The Payment of Bonus Act

Picture Courtesy : http://www.medimanage.com/Images/Bonus.jpg

This article was written by Rachit Sharma, a student of Delhi Metropolitan Education, Greater Noida.

THE PAYMENT OF BONUS ACT, 1965:

The Act provides a statutory right to employees working in a factory or every other establishment where more than 20 or more persons employed on any day during an accounting year, such as to share the profits of his/her employer. As per the Act, any employee who was drawing a salary or wage not exceeding ten thousand rupees per month was eligible to be paid a bonus.

As per section 2(13) of the Act, an “employee” means any person (other than an apprentice) employed on a salary or wage not exceeding [three thousand and five hundred rupees] per mensem 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;

Section 12 of the Principal Act which provides for Calculation of bonus with respect to certain employees- Where the salary or wage of an employee exceeds two thousand and five hundred rupees per mensem, the bonus payable to such employee under section 10 or under section 11, shall be calculated as if his salary or wage were two thousand and five hundred rupees per month.

Thereafter, the Act was amended several times and was last amended in the year 2007

In the year 2007, Section 12 was further amended and as per Section 2(13) of the Act, employee means any person (other than an apprentice) employed on a salary or wage not exceeding ten thousand rupees per mensem 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. However, as per Section 12 of the Act, the bonus payable to an employee whose salary or wage exceeds three thousand and five hundred rupees per mensem shall be calculated as if his salary or wage were three thousand and five hundred rupees per mensem.

THE PAYMENT OF BONUS (AMENDMENT) ACT, 2015

The Payment of Bonus (Amendment) Bill, 2015 was introduced in Lok Sabha on December 7, 2015.The Bill seeks to amend the Payment of Bonus Act, 1965 and thus the Act was further amended.

By amending Section 2(13), the Amendment Act has now widened the scope of employees eligible for payment of bonus from those drawing salary of INR 10,000 per month, to INR 21,000 per month

CALCULATION OF BONUS:

Taking the demands of the trade unions ahead, Section 12 of the Principal Act has also been amended. Previously the maximum bonus payable was 20% of INR 3,500 per month. The minimum bonus payment was also capped at 8.33% of INR 3,500 per month or INR 100, whichever is higher. The calculation ceiling of INR 3,500 has now been doubled to INR 7,000 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 still, depending on applicable minimum wages), based on the organization`s performance.[1]

The method for calculation of annual bonus is as follows:

·         Calculate the gross profit in the manner specified in First Schedule, in case of a banking company, or Second Schedule, in any other case.

·         Calculate the Available Surplus.

1.      Available Surplus = A+B, where A = Gross Profit –Depreciation admissible u/s 32 of the Income tax Act – Development allowance – Direct taxes payable for the accounting year (calculated as per Sec.7) – Sums specified in the Third Schedule.

2.      B = Direct Taxes (calculated as per Sec. 7) in respect of gross profits for the immediately preceding accounting year – (minus)Direct Taxes in respect of such gross profits as reduced by the amount of bonus, for the immediately preceding accounting year.

·         Calculate Allocable Surplus

1.      Allocable Surplus = 60% of Available Surplus, 67% in case of foreign companies.

·         Make adjustment for ‘Set-on’ and ‘Set-off’. For calculating the amount of bonus in respect of an accounting year, allocable surplus is computed after considering the amount of set on and set off from the previous years, as illustrated in Fourth Schedule. (As per Sec. 15)

Thus, the allocable surplus so computed is distributed amongst the employees in proportion to salary or wages received by them during the relevant accounting year.[2]

ELIGIBILITY AND DISQUALIFICATION FOR BONUS

As per Section 8, an employee will be entitled to bonus only if he worked in that establishment for thirty working days in that accounting year.

As per Section 9 and 18 of the 1965 Act, an employee shall be disqualified from receiving bonus:

1.      If he is dismissed from service for fraud

2.      Riotous or violent behavior while in the premises of the establishment

3.      Theft, misappropriation or sabotage of any property of the establishment.

4.      Misconduct of causing financial loss to the Employer to the extent that bonus can be deducted for that year

TIME LIMIT FOR PAYMENT

As per Section 19, 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. However if there is sufficient cause extension may be applied for.

RETROSPECTIVE AMENDMENT

The amendment has been given effect from April 1, 2014. Many were of the view that the retrospective nature of the amendments should have been avoided and employers should have been given adequate time to plan for such increase in their salary costs..

STAY ON RETROSPECTIVE EFFECT FROM APRIL 1, 2014

Upon representations from various industry bodies by way of writ petitions in various State High Courts challenging the retrospective effect from FY 2014-15, several high courts have stayed the retrospective operation temporarily. The following State High Courts have put a stay on the same:

1.
Kerala High Court
The United Planters’ Association of Southern India & Anr. V. Union of India
W.P. (C) No. 3025/ 2016 (C)
January 27, 2016
2.
Karnataka High Court
Karnataka Employees Association V. Union of India
W.P. 5272/ 2016
February 2, 2016
3.
Madhya Pradesh Labour Office
Following the orders given by the Kerala and Karnataka High Courts
February 4, 2016
4.
Allahabad High Court

(Uttar Pradesh)
Benara Udyog Ltd. V. Union of India & 3 Ors.
WRIT (C) No. 6098/ 2016
February 12, 2016
5.
Gujarat High Court
Federation of Gujarat Industries V. Union of India & Anr.
Special Civil Application No. 5207/ 2016
April 5, 2016
6.
Punjab & Haryana High Court
Faridabad Industries Association & Anr. V. Union of India C.W.P. No. 2859/ 2016 AND Gurgaon Industries Association & Anr. V. Union of India C.W.P. No. 2999/ 2016.
April 8, 2016

Thus, for all of the above stay orders, it is clarified that the amendment would take effect from the financial year 2015-16 onwards, and not 2014-15 as earlier stipulated. The Amendment Act is certainly a significant step in the interest of the workforce. However, employers should have been provided with a specified timeframe to factor in the increased costs in their accounts in order to comply with the retrospective bonus payment obligations.

The main concern was that employers would not have budgeted for this expense in the previous financial year (2014-2015) for which the books of accounts were already closed and taxes also paid. Such retrospective application from April 2014 would lead to financial stress, especially on the manufacturing sector where the number of workers is high. The prescribed minimum wages differ from one State to another State. Therefore, the calculation of the bonus will also differ from one State to another State. Thus, various State High Courts’ have put a temporary stay on the enforcement of the retrospective application of The Payment of Bonus Act to avoid complexities.

[1] http://www.trilegal.com/index.php/publications/analysis/the-payment-of-bonus-amendment-act-2015
[2] http://www.helplinelaw.com/employment-criminal-and-labour/PBNS/payment-of-bonus-under-the-payment-of bonus-act-1965.html