corporate law

Understanding the Payment of Bonus Act, 1965: Guidelines and Compliance

Guidance on Payment of Bonus Act, 1965 R/w Payment of Bonus Rules, 1975

The Payment of Bonus Act, 1965 establishes regulations for providing bonuses to employees in certain establishments based on either profits or productivity.

1. Application of the Act

The Act applies to:

  • a) Every factory.
  • b) Any other establishment with twenty or more employees on any day during the accounting year.

2. Key Definitions

  • Accounting Year:

    • i. For a company, this is the period for which the profit and loss account is finalized for the annual general meeting, regardless of whether it spans a year.
    • ii. For other cases, the accounting year commences on the 1st of April.

  • Employee:

    • Defined as any person (excluding apprentices) working under a salary or wage cap of twenty-one thousand rupees per month across any industry, performing skilled or unskilled manual, supervisory, managerial, administrative, technical, or clerical work for compensation, regardless of explicit or implied employment terms.

  • Employer:

    • For any establishment, includes the person or authority with ultimate control over operations. If management is delegated to a manager, managing director, or managing agent, those individuals are also considered employers.

Note: Employees earning above Rs. 21,000/month who have worked for at least 30 days in a year are also eligible for a minimum bonus of 8.33%. This is applicable even if the establishment incurs losses, while a maximum of 20% is payable to supervisory, managerial, and administrative employees.

  • Salary or Wage:
    • Represents all monetary remuneration, excluding overtime work payment, due to employees as part of their employment, including dearness allowance. Certain allowances and benefits, like house accommodations, bonuses, and pensions, are not included in this definition.

3. Departments and Branches

  • Separate branches or departments with distinct balance sheets and profit and loss accounts are treated as separate establishments for bonus computations, unless previously classified as part of the establishment.

4. Eligibility and Disqualification

Eligibility

All employees who have worked a minimum of 30 days in the accounting year are entitled to receive bonuses.

Disqualification

Employees may be disqualified from receiving bonuses if dismissed for:

  • a. Fraud
  • b. Violent behavior
  • c. Theft, misappropriation, or sabotage

5. Payment of Bonus

  • Minimum:
    • 8.33% of earned wages or a minimum of one hundred rupees, whichever is higher.
  • Maximum:
    • If allocable surplus exceeds the minimum bonus, the employer must pay a bonus proportionate to the earned salary, capped at 20% of wages.

Reminder: The High Court has mandated minimum payments regardless of profitability (J & K State Road Transport Corporation v. Tarlochan Singh, 2019).

6. Bonus Calculation

  • Scheduled employment: Rs. 7,000 or minimum wage (whichever is higher).
  • Non-scheduled employment: Considered Rs. 7,000 for the purpose of calculation.

7. Working Days Computation

Employees are considered to have worked during the accounting year for days where:

  • a. They are laid off under agreement.
  • b. They are on paid leave.
  • c. They are absent due to temporary disablement.
  • d. They are on maternity leave.

8. Interim Bonus

Employers who pay customary or part bonuses in an accounting year may deduct these amounts from the total owed under the Act.

9. Time Limit for Bonus Payment

  • For disputes: Within one month after the award or settlement becomes enforceable.
  • For others: Within eight months from the end of the accounting year.

10. Compliance Requirements

Employers must maintain several registers:

  • Form A: Allocable surplus computation.
  • Form B: Set-on and off of allocable surplus.
  • Form C: Bonus due to employees and disbursement records.

11. Annual Return

  • Form D: To be submitted annually within 30 days after the timeline specified in section 19 (within eight months from accounting year end).

Frequently Asked Questions (FAQs)

  1. Bonus from Principal Employer for Contract Workers: Employees employed through contractors under the Contract Labour (Regulation & Abolition) Act are not entitled to bonuses from the principal employer.

  2. Uniformity in Bonus Payments: Employees at different offices may claim equal bonuses. Extension of benefits based on uniformity is upheld (Hindustan Construction Co. Ltd. v. G.K. Patankar).

  3. Ex-gratia Adjustments: Courts have ruled that ex-gratia payments cannot be offset against statutory bonuses mandated by the Act.

  4. Monthly Bonus and CTC: While included in CTC, it must be clearly labeled as a statutory bonus; otherwise, it may lead to ESI contribution obligations.

  5. Maternity Leaves and Bonus: Employees on maternity leave with salary are deemed to be eligible for bonus calculations as per the Act.