Code on Wages Penalties: Non-Compliance Consequences for Employers

Introduction – Code on Wages Penalties

The Code on Wages, 2019 (“Code”) is not just another piece of reform; it represents a comprehensive shift in how wages, payments, and employer liabilities are regulated in India. For many years, employers have dealt with a fragmented structure, navigating the Payment of Wages Act, the Minimum Wages Act, and two other related acts. Whereas now, understanding the complexity of compliance with these fragmented Acts, the legislature has taken a significant step by consolidating these fragmented Acts into a single statute, i.e., the Code on Wages.

In recent months, several businesses have been slapped with hefty fines under the Code on Wages penalties provisions, many of which didn’t even know that they had violated the provisions of the Code. For instance, a Tier-II factory in Gujarat was fined ₹35,000 simply because wage slips weren’t being issued on time. In another case, a Bangalore-based HR tech startup had to face legal inspection for incorrect wage categorisation. It is important to understand that these aren’t isolated stories or incidents; they’re becoming common.

The government has also amped up digital inspections to regularly inspect the violations. Labour inspectors (now called Inspector-cum-Facilitators) are using automated data tools to track labour law non-compliance in India, especially when PF, ESI, and wage delays start overlapping. Moreover, it’s not only big firms being watched and screened, but MSMEs and even small logistics operators have come under scrutiny.

So, what’s going wrong? Why are employers getting penalised despite maintaining salary sheets and payslips?

Well, here’s what’s happening:

Employers are unaware of their obligations under the Wage Code, like proper categorisation of wages.
Delay in the minimum wage revision updates being reflected in HR software.
Failure to maintain record formats exactly as notified under the rules.
Failure to have a documented wage payment timeline, especially for gig and contract workers.
HR is relying on old formats of compliance checklists under the previous labour laws.

Now, technically speaking, not issuing a wage slip might not look serious. But, under the Wage Code 2019, even clerical issues can attract penalties for employers, starting from ₹10,000 to ₹1,00,000. Some violations are even punishable with imprisonment if repeated.

Truth be told, some lawyers even wrongly advised their clients that the Code hasn’t been fully enforced and implemented yet. But the truth is, various states have started enforcing rules, and central monitoring is already active in multiple sectors.

Wage compliance under the Code on Wages isn’t just about paying salaries on time. It’s about aligning every element, from deductions and registers to categorisation and declarations, with what the law now expects. Otherwise, you’re not just risking a notice, you’re risking prosecution.

Overview of the Code on Wages, 2019

There’s been a lot of talk about the Code on Wages, but most companies still aren’t fully sure what actually changed under the Code. This Code basically replaced the old mess of four different wage laws and requires newer formats and compliance, but the truth is, most HR teams still use outdated formats, being ignorant of what the law demands, and that’s where the trouble starts, quietly. Most employers and HR think they’re doing it the right way, but non-compliance creeps in without warning.

So, here’s what happened: The Code on Wages, 2019, was passed by the Parliament with the idea to simplify how wages, bonuses, and remuneration are handled across India. It clubs together the Minimum Wages Act, the Payment of Wages Act, the Payment of Bonus Act, and the Equal Remuneration Act, which sounds neat on paper, but in practice, it’s layered, and that’s where most employers are still confused and lost, resulting in being ignorant and attract penalties.

Employers assume that the Code applies just to factory workers or the unorganised sector, but they are unaware that even white-collar staff in tech, services, and even e-commerce are fully covered now. Still, many HR teams haven’t updated their formats, wage registers, payslips, etc., which results in non-compliance even though salaries are being paid regularly.

Here are a few core things every company should know about wage compliance under the Code on Wages:

Payment of wages within 7 days of the end of the wage period (10 if terminated).
No bias in pay scale between men and women for the same roles, equal remuneration isn’t optional now.
You’ve got to keep digital records of wages and attendance, in the notified formats as provided under the Code.
Minimum wage rules apply even if you’re paying above the industry average.
Structure of wages must follow the statutory split, not just lump-sum figures.

Some employers mistakenly think that state governments haven’t notified their rules yet, so the law isn’t fully enforceable. But what they should understand is that central rules can apply in the absence of state notification. Unfortunately, a few CA firms still advise that bonus payments under this Code are discretionary, which is legally wrong.

Another thing we’ve noticed is that some companies merge basic wage and gross wage to reduce PF liability. But under the new Code, the basic wage floor matters, so structuring it wrong can get you caught during inspection, and once the Code on Wages penalties kick in, it’s hard to explain a system mismatch to an inspector, especially if the digital records don’t match the register formats.

Common Employer Obligations Under the Wage Code

The Code on Wages, 2019, looks simple at first glance, but the obligations it places on companies, especially small and mid-size businesses, are anything but straightforward. A lot of businesses assumed this Code was just a clubbed-together version of the old wage laws. Whereas the new Code does away with earlier laws like the Minimum Wages Act, Payment of Wages Act, and two others, and replaces them with a single unified set of obligations that now apply to almost every employer in India, regardless of the team size, and yet, most compliance systems haven’t adapted to it. Payrolls are still being run using outdated categories, deductions are applied without employee consent, and wage slips are either missing or misformatted. If you’ve ever said, “We already pay well above minimum wage”, that’s not going to be a valid excuse under this Code.

Let’s break down what an employer is supposed to do now:

Pay wages within the statutory timeframe: For active employees, wages must be cleared within 7 days of the wage period. Further, for terminated or resigned employees, the limit is 10 days. Some firms still follow older timelines, which is no longer allowed.
Minimum wage isn’t just a number: Even if a company pays ₹30,000/month, if the basic wage falls below the notified minimum wage (due to inflated allowances), it’s still non-compliant.
Gender parity isn’t optional: There must be equal remuneration for the same or similar work. This includes contract staff, off-roll employees, and anyone else doing comparable duties.
Maintain proper wage records: These aren’t just Excel sheets. Registers must follow the format issued by the State government under the Wage Code rules, and ERP exports alone don’t qualify the compliance.
Give payslips: Employers must issue monthly wage slips to all employees, and not sending them, or sending incomplete ones, can be counted as a violation, even if salaries are paid on time.
Keep records for 3 years: While some believe wage data needs to be stored for 5 years, the Wage Code requires a minimum of 3 years (though, to be cautious, many firms maintain 5 anyway).
Written consent for deductions: Deductions made for canteen, uniforms, accommodation, etc., must be backed by signed employee consent. The internal HR policies don’t override this requirement.

One recurring mistake the employers make is assuming that the Code applies only to large manufacturing units or factories. What they fail to understand is that the employer obligations under the Wage Code 2019 apply to nearly every registered business, including tech firms, consultants, startups, and even LLPs with full-time staff. Moreover, while penalties under the Code on Wages don’t always show up immediately, they are often triggered during inspections or audits. An outdated wage register, inconsistent allowances, or a lack of payslip records, all of these can add up and attract penalties.

Companies relying solely on outsourced payroll providers or believing “our CA handles it”, without verifying wage structuring and register formats, may be operating in a legal grey area without realizing the prosecution that awaits.

Penalties for Employers Under the Code on Wages

Even though the Wage Code 2019 was introduced to simplify older labour laws, many employers are still not fully clear about the consequences of failing to comply with it. In reality, the Code on Wages penalties are fairly direct, and unlike previous legislations, there isn’t much scope to avoid action once a breach is identified. And contrary to what’s commonly assumed, penalties for employers under the Wage Code can apply even where no formal complaint is made by the worker.

Companies often get caught up in two assumptions:

That a show-cause notice always comes first, and
That monetary fines are enough to close the matter.

Neither of these is guaranteed under the present Code.

Below are some core compliance failures and their linked consequences:

Non-payment of minimum wages: This is one of the most common violations. As per Section 54(a), the employer may be fined up to ₹50,000, and in repeat cases, even face imprisonment for up to 3 months.
Improper record-keeping: A lot of companies use payroll software or Excel exports, assuming they are compliant under the Code. However, under the Wage Code 2019, employer obligations require that wage registers need to follow a state-notified format, and a failure here could cost ₹10,000 on first default.
Missing wage slips: It may sound minor, but the law mandates the issuance of wage slips. Many entities forget this, especially for contract staff, which results in audit penalties.
Obstruction during inspection: If the company refuses to allow the Labour Inspector to access documents, penalties can go up to ₹1 lakh or lead to imprisonment in extreme cases. This has been noticed more in warehousing or logistics hubs where inspection teams often face delays.
Repeated contraventions: Here’s where the stakes go up. If the same company defaults again within five years, the offence becomes criminal. This clause is often overlooked by companies who assume each instance is treated separately.

Here’s a quick snapshot in table form:

Type of Offence	Penalty (First Time)	Penalty (Repeat Offence)
Non-payment of notified wages	Fine up to ₹50,000	3 months imprisonment or ₹1 lakh fine
Obstruction of the Inspector’s duties	Fine up to ₹10,000	₹25,000 or imprisonment
Obstruction of Inspector’s duties	Fine up to ₹1 lakh	6 months imprisonment or both
Repeat contravention (any kind)	Not applicable	Criminal charges + higher fine

A small but important error often made by compliance heads is assuming that the Wage Code still allows compounding for all offences, but the truth is, only some breaches are compoundable. Under the penalties for the employers under the Wage Code, repeated failures or those relating to wage underpayment or discrimination are non-compoundable and will proceed to litigation.

Another point many employers overlook is the idea that penalties only apply to “establishments”. Whereas, even LLPs, NGOs, and small proprietorships with over 10 workers are not exempted, unless specifically excluded in state rules. The excuse that a tech startup or digital agency can be left out just because it’s new or loss-making has no legal basis.

Lastly, keep in mind that notices under this Code don’t always stem from complaints. Routine inspections, particularly during labour department drives, can open a file on your firm even if no worker has come forward.

In short, once a business crosses 5 or more workers and starts issuing salaries, its obligations under the Code on Wages 2019 become active. Missing any of the basic checks, be it payslips, consent-based deductions, or wage timelines, invites regulatory action.

Real-World Scenarios of Non-Compliance

There’s always a gap between what the statute says and how things play out on the ground. In the past two years, quite a few enforcement actions under the Code on Wages 2019 have come up, not just in the usual heavy industries, but even startups and digital-first businesses, as they come from internal assessments, inspections and HR audits that law firms or compliance vendors handle, and some of these are not even reported in the media or court orders.

A few practical examples are noted below, not exhaustive, but enough to show the trend.

Example 1: Industrial Tools Manufacturer – Faridabad

They had 42 workers on payroll and about 16 through an agency. Basic wages were being adjusted with allowances, but the total was below the notified minimum wage. They thought they were compliant with the Code, but during a routine inspection, it was flagged that the HR head couldn’t provide Form A and B in the prescribed format, and there was no proper wage slip acknowledgment.

Penalty imposed: ₹50,000, and arrears had to be paid within 15 days. No imprisonment was imposed, but I was flagged for follow-up in the next quarter.

One error here was assuming that the agency’s labour obligations were on the vendor. Whereas under the Wage Code 2019, the employer obligations, principal employers also hold vicarious liability.

Example 2: App-Based Services Startup–Bengaluru

This one’s common in tech. The company hired about 10 developers as “freelancers” but paid them on fixed monthly retainers. There were no wage slips, no PF, and no structured payroll records. It was during their funding due diligence that the issue was caught, not by the labour office. But once flagged, it escalated fast. Since there was no documentation of deliverables or proof, as they were truly independent contractors, the entire model was viewed as a sham contract.

Under the penalties for employers under the Wage Code, they were asked to pay fines plus retrospective PF. The legal mistake here is no fixed-term contract, and the use of full-time hours. Even if the intention wasn’t to default, the structure caused non-compliance under the Code.

Example 3: Engineering Services Vendor – Ahmedabad

Their register entries were all in Excel sheets because they believed that was good enough. But inspectors wanted printed, signed registers in the official Form formats. When these weren’t available, the inspector treated it as a failure to maintain records, and a fine of ₹10,000 was imposed.

Also, they assumed the wage register format was the same as under the old Payment of Wages Act. But, the Wage Code specifies new formats via the central rules, which is a common miss, especially in tier-II cities.

Sector	Compliance Lapse	Fine / Consequence
Manufacturing	Incorrect wage breakup below minimum wage	₹50,000 + arrears
Startup (Tech)	No payslips, PF, or formal contractor model	₹1 lakh+ PF dues retroactively
MSME Vendor	Register in Excel, no official Form B	₹10,000, flagged in labour records

What we’ve seen is that labour law non-compliance in India isn’t just about wages being low; it’s the documentation trail that matters most now, from salary slips to register format to signed acknowledgements, everything has to tie in.

And just to clarify, in most cases, there’s no formal show cause or last warning. Inspectors under the Code on Wages penalties can initiate action on the spot, especially where repeat offences or obvious gaps are visible.

We’ve noticed a pattern: those companies that treat labour law like a tick box task often end up doing just enough to trigger an audit but not enough to pass one.

Enforcement Mechanisms & Inspection Process

The Code on Wages compliance regime has fundamentally altered the way wage-related offences are monitored and enforced in India. Earlier, inspections were sporadic and often discretionary. Today, the law has built-in digital tracking, randomised inspections, and proactive record scrutiny, all aimed at plugging long-standing wage evasion loopholes, and many employers still seem unaware of just how wide the enforcement net has become.

The inspection under the new wage framework in India is by centralised rules as well as state-specific labour codes, which means even companies operating in Tier II or remote industrial clusters are no longer outside the compliance radar.

Role of Inspector-cum-Facilitator

Contrary to the older regime where labour inspectors acted mainly as punitive agents, the Inspector-cum-Facilitator under the Code now has a dual function, monitoring and guidance. However, this does not mean enforcement powers have weakened. In fact, under Rule 56 of the Central Rules, the Facilitator can:

Call for wage records, registers, payslips, and employment contracts without prior notice;
Enter the premises and question HR or payroll officials.
Recommend prosecution where non-cooperation or repeated non-compliance is observed.

This facilitative label has, unfortunately, created confusion among smaller employers; many mistakenly believe that the first inspection is only advisory.

Digital Tools & Scrutiny

The system now operates largely via the Shram Suvidha Portal, where businesses are profiled using risk-based indicators. A missed return filing or a red flag from PF/ESIC systems may automatically trigger scrutiny.

Records like Form A (Wage Register), Form B (Deduction Register), and e-payroll dumps are expected to be synchronized.
Unreconciled entries (like gross wages not matching net payout, or deductions not justified by contract clauses) invite red flags.
Some state authorities (e.g., Maharashtra, Karnataka) have also integrated local trade license renewal portals with labour inspection frameworks.

Employers who still maintain wage records in Excel or physical formats are the most exposed. The Code on Wages compliance requires wage and payment data to be traceable, audit-friendly, and ideally stored digitally.

Audit Notices & Explanation Calls

Upon data mismatch or random selection, a formal audit notice is issued. This typically contains:

A questionnaire on the nature of employment, wage structure, and deductions;
Call for soft copies of registers for the last 6 months.
Details of wage slips and employee acknowledgements.

If there’s no reply within 7 to 15 working days, the department may list the business for on-site verification. Again, some employers mistakenly think these are informal requests, but they’re not. Even basic errors, like showing wage components without written break-ups or omitting consent forms for deductions, have led to non-compliance.

Show-Cause Notices & Prosecution

Where non-compliance is evident, especially in cases of:

Non-payment of minimum wages,
Repeated delays in salary disbursal, or
Lack of documentation on wage deductions,

A show-cause notice is served under Section 54 or 56 of the Code. Once this scrutiny begins, it’s not always compoundable.

Here’s an overview:

Stage	Action Triggered	Implications for Employer
Internal flag on portal	Risk-based selection or reporting	Audit call or soft scrutiny
Formal audit notice	Lack of reconciled records / digital gaps	HR/payout system compliance review
Show-cause notice (Sec 54/56)	Repeated wage delay or minimum wage breach	Must reply with evidence or face prosecution
Prosecution (non-compoundable)	Wilful or repeat default	Fine, blacklisting, or potential imprisonment

Errors Commonly Made by Employers

Assuming inspection follows from complaints, randomised audits are allowed.
Believing verbal clarification will suffice, only written replies are accepted.
Not submitting annexures or supporting payroll documents.
Relying on consultants without cross-checking legal formats.
Filing wage returns without attaching digital register backups.

The enforcement process under the wage inspection framework in India is no longer sporadic; it’s structured, data-led, and outcome-focused. Companies that fail to treat this seriously are not only at financial risk but reputational risk, especially in vendor screening, investor due diligence, and licensing renewals.

How Employers Can Stay Compliant

In the current regulatory landscape, employers must adopt a proactive, evidence-driven approach to remain compliant with the Wage Code 2019 employer obligations. Merely relying on external consultants or assuming historical payroll practices will suffice is, frankly, a risk no organisation can afford anymore, especially with increasing state scrutiny and integrated inspections.

Most enforcement actions arise not due to wilful default, but due to basic errors in wage documentation or unawareness of updates under the Code on Wages framework. Staying compliant is less about legal theory and more about process clarity, documentation hygiene, and internal training. Below are some strategies and obligations that employers must prioritise.

Practical Compliance Measures for Employers

Maintain Digitised Records:
All employers must maintain wage registers in Form A, deduction registers in Form B, and leave registers as per the notified formats. Relying on Excel or unstructured MIS reports has led to penalties in multiple cases. Soft copies must match physical records, if maintained.
Issue Pay Slips with Acknowledgment:
Under Section 50 of the Code, every employee must receive a wage slip, and many forget the second part, the acknowledgement. Inspectors have rejected the slips emailed without proof of read/receipt. One solution advisable is to capture signed copies or maintain a payroll dashboard acknowledgment trail.
Update Payroll Systems:
Minimum wages are revised periodically through notifications. Failing to sync payroll to new wage floors leads to non-compliance, even if the increment is ₹100. This update must reflect in gross wage, PF base, and bonus calculations.
Conduct Bi-Annual Internal Wage Audits:
While not mandatory under statute, internal wage audits every 6 months help identify mismatches between contract language, actual payout, and statutory compliance. Mid-size companies often ignore this and assume TDS filings are enough, which is incorrect.
Train HR and Admin Staff:
In most cases, the HR team wasn’t even aware of the changes made by the notification under the Code. Firms must conduct quarterly compliance training, not just for senior managers but also for operational HR handling attendance, muster rolls, and shift payments.
Engage Labour Law Experts:
A common mistake employers make is taking formats from the internet and using AI. These may not match the latest Central Rules, especially post-2022 updates. Regular engagement with advisors ensures alignment with current practice and pre-empts inspection risks.

Sample Compliance Responsibility Table

Compliance Activity	Responsible Team	Frequency	Documentation Required
Update wage floors as per notifications	Payroll / HR	Signed Form A, Excel + hard copy	Revised salary structure, PF computation
Maintain wage register (Form A)	HR / Admin	Monthly	Signed Form A, excel + hard copy
Issue wage slips with proof	Payroll / Finance	Monthly	Email receipts / digital acknowledgments
Conduct internal wage audits	Compliance / HR	Bi-Annually	Audit memo, contract-to-payroll mapping
Compliance training	Legal / Compliance Lead	Quarterly	Attendance records, policy updates

Common Mistakes to Avoid

Wage slips are issued without employee signatures or acknowledgments.
Reliance on CA firms unfamiliar with labour-specific filings.
Salary deductions (e.g., uniform costs, accommodation) without employee consent.
Believing digital payroll systems are automatically compliant.
Filing wage returns but ignoring register maintenance.

Many of these are seen in litigation and audit reviews, particularly in sectors like manufacturing, warehousing, retail, and logistics. Note that the compliance is not just a formality; several state governments have made it a precondition for vendor registrations, factory licenses, and CSR funding eligibility.

Summary Table – Offences & Penalties Under Wage Code

When it comes to wage law enforcement, employers often overlook the severity of penalties, thinking only large violations get flagged. But under the Code on Wages penalties framework, even routine mistakes, like delayed wage slips or incorrect deductions, can result in formal legal action.

Unlike past practices, these penalties are not merely warnings; they can be monetary or criminal, depending on the nature and frequency of the offence. What makes this more concerning is the fact that most of the triggers are procedural lapses, issues that can be easily avoided with proper documentation and review.

Here is a practical summary of common offences and their legal consequences:

Offence	First-Time Penalty	Repeat Offence	Remarks
Delay in wage payment	₹10,000 fine	₹20,000 + up to 1 month jail	Non-compoundable if repeated
Less than minimum wages paid	₹20,000 fine	₹40,000 + up to 3 months jail	Can also attract civil recovery proceedings
Failure to issue wage slips	₹10,000	₹20,000	Procedural, but flags digital audit trail gaps
No register maintenance	₹10,000	₹20,000	Often seen in SMEs & informal contracts
Obstructing inspector	₹50,000 + prosecution	₹1,00,000 + imprisonment	Serious breach, may lead to blacklisting

These are not hypothetical. Many of our SME and export-sector clients have received show-cause notices just for non-filing of Form A and B registers or missing wage acknowledgements during surprise inspections. Moreover, in a few instances, even accidental errors in splitting basic wage and HRA wrongly triggered penal clauses under labour law non-compliance with Indian standards.

Conclusion – Code on Wages penalties

The penalties under the Code on Wages are not symbolic; they are structured, escalating, and designed to correct long-standing wage violations across industries, especially in low-wage and informal sectors.

From a compliance standpoint, it’s not just the cost of penalties but the reputational risk and regulatory exposure that make this a critical area for business leaders. Yet many organisations still treat wage compliance as an HR task instead of a board-level legal concern.

Mistakes such as outdated wage structures, unchecked salary deductions, or casual employee classifications often go unnoticed until it’s too late, and by that time, state labour departments have already initiated documentation checks and penalty proceedings.

Here’s what we consistently recommend:

Wage policy reviews should be conducted annually by legal experts, not just payroll vendors.
All wage slips must be acknowledged, not just issued.
Registers must match wage returns; mismatches are the first red flag in inspections.
Code on Wages compliance is not a checkbox; it’s an ongoing legal process.
Internal teams should be trained to identify and document minimum wage adherence, especially across states.

One final point, a lot of small businesses assume wage penalties can be handled after a notice. But once the Inspector-cum-Facilitator submits the report, legal remedies become limited. So, legally and financially, prevention is the only real protection.

If your business wants to review its wage structures, deduction practices, or digital register formats, Corrida Legal’s compliance team is equipped to provide audit-led, legally binding support tailored to your industry.

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