Offences and Penalties under the Social Security Code

The four punishment bands. This is the part that gets asked, and the grading is deliberate.

Band 1, clause (a) only, failure to pay contributions. Imprisonment which may extend to three years, but:

• (a) not less than one year, and a fine of one lakh rupees, where the failure is to pay the employee's contribution which the employer has deducted from the employee's wages;
• (b) not less than two months and up to six months, and a fine of fifty thousand rupees, in any other case.

The proviso allows the court, for adequate and special reasons recorded in the judgment, to impose a lesser term.

Band 1(a) is the harshest provision in the Code and the reason is worth stating. An employer who simply cannot pay his own contribution is in default. An employer who has taken the money out of the worker's wages and kept it has taken the worker's property, and section 31(4) already deems such a sum to have been entrusted to him. Hence a minimum of one year.

Band 2, clause (g), gratuity. Imprisonment up to one year, or a fine up to fifty thousand rupees, or both.

Band 3, clauses (d), (f), (i), (k), (l) and (o). Imprisonment up to six months, or a fine up to fifty thousand rupees, or both. These are: penalising a woman employee, obstruction, failure to provide maternity benefit, failure to produce documents, failure to pay building cess, and dishonestly making a false return.

Band 4, clauses (b), (c), (e), (h), (j), (m), (n), (p) and (q). Fine up to fifty thousand rupees only, with no imprisonment.

Notice an oddity worth a sentence of comment: failure to pay compensation under Chapter VII, clause (h), sits in the fine only band, while failure to pay gratuity, clause (g), carries imprisonment up to a year. The Code punishes withholding a retirement lump sum more severely than withholding compensation for an industrial injury.

Section 134: enhanced punishment for a repeat offence

Whoever, having been convicted of an offence under the Code, commits the same offence, shall for the second or every subsequent such offence be punishable with imprisonment up to two years and a fine of two lakh rupees.

The proviso, where the second or subsequent offence is a failure by the employer to pay any contribution, charges, cess, maternity benefit, gratuity or compensation: imprisonment up to three years but not less than two years, and a fine of three lakh rupees.

So a repeat non-payer faces a minimum of two years and a three lakh fine. Note that section 134 requires a conviction first and the same offence repeated.

Section 135: offences by companies

Section 135(1). Where an offence is committed by a company, every person who at the time was directly in charge of, and was responsible to, the company for the conduct of its business, as well as the company itself, is deemed guilty.

The proviso, the defence. Such a person is not liable if he proves that the offence was committed without his knowledge, or that he exercised all due diligence to prevent it.

Section 135(2), the wider limb. Notwithstanding sub-section (1), where the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, secretary or other officer, that person is also deemed guilty.

The Explanation. "Company" means any body corporate, and includes a firm or other association of individuals; and "Director", in relation to a firm, means a partner.

Keep the two sub-sections apart. Sub-section (1) catches the person in charge of the business, and gives him a defence. Sub-section (2) catches any director, secretary or officer on proof of consent, connivance or neglect, and gives no defence, because the state of mind is the thing proved.

Section 136: cognizance

Section 136(1), who may complain. No court shall take cognizance of an offence except on a complaint made by an aggrieved person or by the officer notified: by the Central Government for offences relating to Chapters III and IV, and by the appropriate Government for the rest.

Note the first limb. An aggrieved person, that is the worker himself, may complain. He is not dependent on an official taking up his case.

Section 136(2), sanction. No prosecution shall be instituted except by or with the previous sanction of the authority notified, again by the Central Government for Chapters III and IV and by the appropriate Government otherwise.

Section 136(3), the court. No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try an offence under the Chapter.

Section 136(4), joint complaints. A single complaint may be filed by more than one aggrieved person if they are aggrieved by the same or similar offence committed at a place or different places within the jurisdiction of the court.

Section 136(4) is a practical provision worth naming: it lets a group of workers bring one complaint rather than one each, which matters where the same default affects everybody on a payroll.

Section 137: the opportunity to comply

Notwithstanding anything in the Chapter, the Inspector-cum-Facilitator or other notified officer shall, before initiating prosecution proceedings against an employer for any offence under the Chapter, give the employer an opportunity to comply with the relevant provisions by way of a written direction laying down a time period for compliance; and if the employer complies within that period, no such proceeding shall be initiated.

The exception. No such opportunity shall be accorded if a violation of the same nature is repeated within three years from the date on which the first violation was committed, and in that case prosecution shall be initiated.

This is the most quotable provision in the Chapter. Prosecution is a last resort, not a first one, and the officer has no discretion about giving the opportunity: the section says "shall". But it is a once in three years indulgence for any given kind of violation.

Section 138: compounding

Notwithstanding the Code of Criminal Procedure 1973, any offence committed for the first time under the Chapter, being an offence punishable with fine only, or punishable with imprisonment which is not minimum and with fine, may be compounded by such officer and for such amount as the Code provides.

Read the two limits together. The offence must be a first offence, and it must not carry a minimum sentence. So the worst case in section 133, the failure to pay a deducted employee's contribution under band 1(a), which carries a minimum of one year, cannot be compounded. Nor can a repeat offence under section 134, which carries a minimum of two years where the default is in payment.

A worked example

Anchor Engineering, a private company, deducts provident fund from its workers' wages for eight months and never remits it. Its managing director signs the payroll each month. It also fails to pay gratuity to a retiring fitter and files a return understating its headcount.

Which offences? Clause (a), failure to pay a contribution; clause (g), failure to pay gratuity; and clause (o) if the return was dishonestly false, otherwise clause (e).

What is the punishment for the contribution offence? Because the failure is to pay the employee's contribution which was deducted from wages, band 1(a) applies: imprisonment not less than one year and up to three, and a fine of one lakh rupees. The court may impose a lesser term only for adequate and special reasons recorded in the judgment.

And for the gratuity? Band 2: imprisonment up to one year, or a fine up to fifty thousand rupees, or both.

And for a dishonest false return? Band 3: imprisonment up to six months, or a fine up to fifty thousand, or both.

Who is liable besides the company? Under section 135(1), every person directly in charge of and responsible to the company for the conduct of its business, and the company. The managing director will find it hard to prove the offence was without his knowledge or that he exercised all due diligence, having signed the payroll. Under section 135(2), any director, secretary or other officer with whose consent or connivance, or through whose neglect, it happened is also guilty.

Must an official complain? No. Section 136(1) allows a complaint by an aggrieved person, so a worker may complain. But previous sanction of the notified authority is needed to institute the prosecution: section 136(2).

Which court? Not inferior to a Metropolitan Magistrate or a Judicial Magistrate of the first class: section 136(3).

Twelve workers are affected. Twelve complaints? No. Section 136(4) allows a single complaint by more than one aggrieved person where they are aggrieved by the same or similar offence, even at different places within the court's jurisdiction.

Must Anchor be prosecuted straight away? No. Section 137 requires the officer, before initiating prosecution, to give a written direction with a time period to comply, and if Anchor complies within it, no proceeding shall be initiated. Unless Anchor committed a violation of the same nature within the preceding three years, in which case no opportunity is given.

Can the contribution offence be compounded? No. Section 138 reaches an offence punishable with fine only, or with imprisonment which is not minimum and with fine. Band 1(a) carries a minimum of one year, so it is outside compounding.

Could the gratuity offence be compounded? It carries imprisonment up to one year with no minimum, so it falls within section 138 provided it is a first offence.

Anchor is convicted, and two years later fails to pay contributions again. Section 134 applies. Because the repeat offence is a failure to pay a contribution, the proviso applies: imprisonment not less than two years and up to three, and a fine of three lakh rupees.

What this does NOT mean

Not every offence carries imprisonment. Nine of the seventeen clauses fall in the fine only band.

The minimum sentence is not for every failure to pay. It applies where the employer deducted the employee's contribution from wages and did not pay it over.

Section 137 is not discretionary. The officer shall give the opportunity, unless the same kind of violation was repeated within three years.

Compounding is not available for everything. Only a first offence, punishable with fine only or with imprisonment which is not minimum and with fine.

Section 135 does not make every director liable. Sub-section (1) reaches the person in charge of the business and gives him a due diligence defence; sub-section (2) reaches an officer only on proof of consent, connivance or neglect.

Limits and criticism

Failure to pay compensation is in the lightest band. Clause (h) is punishable by fine only, while failure to pay gratuity under clause (g) carries imprisonment. It is hard to justify treating an industrial injury payment less seriously than a retirement benefit.

Section 137 can be used to delay. An employer who has never before committed that kind of violation is entitled to a written direction and a period to comply, whatever the seriousness of the breach.

The fines are fixed in the Code. Fifty thousand, one lakh, two lakh and three lakh rupees are stated figures and will erode with time.

Sanction under section 136(2) is an additional filter on a worker's own complaint, so the aggrieved person's right to complain does not by itself start a prosecution.

Quick revision

• Section 133: seventeen offences, clauses (a) to (q). Band 1, clause (a) only: up to three years, with a minimum of one year and a fine of one lakh where the employee's deducted contribution was not paid, otherwise two to six months and fifty thousand; lesser term only for adequate and special reasons recorded. Band 2, clause (g) gratuity: up to one year or fifty thousand or both. Band 3, clauses (d), (f), (i), (k), (l), (o): up to six months or fifty thousand or both. Band 4, clauses (b), (c), (e), (h), (j), (m), (n), (p), (q): fine up to fifty thousand only.
• Section 134: same offence repeated after conviction, up to two years and two lakh; if the default is in paying contribution, charges, cess, maternity benefit, gratuity or compensation, two to three years and three lakh.
• Section 135: the person in charge of and responsible for the business and the company are liable, with a defence of no knowledge or all due diligence; any director, secretary or officer is liable on consent, connivance or neglect. Company includes a firm; Director in a firm means a partner.
• Section 136: complaint by an aggrieved person or a notified officer; previous sanction required; tried by not below a Metropolitan Magistrate or Judicial Magistrate of the first class; a single joint complaint by several aggrieved persons is allowed.
• Section 137: a written direction with a period to comply must precede prosecution, and compliance bars it; not available if a violation of the same nature is repeated within three years.
• Section 138: compounding of a first offence punishable with fine only, or with imprisonment which is not minimum and with fine.

Test yourself

1. What punishment does an employer face for failing to pay over provident fund he has deducted from wages? Imprisonment which may extend to three years but shall not be less than one year, and a fine of one lakh rupees: section 133(i)(a). The court may impose a lesser term only for adequate and special reasons recorded in the judgment.

2. How does that differ from a failure to pay the employer's own contribution? That falls in the second limb: imprisonment not less than two months and up to six months, and a fine of fifty thousand rupees: section 133(i)(b).

3. Must an Inspector-cum-Facilitator prosecute an employer who has broken the Code? No. Section 137 requires him, before initiating prosecution, to give the employer a written direction laying down a period for compliance, and if the employer complies within it no proceeding shall be initiated. The opportunity is withheld only where a violation of the same nature was repeated within three years of the first.

4. When is an offence compoundable? Where it is committed for the first time and is punishable with fine only, or with imprisonment which is not minimum and with fine: section 138.

5. Who besides the company is liable for a company's offence? Every person who at the time was directly in charge of, and responsible to, the company for the conduct of its business, unless he proves the offence was committed without his knowledge or that he exercised all due diligence: section 135(1). And any director, secretary or other officer with whose consent or connivance, or through whose neglect, the offence was committed: section 135(2).

6. Can a worker set a prosecution in motion himself? He may make the complaint, because section 136(1) permits a complaint by an aggrieved person. But no prosecution may be instituted except by or with the previous sanction of the notified authority: section 136(2).

7. Ten workers in two branches suffer the same default. How many complaints? One will do. Section 136(4) allows a single complaint by more than one aggrieved person where they are aggrieved by the same or similar offence committed at a place or at different places within the jurisdiction of the court.