Payment of Bonus Act: The share of an organisation’s profit

The tradition of providing bonuses in India gets believed to have begun during the First World War when several textile factories gave their employees a ten per cent wage increase as a war bonus in 1917. The demand for bonus payment also got included in several cases of labour disputes.

It was decided during the second and third sessions of the Eighteenth Session of the Standing Labour Committee in New Delhi in March/April 1960 to create a Commission to look into the bonus issue and develop appropriate regulations.

The Payment of Bonus Act, 1965, was enacted on May 29, 1965, to carry out these proposals. The Payment of Bonus Bill got proposed in Parliament to replace the aforementioned Ordinance.

The government carefully wrote the Payment of Bonus Act 1965 to guarantee that employees get a fair part of the company’s profits. The government has made it mandatory for firms to offer an excellent bonus to their employees annually. It allows employees to earn more than the organisation’s minimum salary. Employers can choose the bonus rate based on the performance of their staff.

Objectives of the Payment of Bonus Act

  • The Payment of Bonus Act of 1965’s ultimate goal is to enable employees to receive a percentage of the company’s profits in exchange for their hard work.
  • It aids in the formulation of the bonus calculation formula.
  • It also explains how to calculate the maximum and lowest bonus percentages.
  • It even includes a set of mechanisms for the company to pay a bonus.

Applicability of the Payment of Bonus Act

  • The Payment of Nous Act governs every factory in India.
  • The Act also applies to any business with 20 or more workers.
  • If your company has less than 20 workers, you can still use the Act if you follow the government’s recommendation published in the official gazette.
  • It does not apply to establishments like LIC and hospitals, exempt under Section 32.
  • It does not apply to businesses where employees have signed an agreement with the employer.
  • It does not apply to establishments exempted by the competent authority, such as sick units.

Bonus payment calculation

As changed in the Payment of Bonus Bill approved in 2015, if the salary exceeds Rs.7000/- or the government’s minimum pay, the bonus will get computed on Rs.7000/- or the government’s minimum wage. The bonus must get paid at a rate of at least 8.33 per cent.

Scheduled employmentNon-Scheduled employment
7000 rupees (minimum salary)
(whatever figure per mensem is greater)
Wages must be assumed to be Rs. 7,000 per month to compute bonus.
(if his monthly pay is greater than or less than 7,000 rupees)
  • Under the Payment of Bonus Act, an ’employee’ is defined as any person, other than an apprentice, who is engaged for hire/reward, whether the conditions of employment are direct or implicit, and includes supervisors/managerial and administrative workers earning salaries/wages not exceeding Rs. 21,000 per month.
  • Every employee earning less than Rs 21,000 per month who worked for at least 30 days in an accounting year is entitled to a bonus of at least 8.33 per cent of his or her salary/wages, even if the establishment is losing money, with a maximum bonus of 20% of the employee’s salary/wages payable in an accounting year.
  • Employees whose salaries/wages vary from Rs. 7,000 to Rs. 21,000 per month for bonus payment will have their salaries/wages assumed to be Rs. 7,000 per month.

Establishments to include departments, undertakings and branches

According to the Payment of Bonus Act, any distinct departments, undertakings, or branches of an establishment, whether located in the same location or different locations, should be treated as sections of the same establishment for bonus purposes.

If a separate balance sheet and profit and loss account are prepared and maintained in respect of any department, branch, or undertaking, that department, undertaking, or branch shall be treated as a separate establishment for bonus computation. It will continue unless that department, undertaking, or branch was treated as part of the establishment for bonus computation immediately before the start of that accounting year.

When no record gets produced under the Payment of Bonus Act, all departments/branches must get considered part of the same establishment; Workmen of Punjab State Cooperative Milk Producers Federation Ltd through Union v. Managing Director, Punjab State Cooperative Milk Producers Federation Ltd., Chandigarh, 2016 LLR 1171 (P&H HC).

Departments and branches with distinct balance statements must get evaluated separately for bonus calculation; India Tourism Development Corporation, Madras v. General Secretary, All India ITDC Employees’ Union, 2011 LLR 272. (Mad. HC).

Eligibility and disqualification of bonus

Eligibility

If the following requirements are met, any employee is entitled to a bonus:

  • The employee gets paid up to Rs 21,000 per month in pay or compensation.
  • Employees who labour in any capacity, whether skilled, unskilled, managerial, supervisory, etc.
  • Employees who worked at least 30 days in the same year are eligible.

Disqualification

  • Employees will not be entitled to a bonus if the management takes action against them for dishonesty, theft, sabotage of establishment property, or aggressive behaviour while on duty within the business’s grounds.

Powers of inspectors underpayment of Bonus Act

Powers of inspectors:

  • Making an employer provide information.
  • Capable of visiting any business at any acceptable moment.
  • Capable of ordering and inspecting specific production papers.
  • Capable of extracting information from records
  • To investigate the employers, his agent or servant, or any other individual discovered in command of the establishment.
  • To carry out any additional powers that the rules may require.

Duties of the Employer

The following are the responsibilities of the employer:

As required by the Act, estimate and pay the yearly bonus

To keep the following registrations up to date:

  • The excess allocation calculations should be shown in the register in the appropriate Form.
  • The register should be kept up to date with the bonus payments to the employees.
  • Before the inspection, the records and other relevant information should be kept.

Right of Employers

Employers are entitled to the following benefits:

  • Any issues about the application or interpretation of any Payment of Bonus Act provision may be brought before the Labour Court or Tribunal.
  • Right to deduct a lawful deduction from an employee’s bonus, such as a festival bonus paid or a financial loss caused by a worker’s misbehaviour.
  • The right to remove an employee’s bonus if he or she gets fired for misbehaviour, violence, fraud, misappropriation, or sabotage of the establishment’s property

Right of the Employees

Under the Payment of Bonus Act, employees get entitled to the following benefits:

  • Right to collect any bonus due under the Act and apply to the government to redeem any unpaid bonus within one year of the due date.
  • The right to file a complaint with the Labour Court/Tribunal.
  • Employees who are not entitled to a bonus under the Payment of Bonus Act cannot file a case under the Industrial Disputes Act.
  • The right to demand clarification and get information on any item in the establishment’s finances

Offences and penalties Under Payment of Bonus Act

In the event of a breach of the provisions of the Act or rules, the punishment is six months imprisonment or Rs.1000 fine, or both.

If failure to comply with the directives or requisitions issued, the punishment is imprisonment for six months or a fine of Rs.1000, or both.

Let’s say a company, firm, corporation, or group of individuals commits a crime.

In that instance, the company’s director, partner, principal, or officer in charge of the company’s operations should get presumed guilty unless the individual can show that the crime was committed without his knowledge or that he exercised all due diligence.

Classes of employees not entitled under the Act

The payment of Bonus Act does not apply to certain classes of employees, which include:

  • Life Insurance Corporation,
  • Universities and other educational institutions,
  • The Unit Trust of India,
  • Employees employed through contractors on building operations, to months employed by the Reserve Bank of India,
  • The Indian Red Cross Society institution of a like nature,
  • The Industrial Finance Corporation of India,
  • the National Bank for Agriculture and Rural Development,
  • Institutions (including hospitals, commerce and social welfare institutions’ chambers) were established not for purposes of profit,
  • Financial Corporations,
  • the Industrial Development Bank of India,
  • Employees of inland water transport establishments passing through another country

Amendment to the Payment of Bonus Act, 1965

S.NoYear Of AmendmentEligibility Limit (Rs. Per Month)Calculation Ceiling (Rs. Per month)
1.1965Rs. 1600Rs.750
2.1985Rs.2500Rs. 1600
3.1995Rs. 3500Rs. 2500
4.2007Rs. 10000Rs. 3500
5.2015Rs. 210007000 rupees Or, whichever is higher, the minimum salary for scheduled work as set by the competent government.

The most recent change from 2015 was announced on January 1, 2016, and it went into effect on April 1, 2014.

Case Study Involving Payment of Bonus Act

Jalan Trading Co. (Private Ltd.) vs Mill Mazdoor Union, 5 August 1966

The President promulgated the Payment of Bonus Ordinance 3 of 1965 on May 29, 1965, with immediate effect. It was done while a reference before the Bombay Industrial Tribunal was pending under Section 73-A of the Bombay Industrial Relations Act, 1946, arising from a demand for bonus payment for 1961 and 1962.

The employers’ claim that the firm’s profit and loss account for the years in question showed a loss was true. Then the workers’ representatives argued that the issue was governed by the ordinance and that the employees were entitled to bonuses of at least 4% of their wages or Rs. 40, whichever was more significant.

The Industrial Court sustained the workers’ claim and ordered employers, subject to the conditions of the Bonus Ordinance, 1965, to pay each employee a bonus for the year 1962 equal to 15 days’ salary or earnings or Rs. 40, whichever was more significant. Employers appealed to this Court with special permission, challenging the constitutionality of the Payment of Bonus Act, 1965, which abolished Ordinance 3 of 1965 and, in particular, the provisions under which a bonus at a minimum rate was made payable under the Act.

Conclusion

The Payment of Bonus Act of 1965 got enacted to make it lawful for businesses to pay bonuses. It has a system for determining bonuses based on earnings and performance. It allows worker underpayment to earn more money than the minimum wage or compensation. This Act specifies rules for various enterprises, including banks and government entities and businesses that are not corporations or firms. In addition to the method, this Act includes a strict redress mechanism.

FAQs Regarding Payment of Bonus Act

Are there deductions from bonus payments?

Suppose an employee engages in any misbehaviour during a fiscal year that results in a financial loss to the employer. In that case, the amount of the loss can get removed from the amount of bonus received by the employer or the firm, with the balance getting paid to the employee after such deductions.

Are there exemptions in bonus payments?

Companies that suffer losses may get excluded from paying a minimum bonus to their employees for a limited time. However, the causes of the company's losses must be reasonable, and the employer must not be attempting to evade incentive payment by fabricating losses.

How is disqualification of bonus payments applicable?

Employers have the right to refuse incentive payments to employees who have engaged in misbehaviour, absenteeism, or fraud. Employers must also confirm that the domestic investigation process, suitable paperwork, and employee acknowledgement of wrongdoing follow the standing instructions before disqualifying the bonus payout.

What are the provisions related to start-ups or new establishments?

The statute exempts new businesses and institutions from bonus payments for the first five years. Employers are only allowed to give statutory bonuses in the year they profit following the start of operations.

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