UNIT – III

PAYMENT OF BONUS ACT, 1965

INTRODUCTION:

In a society like ours where there has been a tradition of celebrating festivals with much fan-fare,
payment of bonus on the eve of such festivals makes a greater impact on the workers who get some
extra money to defray the extra expenses on account of the festival. Payment of bonus is justified on
the ground of sharing the profits of the employer. Bonus is a payment made to maintain industrial
harmony and to motivate the workers to do their best to keep the industry performing well. Bonus is
also paid to make available to every employee a living wage which is more often higher than the actual
wage.
Under the Act, every eligible employee is entitled to a minimum bonus of 8.33% of the salary or wages.
The maximum bonus to be paid is 20%. Though intended to improve industrial relations in India, it has
failed to achieve the purpose.
OBJECT OF THE ACT:

The Payment of Bonus Act, 1965 is an outcome of the recommendation of the Bonus
Commission set by the Government of India in 1961. Its object is to provide for the payment of bonus to
persons employed in certain establishments. The Payment of Bonus Act, 1965 is four dimensional:
a. It imposes a statutory liability upon an employer of every establishment covered by the Act to
pay bonus to employees in establishment;
b. It defines the principles of payment of bonus according to the prescribed formula;
c. It provides for payment of minimum and maximum bonus with the scheme of ‘set off’ and ‘set
on’; and
d. It provides machinery for the enforcement of the liability for payment of bonus.

EXTENT AND APPLICATION OF THE ACT:

The Payment of Bonus Act, 1965 extends to the whole of India including the State of Jammu and
Kashmir. It came into force on September 25, 1965. The Act applies to:

1. Every factory,
2. Every other establishment in which twenty or more persons are employed on any day during an
accounting year. The appropriate government may extend the provisions of this Act to any
establishment employing less than twenty but not less than ten persons.

DEFINITIONS:

1. ACCOUNTING YEAR: (Section 2 (1))

It 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

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(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.
(iv) SALARY OR WAGES: [Section 2(21)]

"Salary or wage" means –

i. all remuneration (other than remuneration in respect of overtime work)
ii. capable of being expressed in terms of money;
iii. payable for work done;
iv. if the terms of employment were fulfilled; and includes
a. dearness allowance,
b. free food allowance,
c. Food given in lieu of whole or part of the salary or wages.

 But it does not include –

(i) Any other allowance;

(ii) The value of any house accommodation;
(iii) supply of light, water, medical attendance, concessional supply of food grains;
(iv) Any travelling concession ;
(v) Any bonus;
(vi) Contribution made by the employer to any pension fund or provident fund;
(vii) Retrenchment compensation or any gratuity or other retirement benefit;
(viii) Any commission payable to the employee.
 
(v) EMPLOYER: [Section 2(14)]

The definition of employer under the Act is both inclusive and exhaustive. The expression in
relation to an establishment which is a factory includes (1) the owner or occupier of the factory,
(2) the agent of such owner or occupier, (3) the legal representative of a deceased owner or
occupier, and (4) where any person has been named as a manager of the factory.
The expression in relation to any other establishment includes the person who has the ultimate
control over the affairs of the establishment and where the said affairs are entrusted to a
manager, managing director or managing agent, such manager, managing director or managing
agent.
NOTE:
The responsibility to pay bonus under this Act is that of the employer. A person in order to be an
employer need not be a manager. Chairman or director of a company having control over the
affairs of establishment is an employer.

(vi) EMPLOYEES: [Section 2(13)]

  An employee under this Act means –
(1) Any person employed on any industry to do the following categories of work namely:
a. Skilled, unskilled or manual;
b. Supervisory;
c. Managerial;
d. Administrative;
e. Technical; or

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 f. Clerical.
(2) Who is employed to do such work for hire or reward;
(3) Whose salary does not exceed Rs. 3500 per month; and
(4) Who is not an apprentice.
NOTE:
Every person who falls within the definition of employee in section 2(13) of the Payment of
Bonus Act is entitled to the benefit under this Act. Unlike the Industrial Disputes Act, it covers
persons employed in supervisory, managerial or administrative capacity. Employees getting
salary or wage up to Rs. 3500 per month are covered by the Act, but for the payment of bonus
their salary or wage will be taken as Rs. 2500.
The term ‘employee’ does not exclude from its definition the casual or the part time workers. A
person who is regularly employed for doing a regular work of sweeping is an employee and not a
casual worker even though he is a part time worker.

IMPORTANT PROVISIONS OF PAYMENT OF BONUS ACT, 1965

1. ELIGIBILITY FOR BONUS (Section 8)
For being entitled to bonus for a particular accounting year, Section 8 requires that
an employee should have at least worked for thirty days in that year. This section puts
restraint upon claims of labour for bonus in respect of such employees who had attended to
duties for not less than thirty days in a year. However, it is not necessary that these thirty
days of work should be a continuous period.
The word ‘worked’ in section 8 means ‘ready and willing to work’. Where an employee is
prevented from working by an act on the part of the employer which is ultimately declared
illegal, the employee’s eligibility for bonus under section 8 shall not be lost. Thus an
employee shall be deemed to have ‘worked’ for the days for which he has not actually
worked on account of wrongful discharge or dismissal.
2. DISQUALIFICATION FOR BONUS (Section 9)
An employee will be disqualified from receiving bonus if he is dismissed from service
for:
a. Fraud; or
b. Riotous or violent behaviour while on the premises of the establishment; or
c. Theft, miss-appropriation or sabotage of any property of the establishment.
An employee shall be disqualified from receiving bonus if he is dismissed from services
on account of acts enumerated in section 9. If the dismissal is due to any other cause,
the employee will not be disqualified from receiving bonus. If the order of the dismissal
by the employer is set aside by the tribunal, the right of the employee to receive bonus
will revive.
3. PAYMENT OF MINIMUM BONUS: (section 10)
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 or one
hundred rupees, whichever is higher, whether or not the employer has any allocable surplus
in the accounting year.
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 But if the employee has not completed 15 years of age at the beginning of the accounting
year, he will be entitled to a minimum bonus which shall be 8.33% of the salary or wage,
during the accounting year or Rs. 60 whichever is higher.
Payment of minimum bonus has no relationship with the actual profit or loss of a particular
year. Section 10 requires payment of minimum bonus to the workers even in cases where
the employers have suffered losses. This also puts a check on the employer’s tendency to
avoid showing profits evade payment of bonus.
4. PAYMENT OF MAXIMUM BONUS: (Section 11 & 12)

Where in respect of any accounting year referred to in Sec.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.
 In computing the allocable surplus under this section, the amount set on or the amount set-off under
the provisions of Sec.15 shall be taken into account in accordance with the provisions of that section.
Section 11 applies only when in any accounting year the allocable surplus exceed the amount of
minimum bonus payable to the employees under section 10.
Section 12 provides the maximum limit of salary or wage to be taken in to consideration for payment of
bonus. Where the salary or wage of an employee, exceeds three thousand five hundred rupees (Rs.
3500 p.m.) per mensem, the bonus payable to such employee under section 10 or as the case may be
under section 11, shall be calculated as if his salary or wage were two thousand five hundred rupees per
mensem (Section 12). Thus where the salary of an employee exceeds Rs. 2500 per month but does not
exceed Rs. 3500 p.m. for the purpose of calculating bonus under sections 10 and 11 his salary shall be
deemed to be Rs. 2500 per month only.
5. CALCULATION OF NUMBER OF WORKING DAYS: (Section 14)
Section 14 provides for the calculation of number of working days for the purpose of
determining the minimum and maximum bonus payable to an employee. The number of
working days of an establishment is the number of days on which it worked. To get the
number of days on which an employee worked, one has to consider the actual number of
days of attendance according to the attendance register and add the days on which he has
been absent on any of the following causes:
a. Lay-off;
b. Leave with salary or wage;
c. Temporary disablement caused by an accident arising out of and in the course of an
employment; and
d. Maternity leave with salary or wage.
6. ADJUSTMENT OF CUSTOMARY OR INTERIM BONUS AGAINST BONUS PAYABLE:
Section 17 empowers the employer to adjust any puja or other customary bonus paid
to an employee during the accounting year towards the bonus due under the Act for that
year. This section implies that an employer can make advance payments of parts of the
bonus due to the employees under this Act, before the date on which the bonus becomes
payable. Such advance payments can be deducted from the bonus as finally determined
under the Act, for that accounting year and the employee shall be entitled to receive only
the balance.

7. DEDUCTION OF CERTAIN AMOUNTS FROM BONUS PAYABLE UNDER THE ACT:

Section 18 provides that if an employee is found guilty of misconduct causing financial loss
to the employer, the employer can deduct the amount of the loss from the amount of

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 bonus payable to the employee under the Act for the accounting year in which he was
found guilty. The misconduct and financial loss must be proved before it can be deducted.
The employer must have proper notice of the misconduct and of financial loss caused and
there should be a finding after proper enquiry. This deduction would be in addition to any
punishment imposed on account of misconduct duly proved.
8. TIME LIMIT FOR PAYMENT OF BONUS: (Section 19)
This section provides for the payment of bonus in cash and the time limit for such payment.
All bonuses has to be paid in cash. According to section 19(1) where there is a dispute
regarding payment of bonus, the bonus has to be paid within one month of settlement or
award in respect of such dispute. In other cases, bonus has to be paid within a period of
eight month from the close of the accounting year. This section empowers the appropriate
government to extend the time for payment of bonus, if the following requirements are
satisfied:
a. The employer should make an application to the appropriate government;
b. The application should disclose sufficient reasons;
c. The appropriate government may make an order extending the period for payment of
bonus but the total period so extended should not in any case exceed a period of two
years.
The claim for bonus can be made only after the close of the accounting year and in
accordance with the provisions of the Act, whether it is the minimum bonus of 8.33 per
cent or the maximum bonus of 20 per cent, they have to be paid within the period
mentioned in section 19.
9. RECOVERY OF BONUS DUE FROM AN EMPLOYER: (Section 21)
Section 21 provides for recovery from an employer of money due as bonus under a
settlement or an award or an agreement. The procedure is that the employee himself or
any other person authorised by him in this behalf, or in the case of his death, his assignee or
heirs, will first make an application to the appropriate government or to the authority
authorised to deal with such matter. The authority authorised to deal with the matter is to
be satisfied regarding the amount due. Thereafter, the authority is to issue a certificate to
the collector who is authorised to recover the same as arrears of land revenue.
The limitation for making the application is one year from the date when the amount
becomes due. The appropriate government is authorised to entertain the application after
the period of one year if it is satisfied that there was sufficient cause with the applicant for
not making the applicant for not making the application within the period.

IMPORTANT QUESTIONS
SHORT TYPE ANSWERS:
1. What is accounting year?
2. Briefly discuss the object and application of Payment of bonus Act, 1965.
3. An amount of bonus is due to employee under a settlement and it is not paid to him.
What should be done for the recovery of the amount?
4. Define the term ‘Employee’ under the Payment of Bonus Act, 1965?

DESCRIPTIVE TYPE ANSWERS:

1. Explain the concept of ‘bonus’. Under what circumstances an employee is eligible for
payment of bonus under the Payment of Bonus Act, 1965? Indicate the mode and time
limit for the payment of bonus.
2. Discuss the specific provisions relating to ‘maximum’ and ‘minimum’ bonus as payable
under the Act. When an employee does forfeit his claim to receive bonus under the
Payment of bonus Act, 1965?

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