personnel to oversee statutory obligations, the regularity of internal audits and the responsiveness of management to identified deficiencies will all be relevant considerations. For directors designated as occupiers under the OSH Code, the standard is likely to be exacting, given that the occupier concept is tethered to ultimate control over factory affairs. A director who accepts the designation but fails to put in place adequate systems for monitoring safety and compliance may find the defence difficult to sustain.

VII. Penalty Architecture Under the Codes

The penalty framework under the four codes is graded and more rationalised than the regime it replaces.¹² Under the Wages Code, first-time offences of underpayment attract fines of up to fifty thousand rupees, with repeat offences within five years attracting imprisonment of up to three months or fines of up to one lakh rupees or both.¹³ The OSH Code prescribes general penalties ranging from two lakh rupees to three lakh rupees for a first contravention, with continued violations attracting additional penalties of two thousand rupees per day. Where a contravention results in a fatal accident, penalties range from five lakh rupees to twenty lakh rupees, with imprisonment of up to two years.¹⁴ The codes also introduce a framework for compounding of certain offences, permitting settlement by payment of a sum equal to fifty per cent of the maximum fine for penalty-attracting offences and seventy-five per cent for offences attracting imprisonment.

A noteworthy feature of the OSH Code is the provision requiring the Inspector-cum-Facilitator to give the employer an opportunity to comply through a written direction before initiating a prosecution. The employer must rectify the breach within the stipulated period to avoid prosecution. This opportunity is not available to repeat offenders found in violation within five years of a first offence. The facilitative element reflects a deliberate shift in regulatory philosophy, promoting compliance through guidance before resorting to penal measures.

Selected Penalties Under the Four Codes

VIII. Implications for Corporate Governance

The simultaneous operation of deemed liability provisions across all four codes creates a cumulative exposure that boards cannot treat as routine compliance delegation. A single set of facts, such as the failure to pay minimum wages to contract workers at a factory, depending on the factual matrix, could simultaneously engage the Wages Code, the OSH Code, the SS Code¹⁵ and the IR Code.¹⁶ The director designated as occupier and any director found to be in charge of the company's business could face proceedings under multiple codes arising from common circumstances.

The practical response demands structural attention. Boards should formally document the allocation of statutory responsibility among directors and senior management. Occupier designations should be made only where the designated director has demonstrable operational control and access to compliance infrastructure, and should be supported by clear board resolutions recording consent, scope of authority and reporting lines. Resolutions designating an occupier should record the director's consent, the scope of authority conferred and the compliance infrastructure available. Companies should also maintain clear records of the allocation of functional responsibility among directors, so that the question of who was in charge of and responsible for the business at any given time can be answered with precision if the need arises. Compliance frameworks should be structured to be auditable, with documented systems for monitoring statutory obligations, escalation of non-compliance and periodic internal review.

IX. Conclusion

The new labour codes have preserved and, in certain respects, refined the long-standing statutory technique of fixing personal criminal liability on directors and officers when a company commits an offence under labour legislation. The express exclusion of independent directors from occupier designation under the OSH Code is a welcome clarification that did not exist under the Factories Act. The deemed liability formula, however, remains broad. The distinction between directors who are functionally in charge of the company's business and those who are not remains the critical line of demarcation. For companies and their boards, the implementation of the codes is an occasion not merely to update compliance checklists but to revisit the governance architecture through which regulatory obligations are allocated, monitored and enforced at the level of individual responsibility.