THE PAYMENT OF BONUS ACT, 1965

Prof. Kalpesh Prajapati

Bonus payment started much before the law was enacted in Ahmadabad textile mills both in cash and kind. It was a payment to employees to face the rigours at work. Gradually by 1929-30, large number of employers all over the country started it out of his own sweet will. It was an ex-gratia concept. By 1930s, the union started clamoring for such payments on claims that they are also entitled to a share in companys profits since they contribute a great deal to earn it. Hence, the concept changed from ex-gratia to Profit sharing. The problem now faced by the management was computation of accurate profits. A High court Commission was ordered to compute the profits. In 1961, Bonus Commission was set up by the Government of India. Later unions felt that bonus should be paid to everyone and devised a new concept called Deferred Wages. The argument was that their wages were so low that they were unable to save any sum of money. Demand under deferred wages was 13 months wages for 12 months for Ex. 1 month wage to be paid during festivals.

In the Law, Concept of Profit sharing and deferred wages was integrated and the Payment of Bonus Ordinance, 1965 was converted to The Payment of Bonus Act, 1965. The law is applicable to factories and other establishments employing 20 or more persons. Since, the main concept of the act is Profit sharing, Bonus is calculated on the basis of trading results of an establishment during a particular accounting year. Each accounting year is a unit and there is no relationship between last and next accounting year.

Only those employees who are drawing a salary/wage not more than Rs. 3500 per month are covered under this act. Capacities of the employees on the basis of skilled/unskilled are not taken into consideration.

Computation of Bonus: Hypothetical example Rs. Net Profit 10,00,000

Add: Add backs charged to Profit & Loss account in respect Of those items included in Schedules I and II 5,00,000 Gross Profit 15,00,000 Less: Deductions like direct tax, Depreciation and 6%-8.5% of Equity capital 7,50,000

Available Surplus 7,50,000 60% of Available surplus is Allocable surplus 4,50,000 Allocable surplus is to be distributed as Bonus to the employees.

SCHEDULE I 4. Computation of gross profitsThe gross profits derived by an employer from an establishment in respect of the accounting year shall (a) in the case of a banking company, be calculated in the manner specified in the First Schedule. SCHEDULE II 4. Computation of gross profitsThe gross profits derived by an employer from an establishment in respect of the accounting year shall (b) in any other case, be calculated in the manner specified in the Second Schedule.

Basic provisions of the Payment of Bonus Act 1965.

1.

The act applies to all factories and establishments covered under Shops & Commercial Establishments Act employing more than 20 persons.

2. The act covers all employees (irrespective of status, grade, designation etc.) who draw wages not exceeding Rs. 3500/- p.m. 3. The "wage" for the purpose of this act is the Basic Salary+ Dearness Allowance, as per the generally accepted meaning of the definition of the term. 4. The act requires the employer to compute "Gross Profit" as stipulated in the act. [Sec. 4 (b)-Second Schedule] 5. From the Gross Profit, the act requires determination of "Available Surplus" (Sec. 5, 6 and 7)

Basic provisions of the Payment of Bonus Act 1965.

6. Sixty Seven per cent of the available surplus is treated as the [Allocable Surplus). The relation between the "bonusable salary/wage" and the "allocable surplus" provides the percentage of the bonus payable. 7. By "bonusable salary/wage" it stipulated as under: 1. for employees with salary/wage up to Rs. 2500/- p.m. the actual figure will be basis on which the bonus will be payable. 2. for employees with salary/wage greater than Rs. 2500/- p.m. and less than Rs. 3500/- p.m. the salary/wage will be deemed to be Rs. 2500/- p.m. only. 3For employees with salary/wage greater than Rs. 3500/- p.m. no bonus is payable by force of law as these employees are NOT covered by the act. 8. No employee who has put in service less than 30 days during the year is eligible to receive bonus under the act.

9. The law stipulates that Minimum bonus payable will be 8.33% and this is payable even when the company has made a loss or the allocable surplus is not adequate to support payment of even 8.33% bonus. The Maximum Bonus payable is fixed at 20% of the bonusable salary/wage.
10.With a view to ensure that there will be stability in payment of bonus, the law also provides a mechanism of "set on" and "set off" (Sec. 15). So, when the particular year's allocable surplus is not adequate to support payment of 20% bonus, the employer is entitled to draw from the set on of previous years, if available. 11. The law also requires the employer to maintain specified registers and file sprcified returns to the authorities.

Payment of bonus finds justification on the ground that the workers should have a share in the prosperity of the concern for which they have made their contribution. The Bonus Commission rejected the argument that the payment of bonus is meant to fill up the gap that is in existence between the actual and the living wages though in the process of sharing the prosperity the gap is narrowed down or closed. It was not felt appropriate by the Commission that the amount of available surplus to be set apart for the purpose of payment of bonus should be linked with the wages level for that would introduce uncertainty and there are in existence wage boards forn different industries with the object to reduce disparity(Difference) in the wages prevailing in different industries.

Payment of bonus is not the product of generosity (Kindness)of the employer but is one paid in the name of industrial peace and to make available to every employee a living wage, which more often is more than the actual wages.

Definitions

In this Act, unless the context otherwise requires:

1.

accounting year means

i.

in relation to a corporation, the year ending on the day on which the books and accounts of the corporation are to be closed and balanced;

ii.

in relation to a company, the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not; allocable surplus means-

4.

in relation to an employer, being a company (other than a banking company) which has not made the arrangements prescribed under the Income Tax Act for the declaration and payment within India of the dividends payable out of its profits in accordance with the provisions of section 194 of that Act, sixtyseven per cent of the available surplus in an accounting year; (in other case 60% available surplus)

6.

available surplus means the available surplus computed

(Calculate) under section 5;

12.

direct tax meansi.

any tax chargeable under-

ii.
iii. iv.

the Income-tax Act;

the Super Profits Tax Act, 1963 (14 of 1963); the Companies (Profits) Surtax Act, 1964 (7 of 1964);

v.

the agricultural income-tax law; and

13.

employee means any person (other than an apprentice) employed on a salary or wage not exceeding three thousand and five hundred 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;

14.

employer includesin relation to an establishment which is a factory, the owner or occupier of the factory, including the agent of such owner or occupier, the legal representative of a deceased (Dead) owner or occupier and where a person has been named as a manager of the factory under clause (f) of sub-section (I) of section 7 of the Factories Act, 1948 (63 of 1948); the person so named;

21.

salary or wage means all remuneration (other than remuneration in respect of over-time work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment and includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living).

a)

b)

Establishments to Include Departments, Undertakings and Branches Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act. Computation of Gross Profits The gross profits derived by an employer from an establishment in respect of the accounting year shall in the case of a banking company, be calculated in the manner specified in the First Schedule; in any other case, be calculated in the manner specified in the Second Schedule. Computation Available Surplus The available surplus in respect of any accounting year shall be the gross profits for that year after deducting there from the sums referred to in section 6;

Sums Deductible from Gross Profits

any amount by way of depreciation admissible in accordance with the provisions of sub-section (1) of section 32 of the Income-tax Act, or in accordance with the provisions of the agricultural income-tax law, as the case may be; Provided that where an employer has been paying bonus to his employees under a settlement or an award or agreement made before the 29th May 1965, and subsisting on that date after deducing from the gross profits notional normal depreciation, then, the amount of depreciation to be deducted under this clause shall, at the option of such employer (such option to be exercised once, and within one year from that date) continue, to be such notional normal depreciation; Calculation of Direct tax Payable by the Employer
Any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year.

a) b)

c)

Eligibility for Bonus 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. Disqualification for Bonus Notwithstanding anything contained in this Act, an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for: fraud; or riotous or violent behaviour while on the premises of the establishment; or theft, misappropriation or sabotage of any property of the establishment. Payment of Minimum Bonus Subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of the accounting year commencing on any day in the year 1979 and in respect of every subsequent accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year.

a)

b)

Payment of Maximum Bonus Where in respect of any accounting year referred to in section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year, subject to a maximum of twenty per cent of such salary or wage. Time-limit Payment or Bonus All amounts payable to an employee by way of bonus under this Act shall be paid in cash by his employer: where there is a dispute regarding payment of bonus pending before any authority under section 22, within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute; in any other case, within a period of eight months from the close of the accounting year;

Set on and Set off (Sec. 15, Payment of Bonus Act) If in an accounting year, the allocable surplus exceeds the amount of maximum bonus payable, then such excess shall be carried forward for being SET ON in the succeeding four accounting years. The amount to be carried forward should not exceed 20% of salary/wages for that accounting year. If there is no allocable surplus or if the allocable surplus falls short of the minimum bonus payable, then such deficiency be met out of the amount brought forward for being SET ON from the previous accounting year, if any. If there is still any deficiency, then such amount be carried forward for being SET OFF in the succeeding four accounting years. While calculating bonus for the succeeding accounting years, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.

Bonus Linked with Production/Productivity Where the employees enter into an agreement or settlement with their employer for payment of an annual bonus linked with production or productivity, in lieu of bonus based on profits, they shall be entitled to receive bonus due to them under such agreement or settlement, subject to a minimum of 8.33% and a maximum of 20% of the salary or wages earned by them during the relevant accounting year. Contracting Out is Void All contracts or agreements depriving the employees of their right to receive minimum bonus, shall be void and not enforceable (Sec.31A, Payment of Bonus Act). Bonus in case of New Establishments (Sec. 16, Payment of Bonus Act) Newly set up establishments are exempted from the liability to pay bonus during the initial period. In the first 5 accounting years following the year in which the employer begins to sell his goods or render services, bonus is payable only in respect of that accounting year in which the employer derives profits

Offences and Penalties (Sec. 28, Payment of Bonus Act) Offence

1.

Penalty
Imprisonment up to 6 months or fine up to Rs. 1000 or both As above

Contravention of the provisions of the Actor Rules Failure to comply with the directions or Requisitions made

2.

Thank You

Origin

The practice of paying bonus in India appears to have originated during First World War when certain textile mills granted 10% of wages as war bonus to their workers in 1917. In certain cases of industrial disputes demand for payment of bonus was also included. In 1950, the Full Bench of the Labour Appellate evolved a formula for determination of bonus. A plea was made to raise that formula in 1959. At the second and third meetings of the Eighteenth Session of Standing Labour Committee held in New Delhi in March/April 1960, it was agreed that a Commission be appointed to go into the question of bonus and evolve suitable norms. The Government of India accepted the recommendations of the Commission subject to certain modifications. To implement these recommendations the Payment of Bonus Ordinance, 1965 was promulgated on 29th May, 1965.

Eligibility for bonus

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.

Disqualification for bonus

Notwithstanding anything contained in this Act, an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for (a) fraud; or (b) riotous or violent behavior while on the premises of the establishment; or

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

Payment of minimum bonus

Every employer shall be bound to pay to every employee a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year

Payment of maximum bonus

If the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting; year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent, of such salary or wage. In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions shall be taken into account in accordance with the provisions of that section.

Proportionate reduction in bonus in certain cases

Where an employee has not worked for all the working days in an accounting year, the minimum bonus of one hundred rupees or, as the case may be, of sixty rupees, if such bonus is higher than 8.33 per cent, of his salary or wage for the days he has worked in that accounting year, shall be proportionately reduced

Computation of number of working days

An employee shall be deemed to have worked in an establishment in any accounting year also on the days on which (a) he has been laid off under an agreement or as permitted by standing orders under the Industrial Employment (Standing Orders) Act, 1946 (b) he has been on leave with salary or wage;

(c) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and (d) the employee has been on maternity leave with salary or wage, during the accounting year.

Set on and set off of allocable surplus

(1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment, then, the excess shall, subject to a limit of twenty per cent. of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilized for the purpose of payment of bonus in the manner

(2)

Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment and there is no amount of sufficient amount carried forward and set on which could be utilized for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner

(3) Where in any accounting year any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.

Time-limit for payment of bonus

All amounts payable to an employee by way of bonus under this Act shall be paid in cash by his employer (a) Where there is a dispute regarding payment of bonus pending before any authority within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute (b) In any other case, within a period of eight months from the close of the accounting year:

Recovery of bonus due from an employer

Where any money is due to an employee by way of bonus from his employer under a settlement or an award or agreement, the employee himself or any other person authorized by him in writing in this behalf, or in the case of the death of the employee, his assignee or heirs may, without prejudice to any other mode of recovery, make an application to the appropriate Government or such authority as the appropriate Government may specify in this behalf is satisfied that any money is so due, it shall issue a certificate for that amount to the Collector who shall proceed to recover the same in the same manner as an arrears of land revenue. Provided that every such application shall be made within one year from the date on which the money became due to the employee from the employer

Provided further that any such application may be entertained after the expiry of the said period of one year, if the appropriate Government is satisfied that the applicant had sufficient cause for not making the application within the said period.

Maintenance of register, records,

etc

Every employer shall prepare and maintain such registers, records and other documents in such form and in such manner as may prescribed.

Act not to apply to certain classes of employees

Nothing in this Act shall apply to (i) employees employed by any insurer carrying on general insurance business and the employees employed by the Life Insurance Corporation of India; (ii) seamen (iii) employees registered or listed under any scheme made under the Dock Workers

(iv) employees employed by an establishment engaged in any industry carried on by or under the authority of any department of the Central Government or a State Government or a Local authority; (v) employees employed by -of (a) the Indian Red Cross Society or any other institution a like nature (including its branches); (b) universities and other educational institutions; (c) institutions (including hospitals, chambers of commerce and social welfare institutions) established not for purposes of profit;

(vi)

employees employed through contractor on building operations;

(vii) employees employed by the Reserve Bank of India; (ix) (a) (b) (c) (d) (e) (f) employees employed by -the Industrial Finance Corporation of India; any Financial Corporation established under section 3, or any Joint Financial Corporation established under section 3A, of the State Financial Corporations Act, 1951 (63 of 1951); the Deposit Insurance Corporation; the National Bank for Agriculture and Rural Development;] the Unit Trust of India; the Industrial Development Bank of India;