IR Code Penalties & Dispute Resolution: What Employers Must Know

Introduction

Employers, particularly in the manufacturing and industrial sectors, have historically faced challenges related to strikes, trade union activities, and employee grievances. The passing of the Industrial Relations Code, 2020 (hereinafter referred to as the “IR Code”) marks a significant legislative reform, fundamentally redefining the framework for addressing such matters. The IR Code has consolidated and revised provisions from the currently applicable legislations like the Trade Unions Act, Industrial Disputes Act, and Industrial Employment (Standing Orders) Act, which are often seen as fragmented and complex.

For businesses operating in multiple states or across high-labour-risk sectors, the Code brings both relief and a fresh set of compliance burdens. On paper, it attempts to simplify engagement with workers, standardise mechanisms for grievance handling, and introduce a more streamlined process for dispute resolution. In practice, however, much will depend on how an organisation interprets, and adheres to, the procedural safeguards built into the legislation.

Employer Risk Exposure Under the IR Code

Employers need to realise that non-compliance under the IR Code doesn’t always require a “serious” violation; even procedural lapses, such as the absence of a duly constituted grievance redressal committee or a delayed notification of changes in service terms, can attract financial penalties. And in certain cases, continued non-compliance or wilful default may even lead to prosecution.

Some common triggers for penalties include:

Failure to notify of closure or lay-offs by prescribed timelines.
Not maintaining standing orders or ignoring model standing orders where applicable.
Disregarding settlement awards passed by conciliatory authorities or labour tribunals.
Retrenchment undertaken without prior permission or due notice.
Acts that amount to victimisation or unfair labour practices under Schedule II or III of the Code.

Even the well-intentioned employers often fall short on documentation or procedural timelines, leaving themselves exposed.

Why This Matters for Dispute Prevention

Compliance with the IR Code is paramount as it establishes the foundational framework for the interpretation of future industrial disputes by tribunals. An employer’s failure to demonstrate the implementation of adequate redressal or engagement mechanisms will significantly weaken its defence in any subsequent industrial dispute

Unlike before, the IR Code places emphasis on preventive action. Employers must ensure that internal processes align with the statutory safeguards and that grievance redressal, union engagement, and service condition alterations are all documented and undertaken with due legal formality.

Penalties Under the Industrial Relations Code, 2020

The Industrial Relations Code, 2020 (“IR Code”) has introduced a structured penalty framework that significantly changes how employer liability under labour laws is assessed. Unlike earlier fragmented regimes, the IR Code outlines well-defined consequences for non-compliance, ranging from monetary penalties to criminal prosecution in severe instances.

Key Non-Compliance Areas

Under the IR Code, the following lapses may expose employers to enforcement action:

Illegal closure or layoff: Units shutting down operations without giving notice to the appropriate Government or failing to comply with prescribed procedures under Chapter IX.
Failure to constitute a Grievance Redressal Committee (GRC): Especially in establishments with 20 or more workers, the absence of a functioning GRC is a punishable offence.
Non-submission of mandatory notices: Employers are required to file detailed notices before changes in service conditions, strikes, lockouts, or retrenchment.
Contravention of Tribunal awards: Where an employer refuses to implement binding directions issued by labour courts or industrial tribunals under the Code.

These violations often occur not due to malice, but owing to poor internal compliance oversight, particularly in small-to-mid-sized enterprises with limited HR compliance frameworks.

Nature and Quantum of Penalties

The IR Code demarcates penalties depending on the nature and severity of the breach:

Type of Offence	Section under IR Code	Penalty on First Offence	Repeat Offence
Illegal Closure without Notice	Section 80	₹1,00,000 – ₹5,00,000	Up to ₹10,00,000
Failure to Maintain Standing Orders	Section 30	₹50,000	₹1,00,000 + prosecution
Contravention of Tribunal Awards	Section 57	₹1,00,000 + imprisonment (optional)	Prosecution mandatory
Non-constitution of GRC	Section 4	₹25,000	₹50,000

Compounding Provisions

Certain offences under the IR Code are compoundable, i.e., may be settled by payment of a specified fine before prosecution. However, this is only allowed for first-time violations that are procedural in nature.

Criminal Prosecution and Repeat Offences

For repeated or serious breaches, particularly those involving union victimisation or illegal layoff, criminal penalties, including imprisonment up to 6 months, may be initiated.

Practical Examples of Enforcement

While penalties have been codified, practical enforcement varies across states. In the past year:

Inspectors in Maharashtra and Tamil Nadu have issued closure notices and initiated fines in manufacturing zones (notably in logistics and automotive assembly).
In Haryana, multiple export processing units were fined for not submitting industrial dispute settlement notices under Section 42.
Third-party labour audits triggered by investor due diligence have increasingly revealed gaps in grievance mechanisms and union engagement compliance.

Employers, particularly those operating in high-risk sectors, must treat the IR Code compliance framework not as a one-time checklist, but as a continuous risk management protocol.

Dispute Resolution Framework Under IR Code

The Industrial Relations Code, 2020, reshapes how industrial disputes are supposed to be addressed, shifting away from outdated practices and towards a more layered, formalised process that still requires a fair bit of procedural clarity on the part of employers. While the Code introduces a supposedly streamlined path for resolving grievances, what this looks like in actual practice will depend heavily on how well employers understand the underlying requirements.

Informal to Formal: The Evolution of Redressal

Where earlier grievance handling often occurred at departmental levels or ad hoc committees, the Code now imposes a statutory obligation for companies to create an internal structure for raising and resolving complaints before they escalate.

Constitution and Role of GRCs (Grievance Redressal Committees)

As per Section 4 of the Code, any establishment employing 20 or more workers is required to constitute a Grievance Redressal Committee (GRC). The goal is to offer a first line of resolution, with these key expectations:

The committee must include both employer and worker representatives.
At least 1/3rd of the committee members should be women.
It should function as a neutral forum, meaning HR-dominated panels are not advisable.
Grievances raised by workers must be resolved within 30 days from the date of submission.
A worker who is not satisfied with the outcome is allowed to escalate the matter to the conciliation authorities.

Even though this structure seems fairly straightforward, companies may falter while operationalising it. For example:

The GRCs, composed solely of internal HR professionals, will weaken the appearance of impartiality.
Often, fixed meeting schedules are not followed. In some cases, minutes are not recorded at all.
Workers may not even be aware that such a committee exists, which will defeat the whole purpose.

Conciliation: The Middle Layer Before Tribunal

Once an internal resolution fails or is not initiated at all, the matter typically will move to the conciliation stage, which will play a pivotal role in filtering genuine disputes from those that can be amicably settled.

The Conciliation Officers, who will be appointed by the respective state government, have a statutory function to:

Review the complaint, call for documents or witnesses.
Try to mediate a fair settlement between the employee and employer.
In cases where no agreement is possible, submit a “Failure of Conciliation” report to the Tribunal.

This step is crucial because most industrial disputes in India still end up settling at the conciliation level. A poorly handled conciliation, especially if the employer comes across as unprepared or defensive, can drastically influence the trajectory of the dispute.

Industrial Tribunals: Where Disputes Are Finally Decided

If conciliation fails or either party is dissatisfied with the outcome, the case will then proceed to the Industrial Tribunal, which will have broader powers under Section 44 of the Code. The Tribunal can:

Pass orders on retrenchments, layoffs, and illegal closures.
Interpret and enforce standing orders or settlement agreements.
Award compensation, reinstatement, or even back pay in certain cases.

Importantly, the Code mandates that the Tribunal should try to resolve disputes within one year from the date of reference and is expected to function with higher efficiency under the new rules.

Practical Safeguards for Employers

Employers and businesses alike should take several proactive measures to be IR Code compliant:

Keep standing orders updated and accessible. These should reflect actual employment practices and not just copied model templates.
Maintain detailed documentation regarding the conditions of employment, prior grievances, any disciplinary action taken, and all communications with the worker concerned.
When separating from employees (especially in unionised sectors), settlement documents should be provided and signed by both parties. A signed and stamped settlement agreement with union representatives often prevents future litigation.

Additionally, when facing larger disputes, some companies often opt for tripartite settlements, where government conciliators, union representatives, and the employer sign off on dispute resolution terms that are binding on all parties. These instruments are particularly useful during plant closures or after contentious retrenchments.

Best Compliance Practices for Employers

Compliance with the Industrial Relations Code, 2020, requires a proactive and structured approach from employers. While the legislation sets out clear obligations, it also implicitly mandates the establishment of internal mechanisms to ensure sustained adherence and prevent non-compliance. The following operational measures are recommended not only to meet statutory requirements, but also to promote organisational stability and sound industrial relations.

Monthly and Quarterly IR Compliance Checklist

Companies, especially those employing more than 50 workers, would be advised to maintain an internal checklist covering key industrial relations compliance events and filings. These may vary slightly based on state-specific rules, but at a central level, the following should be considered non-negotiables:

Whether the Grievance Redressal Committee (GRC) is functional and meeting minutes are recorded regularly.
Submission of applicable reports to labour authorities as per the prescribed timelines.
Display of required statutory notices (like standing orders and trade union contacts) in conspicuous places.
Confirmation that no standing order amendments have occurred without proper ratification and approval.
Internal training for HR and line managers on the dispute redressal escalation matrix.

Legal Audits – Internal or via External Law Firms

An effective way to uncover vulnerabilities is to conduct legal audits for compliance on a semi-annual or annual basis. There are typically two ways companies go about this:

Internal HR-led audits (often checklist-based but tend to overlook deeper structural gaps).
Independent external audits by employment law firms or labour consultants.

While internal audits are cost-effective, the latter often reveal issues that internal teams miss.

Companies should document the audit process, keeping a formal record of recommendations, timelines, and corrective actions undertaken. This becomes an essential safeguard in any later inquiry by labour commissioners or tribunals.

Board-Level Oversight and HR Training

In larger organisations, IR issues tend to get escalated only after they’ve turned into formal disputes. To mitigate this, some employers now report compliance as part of quarterly updates to the board or compliance committee. At a minimum, the following updates can be included:

Number of worker grievances raised and resolved;
Status of union negotiations, if any;
Legal notices or show cause received from any labour department; and
Trends in employee attrition related to industrial conditions.

Training frontline HR teams and factory managers on labour code updates, dispute handling protocols, and union negotiation frameworks is not just advisable, but is critical for the future well-being of the business. In many high-risk cases, poor handling by middle management is what escalates matters to external forums.

Companies may also create a simple compliance calendar that syncs with payroll and HRMS systems to trigger alerts for key deadlines and filings.

Conclusion

With the imminent implementation of the labour codes, proactive compliance with the Industrial Relations Code, 2020, has transitioned from a recommended practice to a critical operational requirement. With increased regulatory scrutiny and a shift toward stricter enforcement of employer obligations, lapses in documentation, procedural rigor, or statutory adherence can lead to significant legal and reputational consequences.

Why IR Compliance Is a Strategic Priority

Non-compliance of the obligations under the Code extends beyond monetary penalties, since it carries significant reputational and financial risks. A single labour dispute, particularly one involving allegations of wrongful termination, discrimination, or anti-union practices, can quickly escalate and result in:

Disruption of operations (strikes, lockouts);
Media backlash and employee disengagement;
Penal fines under Section 86, Section 89, or even criminal prosecution in aggravated cases;
Difficulty in closing future rounds of investment or expansion approvals due to poor compliance history.

Key Takeaways for Indian Employers and HR Teams

Set up and actively use a functional Grievance Redressal Committee.
Keep standing orders updated and in sync with practical realities.
Train HR, line managers, and compliance staff regularly on the Code.
Maintain documentary trails, especially in dispute-related matters.
Engage legal professionals for annual IR compliance audits.
Treat all employee grievances seriously, especially where union activity is involved.

The Industrial Relations Code, 2020, when enforced, will be a permanent fixture of the labour law landscape. Employers who will overlook its implications, will do so at considerable risk, exposing themselves to legal liabilities and operational disruption. Conversely, organisations that integrate compliance into their corporate culture are better positioned to enhance workforce morale, ensure regulatory stability, and support long-term business continuity.

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