The Payment of Bonus Act: A Comprehensive Overview

The Payment of Bonus Act of 1965 is one of the oldest legislations that emphasized on the welfare of the workers by regulating the payment of bonuses for them. The concept of payment of bonus to the employees working in an establishment, is materialized to encourage workers’ work efficiency by enriching their financial status.

What is Bonus?

In reference to our topic, “bonus” refers some extra payment or reward given by the employers to their employees on some special occasions. It is supplement to their regular income that employers usually provide from their surplus incomes. It is interesting to note that according to the Payment of Bonus Act, in certain establishments, providing bonus to the employees from the profit of the company is not an optional act but rather mandatory. One who fails to comply with this provision, may face fine or imprisonment or both.

Besides, in a general context, bonus could be of various types that employers give to their employees on different occasions such as performance bonus (given to those employees who made really hard efforts for the company); referral bonus (given to those employees who successfully refer a potential candidate from his personal contacts); retention bonus (it is given in certain companies where working environment is very harsh and adverse), etc.

What does the Payment of Bonus Act, 1965 Exactly Define?

With the objective to provide payment of some additional amount (other than regular wages i.e. bonus) to the employees especially for their moral boost up and welfare, the Payment of Bonus Act has been enacted in 1965. The bonus is given to the workers from the profit of the establishments. Such generous Act ensures a fair distribution of profits that also help in developing a friendly employer-employee relationship that ultimately help in increasing the productivity of the company.

Features of the Payment of Bonus Act, 1965

Major features of the Payment of Bonus Act are −

• Applicability − The Act that extent whole of India, is applicable to every establishment that employs 20 or more workers or employees and engaged in manufacturing, mining, oil fields, or plantations, or any such other class of establishments as may be notified by the government.

• Eligibility Criteria − As per section 8 of the Act, “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.” However, certain categories of employees are excluded, such as contractual or temporary employed. Besides, as per section 9 of the Act, one who is dismissed because of misbehavior or fraud, etc., will be disqualified and won’t be paid any bonus.

• Calculation of Bonus − Section 12 of the Act (read with some other provisions of the Act as the case may be) prescribes a formula for calculating the bonus.

• Payment of Minimum and Maximum Bonus − Section 10 states that every employee (until and unless discarded by the law), is eligible to get a minimum bonus of 8.33% of the salary or wage earned by them during that accounting year. And, on the other hand, as per section 11, an employee is eligible to get a maximum of 20% of the salary or wages.

• Set-offs and Deductions − The provision of this Act allows justified deduction based on (primarily) employees’ days of present and working and some other factors in a given situation.

• Dispute Resolution − In case of any dispute arises related to the payment of bonus, it will be resolved under the Industrial Disputes Act. There are defined forums (i.e. grievances cell, labour court) that try to resolve dispute arose between employees and employers.

• Penalties − As per section 28 of the Act, if any employer fails to comply with its provisions, then he shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.

Structure of the Payment of Bonus Act

The Act contains 40 sections and 4 schedules. The following table briefly defines all the sections and schedules −

Section	Content
Section 1	Short title, extent and application
Section 2	Definition
Section 3	Establishments to include departments, undertakings and branches
Section 4	Computation of gross profits
Section 5	Computation of available surplus
Section 6	Sums deductible from gross profits
Section 7	Calculation of direct tax payable by the employer
Section 8	Eligibility for bonus
Section 9	Disqualification for bonus
Section 10	Payment of minimum bonus
Section 11	Payment of maximum bonus
Section 12	Calculation of bonus with respect to certain employees
Section 13	Proportionate reduction in bonus in certain cases
Section 14	Computation of number of working days
Section 15	Set on and set off of allocable surplus
Section 16	Special provisions with respect to certain establishment
Section 17	Adjustment of customary or interim bonus against bonus payable under the Act
Section 18	Deduction of certain amounts from bonus payable under the Act
Section 19	Time-limit for payment of bonus
Section 20	Application of Act to establishments in public sector in certain cases
Section 21	Recovery of bonus due from an employer
Section 22	Reference of disputes under the Act
Section 23	Presumption about accuracy of balance-sheet and profit and loss account of corporation and companies
Section 24	Audited accounts of banking companies not to be questioned
Section 25	Audit of accounts of employers, not being corporations or companies
Section 26	Maintenance of register, records, etc
Section 27	Inspectors
Section 28	Penalty
Section 29	Offences by companies
Section 30	Cognizance of offences
Section 31	Protection of action taken under the Act
Section 32	Act not to apply to certain classes of employees
Section 33	Act to apply to certain pending disputes regarding payment of bonus
Section 34	Effect of laws and agreements inconsistent with the Act
Section 35	Saving
Section 36	Power of exemption
Section 37	Power to remove difficulties
Section 38	Power to make rules
Section 39	Application of certain law not barred
Section 40	Repeal and saving
Schedule I	Computation of Gross Profits I
Schedule II	Computation of Gross Profits II
Schedule III	Calculation of Bonus and Deduction
Schedule IV	Calculation of Bonus

Conclusion

The Payment of Bonus Act, 1965, was a pivotal piece of legislation that addressed the equitable distribution of profits between employers and employees. Interestingly, by establishing clear guidelines for bonus calculations and payments, the Act contributed to the promotion of industrial peace and a harmonious work environment. However, this Act was merged into the Code on Wages, 2019.

FAQs

1. Which establishments come under the purview of the Payment of Bonus Act, 1965?

The Payment of Bonus Act is applicable to all establishments that employs 20 or more persons. And, the examples of such establishments are, the companies those are engaged in manufacturing, mining, oil fields, or plantations, or any other class of companies as may be notified by the government.

2. Who is eligible to receive a bonus under the Payment of Bonus Act?

As per section 8 of this Act, all those employees, who have worked for a minimum of 30 working days in a financial year are eligible to receive a bonus. However, certain categories of employees, such as those employed on a temporary or contractual basis, are excluded.

3. How is the bonus calculated under the Payment of Bonus Act?

Sections 10 to 13 of this Act explain the procedure and formula of calculation of bonus on different conditions. Likewise, the bonus is calculated as a percentage of the allocable surplus. The allocable surplus is determined after deducting permissible set-offs and allocable direct taxes.

4. What is the minimum and maximum bonus payable under the Act?

Section 10 of the Act defines the payment of minimum wages and states that every employer is required to pay a minimum bonus of 8.33% of the salary or wage earned by an employee during the accounting year. Similarly, section 11 of the Act defines the payment of maximum bonus and states that every employer is required to pay a maximum bonus of 20% of the salary or wage earned by an employee during the accounting year.

5. Are there any deductions allowed in the calculation of bonus?

Section 13 of the Act allows certain set-offs and deductions, including sums payable by the employer. It is allowed especially in the case when employee did not work all the accounting year.

6. What mechanisms are in place for dispute resolution related to bonus payments?

The Act provides mechanisms for the resolution of disputes under the Industrial Disputes Act, 1947. The respective authorities hear appeals and resolve disagreements between employers and employees regarding bonus payments.

7. What are the penalties for non-compliance with the Payment of Bonus Act?

Section 28 of the Act imposes penalties on employers who fail to comply with its provisions. Penalties may include fines, imprisonment, or both, which is defined as - punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.