Payment of Bonus Act PDF

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Labour Law-II

Payment of Bonus Act, 1965

Submitted by: Tom Wilfred 17BLB1017

Introduction

The Payment of Bonus Act, 1965 is an act that focuses on the payment of bonus for the people employed in various establishments on the basis of profits or production or productivity or on the basis of related things. The scope of the act extends to the whole of India and is applicable to all the factories, the persons employed in railways or is in contract with railways and also to the establishments that has 20 or more workmen employed for work during any of the days during an accounting year. It also includes skilled or unskilled workers, whether under the express or implied terms of the contract. It is the statutory liability of the employer to provide bonus to the employees with the necessary capital available at the establishment. The purpose of the Act is to enable the employees to have a say in the profits of the company and to earn a little more than the minimum wage according to their performance in the organisation. Here, the employee means any person employed on a salary or wage not exceeding ten thousand rupees per month in any industry to do any

skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied.1

Section 12 of The Payment of Bonus Act, 1965 states about the calculation of bonus for the employees. It states that where the salary or wage of an employee exceeds three thousand and five hundred rupees per month, the bonus payable to such employee under section 10 or, as the case may be, under section 11, shall be calculated as if his salary or wage were three thousand and five hundred rupees per month. According to The Payment of Bonus Act, 1965 it is calculated that an employee can receive a maximum bonus of Rs. 3500 in case if he gets Rs. 10,000 as wage per month. The term ‘establishment’ in this Act is of great importance. It could be divided into Public and Private establishments. However, if these establishments function as different departments or branches then those departments and branches would be treated as a single establishment, but in case, different accounts are prepared for these branches and departments, then they would be treated as different departments or branches for the sake of computation of profit for that particular accounting year.

Objective of the Act

The Payment of Bonus Act, 1965 was introduced so that the employees receive the bonus amount for the good work they have done. One of the objectives of the Act is to impose a legal responsibility upon the employer of every establishment covered by the Act to pay the bonus to employees so that no one would be exempted from paying. Another objective is to designate the minimum and maximum percentage of bonus so that no employee would be paid with very low bonus and also no employer would be forced to pay a huge bonus. The Act also has an objective to give the formula for calculating the bonus that ought to be given to the employees. The final objective of the Act is to provide redressal mechanism.

1 Section 2 (13) of The Payment of Bonus Act, 1965

Eligibility and Disqualification

The Act says that every employee working in an establishment shall be entitled to bonus and shall be paid by the employer but the main requirement is that the employee should have worked in the establishment for at least thirty days in the accounting year. 2 In case of disqualification for receiving bonus, the Act states that the employee would be disqualified for a bonus if he has been terminated from employment on account of fraud or theft, misappropriation or sabotage of the establishment’s property or has displayed violent or unruly behaviour in the premises of the establishment.3

Payment of Bonus

The act states about the maximum and minimum bonus that could be attained by an employee working in an establishment. The minimum bonus which the employee would get in an accounting year would be 8.33% of the salary or wages of the employee or ₹ 100 whichever is more. In cases where the age of the employee is less than 15 years at the beginning of the accounting year, this provision would have the same effect except in the place of ₹ 100 it would be ₹ 60. The maximum bonus which an employee could get in an accounting year is equal to 20% of the salary or wages of the employee in the given accounting year. The employer is bound to pay the maximum bonus when the allocable bonus has exceeded the minimum bonus of that accounting year. In case of payment of bonus there is also a certain time limit set where the employer should pay the bonus before the prescribed limit ends. According to the Act, the bonus should be paid in cash within 8 months from the close of the accounting year or within one month from the date of enforcement of the award or coming into operation of a settlement following an industrial dispute regarding payment of bonus.

Calculation of Bonus 2 Section 8 of Payment of Bonus Act, 1965 3 Section 9 of The Payment of Wages Act, 1965

In case of Calculation of Bonus, at first the gross profit is calculated which is of two way: First one is for banking companies which is calculated according to first schedule of the act while the second one is for other cases which is mentioned in the second schedule of the act. Then the available surplus is calculated which is done by taking into account the gross profit after making adjustments of depreciation, development allowance, direct taxes of the current accounting year and all the sums specified under Schedule 3 of the Act. This gross profit has to be added to the direct taxes in respect of the gross profit for the preceding year, deducting from it the direct taxes which has been adjusted to the gross profits that are reduced to the amount of bonus, for the immediately preceding year. After this, certain sums need to be deducted from the calculated gross profit. The sums are: 

Any amount by way of development rebate, investment allowance or the development allowance, which is deductible from the income according to the income tax.

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Any direct tax which the employer has to pay with respect to his income, profits, and gains during that year.

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Any other sums which are specified by the employer.

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Any amount of depreciation according to the Income Tax Act, 1961 or Agricultural Income Tax law.

Next is the calculation of the direct tax payable by the employer. The direct taxes are calculated as per the present year’s income of the employer. In case the employer is an individual or part of the Hindu Undivided Family, then the income which will be considered for the taxes will be treated as the only income of the employer. Moreover, if the employer is a religious institute or charitable trust, not barred by section 32 of the Act and if its income is partially or fully non-taxable then the income which is non-taxable would be treated as the income from an institution in which the public is substantially interested. However, the income would not include any loss of the previous year which is carried forward to this year under any existing law or the depreciation that need to be accounted to the depreciation

allowance or any exemption under section 84 of the Income Tax Act or any deduction under section 101(1) of the Income Tax Act, 1961.

Computation of working days is important in determining the bonus that is payable by the employer. The employee would be considered working even on the days when he is on leave but is paid salary or wages or he is on a maternity leave with salary or wages, or he met with an accident while in undertaking the employment or he has been laid off under an agreement or as permitted under the Industrial Employment Act, 1946 or Industrial Disputes Act, 1947 or any legal provision which is applicable on the establishment at the given time.

Another important topic is the set on and set off of the surplus, The allocable income which is left even after paying the maximum bonus at the rate of 20% on the salary or wages, would be carried forward to the next year to compensate in case there is any shortage in that year. This is called set on. However, the set off is the complete opposite of set on in which the profit falls short to pay even the minimum bonus at the rate of 8.33%. Then, in this case, the set on of the previous year would be used to pay the bonuses of the given accounting year. In calculating the bonus, the amount of set on and set off from the previous accounting year shall be first taken into consideration. This allocable income would be distributed to the employees in proportion to their salary or wages in a given accounting year.

There are also certain provisions specially for the establishments. The Act states that in the first five accounting years, after the establishment has started selling and manufacturing goods or rendering services, it has to pay bonuses only in case of profits. However, in the sixth, seventh and eighth accounting year, after the establishment has started selling and manufacturing goods or rendering services, the bonus shall be paid, taking into account the set on or set off. In the case of the sixth year, the allocable surplus of the fifth and the sixth year would be taking into account and in the case of the seventh year, the allocable surplus of the sixth and the seventh year is taken into consideration.

Amendment to the Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 received Presidential consent for the amendment of the act on December 31, 2015. The three main features of the amendment were: 1. The main change was the revision of wage threshold for eligibility. The wage threshold was previously Rs. 10,000 and it was changed to Rs. 21,000 by the new amendment. This ensures that more employees would be covered under the Act. 2. The next one is the change in the wage ceiling used for calculation of bonus. Before the amendment, the maximum bonus payable was 20% of Rs. 3500 per month. The minimum bonus payment was also capped at 8.33% of Rs. 3500 per month or Rs. 100, whichever is higher. But after the amendment, the calculation ceiling of INR 3500 has now been doubled to Rs. 7000 per month or the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher. Therefore, the cost associated with bonus payments could double or be greater depending on applicable minimum wages which is based on the organization's performance. 3. The last feature is the retrospective effect of the amendment from April 1, 2014.

Under the Payment of Bonus Act, 1965 if an eligible employee's wage exceeded Rs. 3,500 per month, then minimum or maximum statutory bonus payable was calculated as if the wages were Rs. 3,500 per month. The 2015 amendment has now increased this ceiling from Rs. 3,500 per month to Rs. 7,000 per month or the minimum wage notified for the concerned employment as fixed by the Government as per the Minimum Wages Act, 1948, whichever is higher. As with many other labour statutes, the Act also contains a separate definition of wages. Broadly, salary or wage under the Act includes all guaranteed components of an employee's salary and specifically excludes certain allowances and concessions. Salary structures adopted by organizations these days can be fairly complex, with multiple allowances and incentives built into the compensation structure. With the increase in the wage threshold, employers would have to undertake a more detailed assessment to determine

which components of their existing salary structure would fall with the definition of wages under the Payment of Bonus Act, 1965 and accordingly determine which employees are eligible to receive the statutory bonus. The insertion of a reference to the minimum wage under the Minimum Wages Act to calculate bonus payments has created an additional challenge for companies. The appropriate Governments fix different minimum wages for various scheduled employments. Further, even within a particular scheduled employment, different minimum wages are notified for different categories of employees. Thus, employers would have to carry out an assessment of the applicable wage rates for different categories of employees in order to calculate the statutory bonus payable. This issue would be even more significant for employers having offices in multiple States since the minimum wages for the same scheduled employment also vary from one State to another, and the variation can sometimes be quite significant. Under the Payment of Bonus Act, an employer is required to pay bonus within 8 months from the close of the accounting year. Employers in India usually follow a financial year from 1 April to 31 March and close their books of accounts accordingly. Therefore, most companies would have already determined the allocable surplus for the financial year 201415 and distributed bonus to eligible employees. Since the Amendments are retrospective, it would impact the distribution of bonus in relation to the financial year 2014-15 as well which was a huge challenge to be faced by the various companies. The allocable surplus would need to be re-assessed to account for the increased pool of covered employees and the bonus eligibility re-determined based on the revised calculation ceilings and available surplus. This would then have to be redistributed among this larger pool of employees, which may result in various outcomes such as: 

Companies could now be required to pay an additional bonus to employees who have already been paid, if the bonus amount that was paid earlier is lower than the bonus payable after the Amendments.

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If the bonus already paid was higher than the bonus payable after the Amendments, there may even be a reduction of bonus entitlement for some individuals either in terms of the amount payable or in the context of percentage of bonus received, to accommodate bonus payments to the newly covered staff using the allocable surplus.

Conclusion

The Payment of Bonus Act, 1965 seeks to legally regularise the practice of paying bonus by different establishment. It offers an objective way to calculate the bonus based on profit and productivity. It enables the employees to earn over and above their minimum wages or salary. This Act provides different procedures for different establishments like banking companies, public organisations and also for the establishments which are not a company or a corporation. Apart from the procedure, this Act also defines a robust redressal mechanism. The amendments made has helped in providing bonus to a larger number of employees. Also, the change in wage ceiling for the maximum and minimum bonus payable has helped the employees in receiving more bonus from the employers.

References

1. Rebecca Furtado, A Critical Analysis of The Payment of Bonus Act, 1965, November

30, 2016, https://blog.ipleaders.in/critical-analysis-payment-bonus-act-1965/ 2. Payment of Bonus Act- Payment of Bonus under The Payment of Bonus Act, 1965,

http://www.helplinelaw.com/employment-criminal-and-labour/PBNS/payment-ofbonus-under-the-payment-of-bonus-act-1965.html 3. Stephen Mathias, Suhas, Srinivasiah and Debjani Aich, Amendment to The Payment

of Bonus Act, 1965, 07 April, 2017, https://www.mondaq.com/india/employeebenefits-compensation/583902/amendment-to-the-payment-of-bonus-act-1965 4. Trilegal, The Payment of Bonus (Amendment) Act, 2015, 19 February, 2016,

https://www.mondaq.com/india/employee-rights-labour-relations/467968/thepayment-of-bonus-amendment-act-2015

5. Subodh Asthana, Computation of Profits & Bonus Under Payment of Bonus Act,

1965, December 6, 2019, https://blog.ipleaders.in/payment-bonus-act/...