Early European employers in India awarded ‘bakhshish‘, or a gift, to their workers on holidays like Diwali probably because they were happy with their profits. Employers award bonuses to employees to motivate their workers to give their best in the job.
Employees have a legal right on the surplus dispersed by employers. Employers should distribute this surplus among workers based on their wages and not add this expense to the dearness allowance or any other allowance.
Bonuses motivate employees to work at their best capacity. The Payment of Bonus Act of 1965 establishes a statutory bonus. Unlike an incentive bonus, a statutory bonus is mandatory. The act stipulates that a statutory bonus is an employee’s right under the Payment of Bonus Act and is not an option.
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What is a Statutory Bonus?
The Payment of Bonus Act does not define the term ‘bonus’. A statutory bonus is a monetary incentive received in addition to the regular payment. The statutory bonus is a payment employers must pay to their employees under the Payment of Bonus act, 1965.
A bonus is an additional amount of money given to an employee as a present or reward for performing brilliantly in his/her field. The distribution of the firm’s earnings among its workers and employees is the primary purpose of bonus payments by the company. A statutory bonus is a part of an organisation’s profit as a direct result of the efforts by its employees.
The Payment of Bonus Act, 1965
The Payment of Bonus Act is a welfare legislation created for the benefit of labourers. The act states that employees have a statutory right for sharing the profits of their employer.
According to the act, any employee drawing a salary or wage not exceeding Rs. 10,000 per month is eligible to be paid a bonus.
A payment made in addition to regular wages to an employee to motivate the employee is known as a bonus. The Payment of Bonus Act of 1965 required businesses to provide their workers a sum each year based on the business’s success. The act allows employees to receive a share in their firm’s earnings.
Establishments covered under the act
- Every establishment set up in India
- Every establishment with 20 or more than 20 employees during the preceding year (Once the Act applies to the establishment, it will continue to govern it, even if the number of employees falls below 20)
- Establishments consisting of distinct departments/undertakings/branches across India serving as parts of the same establishment
- If a separate balance sheet and profit and loss account are prepared and maintained for branches/departments/undertakings, they will serve as distinct establishments for computing bonuses
What is the percentage of the statutory bonus?
- Every firm must offer qualified employees a bonus of 8.33% of their salary for the accounting year
- Every firm must offer qualified employees a maximum bonus of 20% of their salary for the accounting year
- Employers may pay 8.33% to 20% of workers’ annual salaries
Who is eligible for a statutory bonus?
- An employed person on a salary or wage not exceeding Rs. 21,000 per month
- As long as the employee’s earnings are at least 7000 per month or the minimum wage for such a job set by the government, the employee is eligible for a bonus (regardless of whether the government set the minimum wage)
- Every employee is entitled to a bonus if they have worked in the establishment for at least thirty working days during the fiscal year
- A probationer is eligible for a bonus
- Sweepers working on a part-time basis are eligible for a bonus (but not in a contractor’s role).
- Employees and daily wagers resigning from the organisation are also eligible for bonuses.
Who are not eligible employees for a statutory bonus?
The following groups are ineligible for a statutory bonus:
- Employees of general or life insurance companies, merchant vessels, shipping, dock workers, central and state government employees, employees of educational institutions, universities, hospitals, chambers of commerce, Indian Red Cross, and RBI
- Employees working for less than thirty days
- Employees hired through contractors
- Employees dismissed from service for riotous or violent behaviour while on the establishment premises
Employees’ and Employers’ rights
- A year from the date of due payment, employers have the right to pursue the government for any unpaid bonuses owed under the Bonus Claims Act
- Labour courts and tribunals have the power to hear any issue. However, employees who do not get bonuses cannot take their cases to these courts or tribunals.
- Each employee has the legal right to demand information about the company’s offerings to assess if they receive a fair wage
- Labour Courts and Tribunals have jurisdiction over any claim for interpretation of any clause of the Act
- A deductible bonus for misbehaviour or a previously paid festival bonus could be deducted reasonably from an employee’s pay, depending on the circumstances
- Employees fired for misconduct, offensive behaviour, or blocking the business’s land can withhold any bonus money
The timeframe for receiving statutory bonus payments
According to the act, employers should disburse bonuses to the workers within 8 months after the end of the accounting year. However, in the event of a disagreement (which falls within the jurisdiction of the Industrial Dispute Act), the bonus should be paid out within one month when the settlement becomes effective.
Statutory bonus repayment
- If an employee is due a bonus, he or someone authorised by him can apply to the authorities to reclaim the money
- If the government believes an employee is entitled to a bonus, it issues a certificate to the collector, who retrieves the money
- The employee must apply within a year of when the money becomes due. A late application may be levied if the applicant can prove reasonable cause.
Provisions related to a newly established organisation
When newly established companies, employees are eligible for statutory bonuses as follows:
- In the first five years, bonuses are disbursed to the employees only if the company is profitable
- Employees benefit from the allocable surplus in the sixth year, which can affect fifth- or sixth-year bonus.
- In the seventh year, the company must distribute the bonus from the allocable surplus and can set off the fifth-, sixth-, and seventh-year bonuses.
How is a statutory bonus calculated?
- If the Basic Salary + Dearness Allowance is less than Rs. 21,000, then the bonus is payable.
- If the Basic Salary + Dearness Allowance is more than Rs. 21,000, then the bonus is not payable.
Sharing the wealth from the profits generated by the company may benefit low-wage employees and help them close the gap between their current salary and need-based money they should be receiving.
Article 43 of the constitution aims to improve the standard of living for all industrial and agricultural workers. Improving the standard of living for workers whose efforts have contributed to the profitability of their organisation is highly appreciable
The Payment of Bonus Act of 1965 attempts to legitimise the practice of businesses awarding bonuses to their employees. Statutory bonuses may be calculated objectively using this technique, in which earnings and productivity are considered. This approach allows workers to earn extra money on top of their regular salary or minimum wage.
What Is the difference between Bonus and Ex-Gratia?
A bonus is an additional payment on top of one's income and other benefits and is typically related to one's level of productivity or performance.
Ex gratia payments may be made by an employer after a certain period of existence, the successful completion of a significant export order, or any other event that is an important milestone.
Can any establishment discontinue bonuses after a few years?
No. When employees become eligible, giving bonuses becomes mandatory
What goes into the bonus?
Only the base salary and discretionary allowance for bonus payment are included in salaries and wages.
Are contractual workers eligible for receiving a bonus?
No. The employer does not have the authority to award bonuses to independent contractors under him.
Who is eligible for a bonus?
Every employee is eligible for a bonus paid by his employer in an accounting year.