Section 46: Priority of claims

Overview

Section 46 of the Code on Wages, 2019, deals with the crucial protection of employee wages and bonuses in situations where a company faces financial difficulties like insolvency or winding up. It ensures that workers get paid what they are owed *before* other creditors of the company are paid.

Scope and Coverage

• Which employees and establishments are covered: This section applies to *all* employees covered under the Code on Wages, 2019 – essentially, all workers receiving wages, regardless of their skill level or type of employment (skilled, unskilled, manual, etc.). It covers all establishments, whether organized or unorganized, that employ workers.
• Any thresholds or exclusions: There are no specific thresholds regarding the number of employees or the size of the establishment. This protection applies universally to all covered employees.

Key Obligations and Rights

• Main duties of employers: While this section doesn’t directly impose a *new* duty, it reinforces the employer’s fundamental obligation to pay wages and bonuses. It clarifies that this obligation remains paramount even during financial distress. The employer (or liquidator in case of winding up) *must* prioritize wage payments.
• Important rights or protections for employees: This section provides a significant protection for employees. It guarantees that their wages and bonuses will be given preference over other debts of the company. This means employees are more likely to recover their dues even if the company doesn’t have enough money to pay everyone.

Compliance and Penalties

Violation of this provision doesn’t carry a separate, specific penalty *beyond* the general penalties applicable for non-payment of wages under the Code on Wages. If an employer fails to prioritize wage payments during insolvency or winding up, it can lead to inspections by labour authorities, and potential prosecution under the relevant provisions of the Code, resulting in fines and/or imprisonment for the responsible persons. Employees can also approach Labour Courts or Tribunals to enforce their rights.

Practical Examples

• Example 1 from a typical workplace: A textile factory goes into liquidation due to mounting debts. The factory owes its workers wages for the last two months and a festival bonus. Section 46 ensures that the liquidator *must* pay the workers their outstanding wages and bonus before paying other creditors like banks or suppliers.
• Example 2 for a borderline scenario: A construction company becomes insolvent while working on a large project. They owe subcontractors money for materials and labour, *and* they owe their direct employees wages. Section 46 prioritizes the wages of the company’s *direct employees* over the payments owed to the subcontractors.