ASSIGNMENT

TOPIC: Payment of Bonus Act

SUBMITTED TO:

Sonal Thaker

GLS Law Collage

SUBMITTED BY:

Harshil Vadodaria 115

Sem- 5(B)

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  ABSTRACT:

Payment of Bonus Act, is efficiently drafted by the government to ensure that the employees get
a fair amount of share from the profit earned by the organisation. The government has made it
mandatory for employers to provide its employees with decent bonus yearly. It enables the
employees to earn more apart from the minimum wage that they earn at the organisation.
Employers can decide the bonus rate according to the employees' performance.

Factory workers and persons employed in railways or is in contract with railways are eligible to
avail the benefit of the act. The act even benefits the skilled and unskilled workers, even if they
are on a contract job.

In 1965, the government of India implemented the payment of bonus act, which guaranteed a
minimum bonus per month to people whose salary was below a certain limit.

As stated by the 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 percent 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.”

 BACKGROUND

The Principal Act provides for the mandatory annual payment of bonus to eligible employees of
establishments which employ 20 or more persons. In accordance with the terms of the Principal
Act, every employee who draws a salary of INR 10,000 or below per month and who has worked
for not less than 30 days in an accounting year, is eligible for bonus (calculated as per the
methodology provided under the Principal Act) with the floor of 8.33% of the  salary payable to
him/her and a cap on the maximum bonus statutorily payable (20% of the salary). Apart from
seeking to broaden the eligibility limit, (from INR 10,000 set out under the Principal Act, the
Amendment Act also raises the calculation ceiling for payment of bonus and retrospectively
places the onus on employers to make payment of bonuses to eligible employees effective from 1
April 2014.

 INTRODUCTION:

At present bonus is paid to many categories of employees both in public and private sectors. It is
cash payment made to employees in addition to wages. It is not an ex gratia payment. The bonus
was first paid in India in the year 1917 by the textile industry, which is known as war bonus. It
was an increase in wages allowed owing to war conditions. Though bonus would mean a gift or
gratuitous payment over and above the normal remuneration, it has acquired a right in industrial
law and it ca n be claimed either by an agreement with the employer or by adjudication. After the
payment of Bonus Act 1965, it has become a statutory right. Two conditions were laid down for
justifying the demand for bonus (I) Wages fall short of the living wage and (2) the industry has

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made huge profits part of which are due to the contribution of the workmen. If either or both the
conditions are satisfie d the demand for bonus would become an industrial claim, Discrimination
in the payment of bonus only to some Sections of the workmen has been disapproved by
tribunals. However in Burrnah Shell Refineries Ltd. Vs. Their Workmen 1961 L.A.C the
Supreme Court, held that if a tribunal being of opinion that payment of bonus at the same rate
will not be fair and may cause discontent amongst the worker's awards bonus at a lower rate to
the clerical staff than to Labour staff there would be no reason for disturbing, the award. Where
the workmen accepted an ex gratia bonus, it will not deter or stop them from claiming additional
bonus. The Labour Appellate Tribunal in Mill Owners Association vs. Rashtriya Mill Mazdoor
Sangh, 1952 L. A. C. 423 observed that bonus could no longer be considered as an ex gratia
payment and laid down a formula known as "Full Bench Formula".

 APPLICABILITY OF ACT

This Act further applies to the following establishments which constitute any of the reasons
listed below:

1. It applies to any factory or institution which have 20 or further employees during any day in
the assessment year.

2. This Act is not applicable to non-profit manufacturing organizations.

3. It excludes establishments like LIC or hospitals which are included in Section 32.of this Act.

4. This Act is also impracticable to institution and establishments where employees have signed
an agreement with the employer.

5. It is not applicable to institutions and establishments spared by the state governments also.

 ELIGIBILITY FOR BONUS

An employee is entitled for bonus under section 8 of the said act if the subsequent circumstances
are contented:

1. The employee accepting remunerations or wages upto Rs. 10,000 per month which has been
increased to Rs. 21.000 per month as per the 2015 amendment.

2. The employee involved in any of the work whether proficient, less proficient, executives. The
employee who have operated atleast 30 working days in one and the same year

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  DEFINITIONS:

Section 2 (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; (iii) in
any other case- (a) the year commencing on the 1st day of April; or

(b) if the accounts of an establishment maintained by the employer thereof are closed and
balanced on any day other than the 31st day of March, then, at the option of the employer, the
year ending on the day on which its accounts are so closed and balanced.

"Allocable surplus" means- (a) 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, 67% of the available surplus in an
accounting year; (b) in any other case, 60% of such available surplus;

"Corporation" means any body corporate established by or under any Central, Provincial or
State Act but does not include a company or a co-operative society;

"direct tax" means- (a) any tax chargeable under- (i) the Income-tax Act;

(ii) the Super Profits Tax Act, 1963 (14 of 1963);

(iii) the Companies (Profits) Surtax Act, 1964 (7 of 1964);

(iv) the agricultural income-tax law; and

(b) any other tax which, having regard to its nature or incidence, may be declared by the Central
Government, by notification in the Official Gazette, to be a direct tax for the purposes of this
Act; The Payment of Bonus (Amendment) Bill, 2015

Section 2 (13) "employee" means any person (other than an apprentice) employed on a salary or
wage not exceeding 21,000/- 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; (2007 amendment)

"Establishment in private sector" means any establishment other than an establishment in

"Establishment in public sector" means an establishment owned, controlled or managed by-

(a) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);

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 (b) a corporation in which not less than forty per cent of its capital is held (whether singly or
taken together) by-

(i) the Government; or

(ii) the Reserve Bank of India; or

(iii) a corporation owned by the Government or the Reserve Bank of India;

 OBJECTIVE:

The objective of the Act is to provide payment of bonus to persons employed in certain
establishments on the basis of profits or on the basis of production or productivity and for
matters connected there-with. The scheme of the Act is fourfold.

1. to impose a liability on an employer to pay a bonus to employees in an establishment

2. to define the principle of payment of bonus according to the prescribed formula

3. to provide payment of minimum and maximum bonus, linking it with the scheme of set-off
and set on 4. To provide machinery for the enforcement of liability for payment of bonus.

5. The Act is not retrospective in operation. So where a workman demands a bonus for the year
1963-64, it will have to be calculated on the basis of the Full Bench Formula mentioned above.

 OFFENCES & PENALTIES U/S 28 & 29

For contravention of the provisions of the Act or rules the penalty is imprisonment up to 6
months or fine up to Rs.1000, or both.

In case of offences by companies, every person who, at the time the offence was committed, was
in charge of, and was responsible to, the company for the conduct of business of the company, as
well as the company, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly: any such person liable to any punishment if he
proves that the offence was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.

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  CASE LAWS:

In Jalan Trading Co. v. Mill Mazdoor Sabha (AIR 1967 SC 691), the Supreme Court observed
that the power of Parliament to fix minimum bonus cannot be questioned, because the object of
the Act is to make an equitable distribution of surplus profits between the three factors of
production. It flows from jurisdiction over industrial and labour disputes, welfare of labour. The
legislation is therefore neither a fraud on the Constitution nor is colourable exercise of power.

In M/s. J.K. Acrylics v. Union of India (1997 (2) LLJ 608.), the Court held that where the
Payment of Bonus Amendment Act, 1995, replacing the Amendment Ordinance of 1993 was
challenged on the ground that it cannot have retrospective operation, the employer has no right to
say that his liability to pay bonus cannot be retrospectively enlarged.

In J.K. Chemicals v. Govt, of Maharashtra (1997 (3) Supp. LLJ 578.), the Court observed that
the obligation to pay compulsory minimum bonus is subject to the claim for under Section 36 of
the Act . However the payment of compulsory minimum bonus cannot be avoided merely
because there was loss in the concerned accounting year. The expression “financial position of
the establishment'’ in Section 36 is comprehensive to include loss suffered by the establishment
and various other factors, the totality of which would picture the economic conditions of the
establishment.

In Midhani Workers and Staff Union v. Mishradhatu Nigam Ltd., Hyderabad, it was held that a
writ of mandamus will be issued compelling performance of a statutory duty. Section 10 of the
Act, imposes a statutory duty in respondent industry to pay minimum bonus to its workmen
irrespective of the allocable surplus.

 THE PAYMENT OF BONUS (AMENDMENT) ACT OF 2015

It was introduced in the Lok Sabha on December 7, 2015 and which was passed in the Lok
Sabha on December 22, 2015. The act was then further passed in the Rajya Sabha on December
23 of the same year. This act was introduced in the Lok Sabha by the Minister of State for labour
and employment, Mr. Bandaru Dattatreya and was seeking an amendment in the previous act ie
Payment of Bonus Act, 1965.

The Act mandates bonus to the employees whose salary is up to Rs. 10,000 per month. The new
amendment seeks to increase this eligibility limit to Rs. 21,000 per month.

 Employees eligible for bonus: The Act mandates payment of bonus to employees’

 Calculation of bonus: The Act provides that the bonus payable to an employee will be in
proportion to his or her salary or wage.  However, if an employee’s salary is more than
Rs 3,500 per month, for the purposes of calculation of bonus, the salary will be assumed
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 to be Rs 3,500 per month.  The Bill seeks to raise this calculation ceiling to Rs 7,000 per
month or the minimum wage notified for the employment under the Minimum Wages
Act, 1948 (whichever is higher).

 Prior publication of rules: The Act provides that the central government may make
rules to implement its provisions.  The Bill seeks to mandate prior publication of such
rules in the Official Gazette to allow for more public consultation.

 Retrospective effect: The Bill will come into force on April 1, 2015.

 ANALYSIS:

The Amendment has sought to make more employees eligible for bonus by raising the ceiling
limit of the monthly wages. The Amendment also increases the amount of bonus that would be
received by the eligible employee as against the Principal Act which provided that the bonus
payable to an employee will be in proportion to his or her salary or wage. However, if an
employee’s salary is more than INR 3,500 per month, for the purposes of calculation of bonus,
the salary will be assumed to be INR 3,500 per month. After the Amendment, this limit has been
enhanced to INR 7,000 per month or the minimum wage for the scheduled employment
(whichever is higher).

Although the Amendment received the assent of the President of India on 31 December, 2015,
the Amendment shall be deemed to have come into force on the 1st day of April, 2014. Hence, it
has a retrospective effect. This would mean that the employees who have already been paid a
bonus for the financial year 2014-15, would now become eligible for arrears. The employees
who draw a salary between INR 10,000 and INR 20, 999 per month would be eligible for bonus
starting from the financial year 2014- 2015 due to the retrospective nature of the Amendment.
The labor intensive industries would have a significant impact as the differential/balance amount
for the financial year 2014-105 would have to be provided in the current financial year to the
employees. However, no specific date for the payment has been provided for in the Amendment.

 CONCLUSION:

It is important that the government furnish clarifications, further modifications or exemptions to ease the
operational difficulties with the retrospective modifications or amendments. The demand to think about
the minimum wages under the Minimum Wages Act while calculating bonus will generate
unpredictability and inconsistency around bonus payments, which was best to keep away at this stage.
Optimistically, other labour reforms in progress like the Government's aspiring plan of decreasing the
total number of the labour laws by further systemizing of the laws regarding industrial relations code and
of the social security which is prescribed under uniform code. It will also take into the consideration of
the one who is employing and in the interest of providing them with the efficient way of preparing and
also in the effective deal with the scope of any retrospective modifications or any amendments may be
possible.

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