PAYMENT OF BONUS ACT 1965

INTRODUTION

The “Payment of Bonus Act 1965,” along with its amendments by the “Payment of Bonus Rules, 1975” (central rules), legally mandates employers to ensure bonus payments. Its primary objective is to impose a legal obligation on employers regarding bonus provision.

Any factory or establishment that employs a minimum of 20 individuals on any given day during the financial year falls under the applicability of the Payment of Bonus Act 1965.

 

What exactly is a Bonus?

An employer gives a bonus to an employee as an additional payment, typically as a reward, along with their regular monthly salary within an establishment. The primary aim of a bonus is for the organization to distribute its profits among its workforce. It’s important to emphasize that a bonus does not take into account any form of non-monetary contribution.

The employer must ensure that the minimum bonus is equivalent to 8.33% of the employee’s annual wage or a fixed amount of one hundred rupees for employees aged 15 and above, and sixty rupees for those below 15. However, the employer must limit the maximum bonus payable during the fiscal year to 20% of the employee’s salary.

 

What are the establishments/industries/factories covered by the act?

The law applies across India and covers:

All factories

Other establishments with 20 or more employees engaged on any day during the year

Any establishment or category of establishments recognized in the Gazette by the relevant governments

Part-time employees are also covered.

Establishments under the Payment of Bonus Act 1965 must continue bonus payments even if the number of employees decreases later on.

 

Which types of establishments are exempt from the application of the Act?

General Insurance Company or LIC employs workers.

Seafarers fall under the Merchant Shipping Payment of Bonus Act 1965.

The Reserve Bank of India employs staff.

Unit Trust of India, IDBI, Deposit Insurance Corporation, and similar organizations employ workers.

 

What are the criteria employees need to fulfill to qualify for a bonus?

Employees qualify to receive a bonus if they meet the following criteria:

Their monthly salary must not surpass Rs. 21,000/- (As per the 2015 Amendment).

They must have worked in the establishment for at least 30 days throughout the calendar year.

However, involvement in certain misconducts such as fraud, aggression, rioting, theft, misappropriation, or property sabotage disqualifies an employee from receiving a bonus (As per Section 9 of the Payment of Bonus Act 1965).

 

What is the maximum time for Bonus Payment?

Employers must disburse the bonus within eight months from the conclusion of the financial year or within one month from the enactment of the Payment of Bonus Act 1965.

 

How is the amount of Bonus due determined?

Section 10 of the Payment of Bonus Act 1965 requires all institutions covered by the act to provide a minimum bonus of 8.33% of the employee’s salary/wages. However, Section 11 stipulates that the maximum bonus allowable cannot exceed 20% of the employee’s salary/wages.

As of 2015, the calculation ceiling for bonus computation rose to Rs. 7,000 per month from its previous level of Rs. 3,000. Hence, employees with a gross salary of up to Rs. 21,000 per month qualify for a bonus.

Only the employee’s salary/wages and Dearness Allowance are considered for bonus calculation.

Therefore, if the Basic Salary and Dearness Allowance fall below Rs. 7,000 (the calculation ceiling), the bonus calculation will be based on the actual amount. However, if the Basic Salary and Dearness Allowance exceed Rs. 7,000, the bonus calculation will be based on Rs. 7,000 only.

 

What are the Act’s offense and penalty provisions?

If an individual fails to comply with any provision of the Payment of Bonus Act 1965 or its regulations, they may face imprisonment for up to six months, a fine of up to Rs. 1,000, or both.

Non-compliance with a directive issued under the Payment of Bonus Act 1965 may lead to imprisonment for up to six months, a fine of up to Rs. 1,000, or both.

If the corporation commits an offense under the Payment of Bonus Act 1965, individuals responsible for the company’s operations (such as Managing Director, CEO, CFO, Managerial Head) will incur corresponding penalties.

 

What are the most recent Act updates/changes?

An amendment named the Payment of Bonus (Amendment) Act, 2015, became effective on April 1, 2014, increasing the maximum calculation for bonus payment to Rs. 7,000.

Furthermore, the Payment of Bonus (Amendment) Rules, 2016, which revised the fundamental rules of 1975, were officially published in the gazette.

 

Bonus Disqualification Under the Act

Section 9 of the law stipulates that if an employee is terminated for reasons such as fraud, engaging in violent behavior on the business premises, or involvement in theft, misappropriation, or sabotage of company property, they become ineligible to receive a bonus under the Payment of Bonus Act 1965.

This guideline reflects the recommendation of the Bonus Commission, emphasizing that employees who contribute to the stability and prosperity of the industry, rather than those who display disruptive behavior, should receive bonuses. Undoubtedly, receiving bonuses entails a responsibility to uphold good conduct..

 

Payment of Minimum Bonus

Section 10 of the Payment of Bonus Act 1965 mandates that every employer must ensure that each employee receives a minimum bonus equal to 8.33% of their salary or wage earned during the fiscal year, or one hundred rupees, whichever is higher. For employees under the age of fifteen at the beginning of the fiscal year, this Section applies with sixty rupees substituted for “one hundred rupees.” The employer must still pay the minimum bonus even if the company experiences losses during the fiscal year.

 

Payment of Maximum Bonus

If the allocable surplus for a fiscal year specified in Section 10 exceeds the minimum bonus amount prescribed for employees under that Section, the employer may choose to give a bonus equivalent to each employee’s salary or wage earned during that fiscal year. The calculation of the allocable surplus under this Section takes into account any amounts allocated or set off under the provisions of Section 15.

 

Conclusion

The Payment of Bonus Act 1965 was enacted to legalize the practice of many organizations providing bonuses. It establishes a bonus calculation approach tied to profits and performance, enabling employees to earn beyond the minimum salary or income.