Employers pay bonus as an instrument to motivate their employees to work to the best of their capabilities. The Payment of Bonus Act, 1965 provides for the payment of a Statutory Bonus, which is often confused with the incentive bonus paid by employers. Unlike incentive bonus, which is an ex gratia payment, Statutory bonus is a compulsory payment by law. Payment of statutory bonus under the Payment of Bonus Act is not a matter of choice of the employer but rather a matter of right of the employee.
The minimum quantum of Statutory Bonus payable to an employee should be in conformity with the rates and calculations specified under the Payment of Bonus Act. The Act in no manner expects an employer from payment of a higher amount of bonus voluntarily to his/her employee.
This blog discusses the applicability and calculations of Statutory Bonus.
Applicability of the Act
The provisions under the Payment of Bonus Act, 1965 are applicable to every factory and establishment which employs 20 or more persons. ‘Establishments’ has the same meaning as under the Shops and Establishments Act of various states and includes departments, undertakings, branches etc.
Once the establishments begin fall under the Act they should continue to pay the bonus even if the number of employees falls below 20 subsequently.
Employee’s eligibility to receive bonus
Only employees who have worked in an establishment for a period of not less than thirty (30) days in that year shall be eligible to receive bonus. An employee is deemed to have worked in an establishment in any accounting year also on the days on which he/she has been laid off or on leave (with salary) or he/she has been absent due to temporary disablement caused by accident arising out of and in the course of his employment or availing maternity leave.
If the services of an employee are dismissed on account of fraud, riotous or violent behaviour in the premises of the establishment or due to an act of theft, misappropriation or sabotage of the property of the establishment then, under such circumstances such an employee may be disqualified from receiving bonus from his employer.
Any agreements between the employee and employee regarding the nonpayment of bonus are not valid.
Deductions from the amount of bonus payable
If during an accounting year an employee is found guilty of misconduct which has resulted in a financial loss to the employer then in such case the employer may deduct the amount of loss suffered from the amount of bonus payable to the employee in respect of that accounting year only and balance if any after such deductions shall be remitted to the employee.
Special Provisions pertaining to startups/ new establishments
Startups and New establishments have been given a respite from payment of bonus for the first five years. In the first five (05) years following the accounting year in which the operations of the new establishment/ startup commence, employer can pay Statutory Bonus only in the years in which the employer derives profits.
Minimum and Maximum Bonus
The Act contemplates that a minimum bonus of 8.33% of the salary or the wage earned by the employee during the accounting year or Rs. 100 whichever is higher should be paid to an employee.
Since bonus is paid out of the allocable profits of the establishment, if in a year the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer should pay a higher bonus. It is pertinent to note that the Act stipulates an upper limit of 20% of the salary or wage earned by the employee during an accounting year for the payment of maximum bonus.
Calculation for Bonus Payable
If the gross earning of your employees is below Rs. 21,000 employers are liable to pay bonus. Calculation of bonus will be as follows:
If Salary is equal to or less than Rs. 7000/- then the bonus is calculated on the actual amount by using the formula: Bonus = Salary x 8.33/100
If Salary is more than Rs. 7,000/- then the bonus is calculated on Rs. 7,000/- by using the formula: Bonus = 7,000 x 8.33/100
Note: Salary means Basic Salary + Dearness Allowance
Example 1: If Bella’s Salary is Rs. 6000/- than bonus payable to Bella shall be = 6000 x 8.33/100 = 500 per month (Rs. 6000/- per year).
Example 2: If Brandon’s Salary is Rs. 7000/- than bonus payable to Brandon =583 per month (Rs. 6996/- per year).
Example 3: If Bipasha’s Salary is Rs. 15000 than bonus payable to Bipasha shall be = 7000 x 8.33/100 = 583 per month (Rs. 6996/- per year).
Payment method and time limit for the payment of bonus
All amounts payable to the employee as bonus under the provisions of the Act should be paid in cash. Which means that the employer cannot guise bonus as perquisites or allowances.
Statutory Bonus should be paid within 8 months of closing the book of accounts. For instance, the accounting year ending 31st March 2019 bonus shall be paid before 30th November 2019.
Exemption in Payment of Bonus
In certain circumstances payment of minimum bonus can be exempted by the appropriate government by taking into consideration relevant circumstances of concern factory or establishment which is in losses and may be given for a certain period only. The relevant factors may be, the reasons for occurrence of losses to company, reasons and ingenuity in consecutive occurrence of losses. The factors must be justifiable and there should not be intention to avoid payment of bonus by creating fake losses (mens rea).
Penalty when Bonus is not paid or Act is contravened in any manner
If any person acts in any manner derogatory to the provisions of this Act he/she shall be penalised with imprisonment for a term which may extend to six (06) months or with a fine of Rs. 1000 or with both.
The Payment of Bonus Act does not apply to the following sections of employees:
The employees of Life Insurance company
Seamen defined under clause 42 of the merchant shipping act 1958.
Employees who registered or listed under the dock workers Act 1948 and employed by the registered or listed employers.
The employees of any industry controlled by Central or State Government.
Employees from Indian red cross society or education institutions, institutions not for profit.
Employees employed by the contractor on building operations
Reserve Bank Of India(RBI) employees
Employees of any financial corporation under Section 3 or Section 3a of the State Financial Corporation Act (SFC) 1951
Employees of IFCI, Deposit Insurance Corporation, agriculture Refinance Corporation.
Any financial institution is an establishment in public sector which Central Government notifies.
The employees of Inland Water Transport Establishment