Payment of Bonus Act, 1965 : Applicability, Calculation, Offences and Penalties

Payment of Bonus Act, 1965

The Payment of Bonus Act, of 1965 focuses on bonuses. The act serves as a legal mechanism to govern and regulate the distribution of bonuses, ensuring a systematic approach to acknowledging employees’ contributions to the overall success and profitability of the business.

The Payment of Bonus Act, 1965 is a regulatory framework that extends beyond the routine task of managing payroll within a business. Once a business has been established and is operational, a significant aspect of its financial management involves the equitable distribution of the profits it has accrued in the form of bonus payments to its employees. The act, in essence, encompasses specific establishments engaged in activities related to productivity, production, or business profits. This implies that the provisions of the act are designed to ensure fair and standardized bonus practices in entities where the generation of profits is a key aspect of their operations.

Key Takeaways:

• The act proclaims the progression to deliver a rightful responsibility to the employers to distribute their profits to their employees.
• The main purpose of the act is to impose a legal obligation on the employer to provide for payment of a bonus.
• The act applies to every factory and establishment employing not less than 20 persons on any day throughout an accounting year.

What is Bonus?

The matter of bonuses is a subject of considerable controversy within the realm of industrial relations. Before 1965, up to the enactment of the Payment of Bonus Act, 1965, the entitlement to a bonus was not established through statutory provisions but rather through judicial decisions. The lack of a clear legislative definition for the term “Bonus” contributed significantly to the complexities surrounding this issue, and this deficiency persisted even after the enactment of the Bonus Act. In light of these complexities, this article aims to provide an overview of the evolving nature of the term “Bonus” over the years and its current definition as outlined in the Payment of Bonus Act, 1965.

Notably, Bonus has not been explicitly defined in any legislative enactment, including the recent Payment of Bonus (Amendment) Bill, 2002. Nevertheless, insights into the nature of bonuses can be gleaned from pronouncements made by committees and courts. Etymologically, Bonus originates from Latin, signifying a Gift or Boon. According to the Corpus Juris Secundum, it has been characterized as conveying the notion of uncertainty and indefiniteness.

The fundamental aim of the Payment of Bonus Act, 1965 is to enhance workers’ morale by allowing them to partake in the prosperity of the establishment. This legislation ensures their entitlement to a share in the surplus derived from the business’s profits and is applicable across the entirety of India.

Payment of Bonus Act, 1965 is pertinent to:

• Individuals employed in designated establishments that engage 20 or more individuals, contingent upon the profits garnered in a given financial year.
• Any employee receiving a monthly salary of ₹21,000 engaged in any industry for remuneration.
• The government reserves the authority to apply the Payment of Bonus Act to enterprises employing more than 10, but fewer than 20 individuals by issuing a notice in the Official Journal (JO), simultaneous notification to the employer, accompanied by a two-month notice, is mandatory.
• In establishments with a workforce numbering less than 20/10, the Payment of Bonus Act remains applicable for the financial year if invoked at the commencement of said financial year.

Employee Classifications as per the Act

• Temporary employees for the duration of their services.
• Trainees
• Reinstated employees who were terminated and received retroactive salary payments.
• Regularly employed part-time janitors.
• Proportional bonus for seasonal factory employees.
• Discharged employees, contingent upon having completed the stipulated minimum qualifying service period.
• Pieceworkers

Applicability of the Act

What are the categories of Establishments/Industries/Factories to which the act is applicable?

The act is extended to the whole of India and is applicable to:

• Every Factory
• Any establishment where 20 or more persons are employed on any day during the year.
• Any establishment or any class of establishment is notified in the gazette by the appropriate government.
• Part time employees are also included.

What are the categories of Establishment to which the act is not applicable?

The provisions of the Payment of Bonus Act, 1965 delineated in Section 32, do not extend to the following categories:

• Employees of LIC
• Employees of RBI
• Employees of UTI, IDBI, IFCI, SFC, and similar institutions
• Seafarers, as stipulated by the Merchant Shipping Act
• Workers registered under the Dockworkers Act, 1948
• Employees affiliated with universities, Indian Red Cross Societies, hospitals, educational institutions, chambers of commerce, and social agencies
• Employees engaged by facilities under the central government, state government, or local government authority
• Employees of Inland Water Transport establishments, in accordance with Section 32(iv) of the Act, as established in the case of Haryana Housing Authority v. Haryana Housing Board Employees’ Union, AIR 1996 SC 434.

What is the Maximum time for the Payment of Bonus?

The bonus amount is to be paid within 8 months from the end of the accounting year or within a month from the date of the enforcement of the act.

Calculation of the Bonus Amount

1. Basic Salary + DA < 7,000, then in such cases,

Bonus Payable = (Basic Salary + DA) * Amount %, either 8.33% (establishment is supposed to give even in case of deficit) or could go up to 20%

2. Basic Salary + DA > 7000, then in such cases,

Bonus Payable = ₹7000, % either 8.33% (establishment is supposed to give even in case of deficit) or could go up to 20%

Statutory Compliance on the part of the Employer

Considering the given act, there are certain compliances on the part of employers that they are obliged to follow, such as:

• The amount of Bonus shall be paid within 8 months by the employer, from the end of the accounting year in cash.
• The employer shall prepare different registers, such as: Register having the entire computation of allocable surplus (Form A), Register showing set-on and set-off (Form B). Register containing details such as bonus payable, deductions to be made, amount disbursed (Form C).
• Employer must upload on or before 1st February every year the details of annual returns in Form D, on the portal of the Ministry of Labour and Employment.
• Annual return is supposed to be filed in Form D by every employer to the inspector on or before 1st February every year.
• In case of disputes related to bonuses, the amount shall be paid within one month from the date the award passed becomes enforceable.

Offences and Penalties under the Act

• If any person fails to comply with the provisions of the act, then such person shall be punished with imprisonment, which may extend up to 6 months or a fine, which may extend up to ₹1,000 or both.
• If any person receives any direction under the act but fails to comply, such person shall be punished with imprisonment, which may extend up to 6 months or a fine, which may extend up to ₹1,000 or both.
• In case, any offence is committed by the company, then every person who is responsible for the business of the company (Managing Director, CEO, CFO, Managerial Head) will be punished accordingly.

Conclusion

Payment of Bonus Act, 1965 legally seeks to regularise the practice of paying bonuses by different establishments. It paves a way to calculate the bonus based on profit and productivity. It enables the employees to earn more than the minimum wage or salary. Hence, the act provides different procedures for different establishments like banking companies, public organisations and establishments, which are not a company or a corporation.

Payment of Bonus Act, 1965- FAQs

When is the employee considered to be working under the Act?

The employee will be considered to be working in the following cases:

• An employee laid off under an agreement
• An employee on paid leave
• Absent due to temporary disablement (caused by accident during employment)
• An employee is on maternity leave.

What amounts are allowed to be deducted from the bonus by the employer?

The following amounts are allowed to be deducted from the bonus by the employer:

• In case, the employer made any payment of customary bonus in the year.
• In case, the employee caused any financial loss to the employer.

What safeguard is provided under the act in case of non-payment of bonus?

If under any agreement, an employee is entitled to receive a bonus but fails to, then the employee has the right to make an application to the central/state government, and the government issues a certificate to the collector having jurisdiction to recover that amount and provide the same to the employee.

Is a person under 15 years of age entitled to receive a bonus as per the provisions of the act?

In case, the employee has not attained the age of 15 years, the minimum bonus amount received by that person will be ₹60 and for other employees, it would be ₹100.

Are overtime, HRA, and Travel Allowances considered a part of salary while calculating the bonus amount?

No, only Basic Salary and Dearness Allowance are included in calculating the bonus. Other amounts are not considered for bonus calculation.

References:

• Ministry of Labour & Employment
• Chief Labour Commissioner (Central)

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.