Unit 4 Part B: The Payment of Bonus Act, 1965

1.​​ What are the objectives of Payment of Bonus Act, 1965? Mention the classes of employees where the act does not apply.​​  2019

2.​​ Justify the payment of bonus to workers. Which employees are entitled to bonus? What is the minimum bonus an employer is required to pay even if there is no allocable surplus? ​​​​ 2023

3.​​ What are the conditions for eligibility of bonus? When is an employee disqualified from receiving bonus? ​​ 2016, 2017, 2018

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Introduction to Payment of Bonus Act, 1965

Bonus is really a reward for good work or share of profit of the unit where the employee is working. Often there were disputes between employer and employees about bonus to be paid. It was thought that a legislation will solve the problem and hence Bonus Act was passed. Unfortunately, in the process, bonus has become almost as deferred wages due to provision of payment of minimum 8.33% and maximum 20% bonus. Bonus Act has not in any way reduced the disputes. Now, Bonus is accepted by Trade Unions as per Bonus Act and disputes are raised about ‘ex gratia’ amount to be paid.

The present Payment of Bonus Act, 1965 is being replaced by Code on Wages, 2019. Once the Code on Wages, 2019 is notified and made effective, the present Payment of Bonus Act, 1965 will be repealed.

Objective and Scope of the Payment of Bonus Act

The primary purpose of the Payment of Bonus Act is to boost the workers' morale by allowing them to share the wealth of the establishment. This law guarantees their right to be eligible for a surplus from the profits earned by the business and applies to all of India.

The Payment of Bonus Act applies to:

1.​​ People who work in specified establishments and employ 20 or more people, based on profit earned in a given financial year

2.​​ Any employee with a salary of Rs. 21,000/- p.m. doing any work in any industry for a salary

The government can apply the Payment of Bonus Act to businesses that employ more than 10 but less than 20 people by issuing a notice in the Official Journal (JO); they also need to send a 2​​ months’ notice​​ to the employer along with a notification of the same

3.​​ In an establishment with several employees less than 20/10, the Payment of Bonus Act will still apply for the financial year if it was applied since the start of the financial year

Categories of Employees for the Payment of Bonus Act

Following employees have been held as eligible for under The Payment of Bonus Act, 1965:

(a) Temporary workmen

(b) Retrenched employee

(c) Part time employee

(d) Probationer

(e) Piece rated workman

(f) employee is seasonal factory is entitled, though on proportionate basis

(g) Retrenched employee

(h) Employee who has caused financial loss to employer is eligible, but the loss can be recovered from bonus only of the current year – section 13 (i) Employees of Public Sector Units which sell goods or renders services in competition with others.

Following categories of employees are not eligible for bonus​​ under The Payment of Bonus Act, 1965:

(a) Apprentice

(b) In case of employees employed through contractors, Principal Employer is not liable, as bonus is not ‘wages’, though contractor may be liable

(c) Employees dismissed from service on ground of fraud, riotous behaviour, theft, misappropriation or sabotage of property of establishment – section 9 – but he will be entitled if he is reinstated by Court with back wages

(d) Employees excluded u/s 32 e.g. employees of LIC, Docks, institutions not established for making profits, universities, Financial Institutions, RBI, NABARD, UTI, IDBI etc.

(e) Government employees

(f) Establishments employing less than 20 persons

(g) Employees of PSU where the PSU does not sell goods or renders services in competition with private sector

(h) Employee whose salary/wage exceeds Rs. 21,000 per month (the limit was Rs. 10,000 upto 1-4-2014).

Eligibility of Bonus under The Payment of Bonus Act, 1965

Under the Payment of Bonus Act, 1965, the conditions for eligibility of bonus are as follows:

1.​​ Employees Covered: The Act applies to every establishment in which twenty or more persons are employed on any day during an accounting year. It applies to employees drawing a salary or wage not exceeding a certain limit as specified by the government.

2.​​ Working Period: Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year.

3.​​ Minimum Bonus:​​ The Payment of Bonus Act, 1965 provides for a minimum bonus of 8.33 percent of wages. The salary limited fixed for eligibility purposes is Rs. 3,500 per month and the payment is subject to the stipulation that the bonus payable to employees drawing wages or salary not exceeded to Rs.10000 per month would be calculated as if their salary or wages is Rs. 3,500 per month.

4.​​ Calculation of Bonus: The bonus payable to an employee is calculated based on the salary or wage earned by him during the accounting year, subject to a maximum limit of 20% of such salary or wage.

5.​​ Profit Eligibility: An employee is entitled to receive bonus if he has worked for at least thirty days in the accounting year and the establishment has made a profit during the accounting year.

6.​​ Payment of Bonus: The bonus is payable within eight months from the close of the accounting year. If an employee is dismissed from service or leaves service before the expiry of the bonus payment period, the bonus due to him should be paid within the time limit specified under the Act.

7.​​ Computation of Salary: The salary or wage includes basic pay, dearness allowance, and other allowances.​​ It's important to note that these conditions may vary depending on any amendments made to the Payment of Bonus Act, 1965, and specific details should be referred to as per the latest regulations.

Disqualification​​ from receiving bonus under The Payment of Bonus Act, 1965

Any employee who has worked in the establishment for 30 working days in a given accounting year qualifies for receiving bonuses under this Act.​​ However,​​ there are exceptions where employees are disqualified from receiving bonuses;

(a)​​ If an employee has been dismissed from service for fraud, he may be disqualified from receiving bonus for the accounting year in question.

(b) riotous or violent behaviour while on the premises of the establishment; or

(c) theft, misappropriation or sabotage of any property of the establishment; or

(d) conviction for sexual harassment.

(e)​​ Employees who have been employed on a basis for a specified period and whose services have been terminated before the contract expires.

(f)​​ Trainees.

(g)​​ Employees who solely earn based on commissions.

Justification of Payment of Bonus to Workers

The payment of bonus to workers serves several important purposes, and there are several justifications for doing so:

1.​​ Recognition of Contribution: Bonus payments recognize and reward the contribution of workers to the success and profitability of the organization. Employees often work hard, contribute ideas, and put in extra effort to achieve organizational goals. Bonus payments serve as a tangible acknowledgment of their efforts.

2.​​ Motivation and Morale: Bonus payments can serve as powerful motivational tools. They provide employees with a clear incentive to perform at their best and to strive for excellence in their work. When employees see their efforts being rewarded with bonuses, it boosts their morale, increases job satisfaction, and fosters a positive work environment.

3.​​ Retention and Loyalty: Offering bonuses can help in retaining talented and skilled employees. When workers feel valued and appreciated through bonus payments, they are more likely to remain loyal to the organization. This can reduce turnover rates, save on recruitment and training costs, and maintain continuity in operations.

4.​​ Attracting Talent: Bonus schemes can also be used as a tool for attracting top talent to the organization. In a competitive job market, offering attractive bonus packages can make an employer more appealing to prospective employees, especially those with specialized skills or experience.

5.​​ Alignment with Organizational Goals: Bonus payments can be structured in a way that aligns employee performance with organizational objectives. By linking bonuses to specific performance targets, such as meeting sales targets, achieving production goals, or improving customer satisfaction, employees are motivated to work towards common organizational goals.

6.​​ Share in Success: Bonus payments allow employees to share in the success and prosperity of the organization. When a company performs well financially, it is only fair that employees who have contributed to that success receive a share of the profits through bonus payments.

7.​​ Legal Compliance and Social Responsibility: In many jurisdictions, payment of bonuses may be legally mandated under​​ labour​​ laws such as the Payment of Bonus Act, 1965 in India. Adhering to these legal requirements demonstrates a company's commitment to fair​​ labour​​ practices and social responsibility.

Meaning of "available surplus" and "allocable surplus"

Bonus payable under the Act is linked with profits. The employer has to calculate "gross profits" of his establishment in the manner specified in section 4. Then, from "gross profits" so calculated he has to deduct the sums referred to in section 6 as prior charges. The balance is called "available surplus". A percentage of the available surplus calculated in accordance with the provisions of sub-section (4) of section 2 is called "allocable surplus."

Where, in respect of any year the allocable surplus exceeds the amount of minimum bonus payable to the employees' the employer must pay to every employee in respect of that year bonus in proportion to the salary or wage earned by the employee during the year subject to a maximum of twenty per cent of such salary or wage.

Minimum and Maximum Bonus

Payment of Minimum Bonus

According to Section 10 of the Payment of Bonus Act 1965, regardless of whether the employer has an allocable surplus in the fiscal year, each employer shall give each employee a minimum bonus equal to 8.33 percent of the employee’s salary or wage received during the fiscal year, or one hundred rupees, whichever is larger. If at the commencement of the fiscal year, an employee is under the age of fifteen, the terms of this Section apply to such employees as if the words “one hundred rupees” were substituted with “sixty rupees.” Articles 19 and 301 of the​​ Constitution are not violated by Section 10 of the Payment of Bonus Act 1965. Even if the company loses money throughout the fiscal year, the minimum bonus must be paid.

Payment of Maximum Bonus

If the allocable surplus for any fiscal year referred to in Section 10 exceeds the amount of the minimum bonus available to employees under that Section, the employer may give a bonus equivalent to each employee’s salary or wage earned during that fiscal year. The amount placed on or set off under the requirements of Section 15 shall be taken into account when assessing the allocable surplus under this Section.

Time for Bonus Payment

The bonus must be paid within eight months after the end of the fiscal year or within one month of the act’s (Payment of Bonus Act 1965) implementation.

Calculation of Bonus

The legislation provides a minimum bonus of 8.33% of the employee’s salary/wages, which is the lowest percentage that must be paid by every institution or organization covered by the act (Section 10 of the Payment of Bonus Act 1965); nevertheless, the maximum bonus shall not exceed 20% of the Salaried worker’s salary/wages (Section 11 of the Payment of Bonus Act 1965).

The limit amount on which the bonus payment is computed is Rs. 7,000 per month (as of 2015), up from Rs 3,000 before. As a result, if the employee’s gross salary is up to Rs 21,000 per month, the employee is entitled to a bonus.

Only the employee’s salary/wages and Dearness allowance are used for bonus computation.​​ As a result, if the Basic Salary and Dearness Allowance are less than Rs. 7,000 (calculation ceiling), the Bonus will be calculated on the real amount; if the Basic Salary and Dearness Allowance are greater than Rs. 7,000, the Bonus will be calculated on Rs 7000 only.