What is compounding?
As per the Black’s Law Dictionary, to compound means “to settle a matter by a money payment, in lieu of other liability”. Compounding is a process where a defaulter or an accused voluntarily admit to have committed an offence and submit an application to the designated compounding authority, requesting the offence be condoned. The authority may agree to compound the offence upon the payment of the prescribed fee. If this is done before prosecution has been initiated, no legal proceedings are launched. If the offence is compounded after prosecution has commenced, the compounding authority notifies the concerned court to discharge the accused. As a result, the defaulting person or employer avoids acquiring a criminal record.
In the context of labour laws, the significance of compounding becomes especially relevant. Labour accounts for 463 Acts (30.1%), 32,542 compliances (47%), a
nd 3,048 filings (46%) across the regulatory landscape. A closer look reveals that 97% of labour-related compliances amounting to 31,605 are governed at the state level, while only 937 fall under union-level jurisdiction. Alarmingly, 17,819 (54%) of these labour compliances carry imprisonment as a penalty for non-compliance. In fact, of the total 26,134 compliances that prescribe jail terms across all sectors, a staggering 68% are labour-related.
Non-compliance with the provisions of the Labour Codes can lead to specified penalties and/or imprisonment. While initial drafts of the Codes proposed high penalties, there was widespread concern that the fines were excessive. To address this, the provision for compounding was introduced as a mitigating mechanism. Certain specified offences can be compounded by a Gazetted/notified officer before or after the institution of prosecution proceedings.
Provisions for compounding under the Labour Codes?
Section 56 of the Code on Wages, Section 138 of the Code on Social Security, Section 114 of the Occupational Safety and Health Code, and Section 89 of the Industrial Relations Code deal with the provisions relating to compounding of offences.
| Code on Wages | COSS | OSH | Industrial Relations Code |
Compoundable Offences | Every offence that is not an offence punishable with imprisonment only or with imprisonment and fine. | Offences punishable with fine only or with imprisonment less than 1 year and fine. | Penalty under Sections 12(3), 94, 96, 97(1), 99, 106, 97(2), 100(1), 101, 103(1)(b), 105, 113(2). | Every offence that is not an offence punishable with imprisonment only or with imprisonment and fine. |
- Under the Code on Wages, all first-time offences are punishable with fine only [Section 54]. Hence, it can be inferred that all offences under the Code are compoundable since no offence is punishable with imprisonment only or with imprisonment and fine.
- Similarly, all offences under the Industrial Relations Code are compoundable since they are punishable either with fine only or with imprisonment or with both [Section 86]. None of the offences are punishable with only imprisonment or with imprisonment and fine.
- Under the Code on Social Security, failure to pay an employee's contribution, which has been deducted by the employer from the employee’s wages, is punishable with 1 year of imprisonment or more and fine [Section 133(i)(a)]. Hence, this is the only offence, which is not compoundable. All other offences prescribe imprisonment for less than 1 year or prescribe punishment through imprisonment or fine and are hence compoundable.
- Under the Occupational Safety Code, the compoundable offences are- failure of qualified medical practitioner to send notice of certain diseases to the prescribed authorities [Section 12(3)]; any contravention for which a specific penalty is not expressly provided under the Code [Section 94]; non-maintenance of registers and records and non-filing of returns [Section 96], and other such offences, which are unintentional or non-serious violations. It must be noted that the Code does not provide the option of compounding for offences involving mens rea or serious violations relating to safety and hazardous activities, such as willful obstruction to Chief-Inspector/Inspector, falsification of records, omission to furnish plans, notices, reports without a reasonable excuse, contravention of provisions relating to hazardous activities and safety provisions, resulting in an accident.
Comparative analysis of compounding provisions under the Labour Codes
The table below provides a brief comparative overview of compounding provisions under the 4 Labour Codes.
| Code on Wages | COSS | OSH | Industrial Relations Code |
Applicability | Not applicable to an offence committed for the second time within 5 years from the date of commission of a similar offence, which was earlier compounded, or date of commission of a similar offence for which such person was earlier convicted.
| Not applicable to an offence committed for the second time within 3 years from the date of commission of a similar offence, which was earlier compounded, or date of commission of a similar offence for which such person was earlier convicted.
| Not applicable to an offence committed for the second time within 3 years from the date of commission of a similar offence, which was earlier compounded, or date of commission of a similar offence for which such person was earlier convicted. | Not applicable to an offence committed for the second time within 3 years from the date of commission of a similar offence, which was earlier compounded, or date of commission of a similar offence for which such person was earlier convicted. |
Compounding Fee | A sum of 50% of the maximum fine provided for such offence, in the prescribed manner. | A sum of 50% of the maximum fine in case offence punishable only with fine and 75% of the maximum fine in case offence punishable with fine and imprisonment less than 1 year. | A sum of 50% of the maximum fine in case offence punishable only with fine and 75% of the maximum fine in case offence punishable with fine and imprisonment less than 1 year. | A sum of 50% of the maximum fine in case offence punishable only with fine and 75% of the maximum fine in case offence punishable with fine and imprisonment less than 1 year. |
Usage of amount of composition | N/A | N/A | Amount of composition received to be credited to Social Security Fund under S.115 for unorganised workers. | Amount of composition received to be credited to Social Security Fund under S.141 of COSS. |
Compounding of offences under the Labour Codes has the potential to support both regulatory enforcement and ease of doing business. By allowing employers to voluntarily come forward and settle offences through payment of a specified fee, compounding can lead to quicker resolution, reduce litigation, and minimize reputational damage. It can also help avoid unnecessary prosecution of directors and managers for minor non-compliances.
The Standing Committee on Industrial Relations Code had suggested the addition of adequate safeguards to ensure that compounding of offences with payment of fifty percent of fine amount does not reduce the deterrent value of the penalties prescribed under the Code. Safeguards include barring compounding for repeat offences within a specified period 5 years under the Code on Wages and 3 years under other Codes. While certain aspects, such as the rationale for varying time frames, may require further review, the compounding mechanism is expected to strike a balance between efficient enforcement and business facilitation.
Disclaimer
The information provided herein is intended solely for general knowledge and informational purposes. It does not constitute legal advice or a substitute for professional consultation. While efforts have been made to ensure the accuracy of the content, users are advised to refer to the original Acts, rules, notifications, or consult with a qualified legal professional for interpretation or application. This content should not be relied upon for any legal or financial decisions.