The Payment of Bonus Act 1965 (“Act”) is applicable to every factory and other establishment in which 20 (twenty) or more persons are employed on any day during a financial year. The Act provides for the payment of bonus to person employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith. The Act grants a statutory right to employees for hire or reward, whether the terms of employment be express or implied, of an establishment to acknowledge the profits of his/her employer in any industry. On 31st December, 2015, President Mr. Pranab Mukherjee affixed his signature on the Payment of Bonus (Amendment) Bill, 2015 and the Payment of Bonus (Amendment) Act, 2015 (“Amendment Act”) came into existence. After the notification of the Amendment Act there was outcry all over the country specifically in the labour intensive industries. The Amendment Act introduced substantial changes with regards to calculation of bonus for certain employees and has also expanded the arena of the definition of employee. These amendments shall have a significant impact in the balance sheet of the related industries as the differential amount for the financial year 2014-2015 would have to be provided in the current financial year i.e. 2015 – 2016 to the employees. Section 19 of the Act mentions that bonus payments should be completed within 8 (Eight) months from the closing of the accounting year which may be extended by the appropriate authorities’ subject to a maximum limit of 2 (Two) years. Moreover, this Amendment Act shall have retrospective effect from 1st April, 2014 and no specific date for the payment of bonus has been provided for in the Amendment Act.
Highlights of the Amendment Act
- Amendment Act has amended the definition of employee under Section 2(13) of the Act by increasing the salary or wage limit of a person from Rs. 10,000/- (Rupees Ten Thousand) per month to Rs. 21,000/- (Twenty One Thousand) per month. Therefore, any employee who is receiving a salary or wage not exceeding Rs. 21,000/- (Twenty One Thousand) per month are eligible to be paid bonus.
- For the purposes of calculation of bonus under Section 12 the base salary or wage has been amended by enhancing the limit from Rs 3,500 (Rupees Three Thousand Five Hundred) per month to Rs. 7,000 (Rupees Seven Thousand) per month or the minimum wage notified for scheduled employment under the Minimum Wages Act, 1948 whichever is higher for consideration of bonus. The Act specifically mentions that bonus is payable to an employee in proportion to the salary or wage of an employee. Prior to this amendment the salary or wage of an employee was considered as Rs. 3,500/- (Rupees Three Thousand Five Hundred Only) irrespective of the wage of an employee for the calculation of the bonus. The Amendment Act has raised the salary or minimum wage limit to Rs. 7,000 (Rupees Seven Thousand) per month which shall be the lower threshold limit for calculation of bonus under the Act.
Additionally, to clarify, the percentage to issue bonus for every subsequent year has not been altered. According to Section 10 and Section 11 of the Act, the amount of minimum bonus payable to every employee shall be 8.33% to an amount in proportion to the salary or wage earned by the employee during the accounting year subject to maximum of 20% of such salary and wages.
- Further, an explanation has been provided which states that the term ‘‘scheduled employment’’ shall have the same meaning as assigned to it in section 2(g) of the Minimum Wages Act, 1948.
- Additionally, Section 38 of the Act, which deals with the power to make rules has been amended and it now clarifies that central government shall make rules subject to the previous publication by notification in the official gazette. The Bill seeks to mandate prior publication of such rules in the Official Gazette to allow for more public consultation.
Snapshot of the amended provision which shall have retrospective effect from 1st April, 2014 against the last provision has been provided below:
|Section of the Act||Provision|
|Section 2(13)||widened the scope of employees eligible for payment of bonus from those drawing salary of INR 10,000 per month to INR 21,000 per month.|
|Section 12||The salary or wage of an employee exceeds INR 7,000 per month or the minimum wage for the scheduled employment, the bonus payable to such employee shall be calculated as if his salary or wage were INR 7,000 per month or the minimum wage for the scheduled employment, whichever is higher.|
|Section 38||Expanded publication of amended rules in the official gazette to permit more public consultation.|
Dispute with regards to retrospective effect of the Amendment Bill
However, the implementation of the Amendment Act retrospectively caused confusion amongst employers. Most of the employers have opposed this amendment as it has added an additional financial burden on the employers as the financial statements have been closed for the preceding year.
The retrospective effect of the Amendment Act has been challenged in Karnataka High Court by way of a writ petition by Mr. B C Prabhakar, President of the Karnataka Employers Association. The second contention raised in the same case was about the effect of payment scale for calculation of the bonus, which has been prescribed to the minimum wages of the schedule employment or the scale fixed by concerned government, whichever is higher. The calculation of the bonus shall be taken into consideration from the financial year 2015 – 2016 and not from April 2014 as laid down by the court. The Hon’ble Court passed an interim order which stated that the amended provision i.e. second contention, shall be effectively implemented from 2015-2016 and has further, granted a stay on the retrospective operation of the Amendment Act till the final disposal of the writ petition.
Additionally, the Kerala High Court in United Planters’ Association of Southern India and another v. Union of India has also ordered a stay on the Amendment Act with regards to the retrospective operation.
Thereafter, Madras High Court on 25th February, 2016, in The Employer Federation of Southern India and others v. Union of India has also stayed the retrospective effect of the Amendment Act after considering the financial implication and imposition of additional liability on the employer for payment of bonus for the past year.
Furthermore, Madhya Pradesh labour office has issued a notification which has stayed the implication of the Amendment Act on the basis of the above mentioned interim judgements. The notification precisely mentions that the Amendment Act shall not be applicable to the State of Madhya Pradesh until the next order is passed by any of the aforementioned High Courts.
Further, Article 226 states that the applicability of an order passed by any High Court while questioning the constitutional validity of a parliamentary act whether interim or final shall prevail throughout the territory of India. Therefore, it is to be noted that these orders passed by Karnataka and Kerala High Court, even though they are an interim orders, shall prevail throughout the territory of India as per Article 226(2) of the Constitution of India.
Moreover, the employers of the labour industries have collectively written a letter to the government of India via the labour law reporter. The main concerns stated by them were that the retrospective effect shall be burdensome on the employer as the accounts for the year 2014-15 have already been closed and the bonus had been paid in accordance with the provisions on the Act as it stood on 1st April, 2015. Further, the bonus was paid after determining the profits and calculating of the allocable surplus for that particular year. Hence, the retrospective implementation from the perspective of employer has put an additional burden on the industry, which was neither planned nor budgeted.
For time being, the retrospective effect of the Amendment Act has been stayed till the final disposal of the cases mentioned above. In the event, the retrospective effect of the Amendment Act is upheld, clarity will be required on the point of time from which the bonus is payable and the financial year from which the liability accrues. Currently the extant provisions merely provide the applicability to be from 1st April, 2014 without specifying the relevant financial year i.e. whether the amendments are applicable for payments after 1st April, 2014 (which would include financial year 2013 – 2014) or for the financial year commencing from 1st April, 2014. Until the above is effectively resolved, businesses will be required to wait and watch and build in appropriate provisions in their accounts for incremental bonus payments.
– Archana Balasubramanian & Rupal Shah
Section 19: Time-limit for payment of bonus: All amounts payable to an employee by way of bonus under this Act shall be paid in cash by his employer
(a) where there is a dispute regarding payment of bonus pending before any authority under section 22, within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute;
(b) in any other case, within a period of eight months from the close of the accounting year: Provided that the appropriate Government or such authority as the appropriate Government may specify in this behalf may, upon an application made to it by the employer and for sufficient reasons, by order, extend the said period of eight months to such further period or periods as it thinks fit; so, however, that the total period so extended shall not in any case exceed two years.
Section 2 (13) of the Act: “employee” means any person (other than an apprentice) employed on a salary or wage not exceeding [ten thousand rupees] per mensem 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;
Section 12 of the Act: Calculation of bonus with respect to certain employees —Where the salary or wage of an employee exceeds [three thousand and five hundred rupees] 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 [three thousand and five hundred rupees] per mensem.
Section 10 – Payment of minimum bonus — 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: Provided that where an employee has not completed fifteen years of age at the beginning of the accounting year, the provisions of this section shall have effect in relation to such employee as if for the words “one hundred rupees”, the words “sixty rupees” were substituted.
Section 11– Payment of maximum bonus — (1) Where in respect of any accounting year referred to in section 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.
(2) In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section.
Section 2(21) – “salary or wage” means all remuneration (other than remuneration in respect of over-time work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment and includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living), but does not include—
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of foodgrains or other articles;
(iii) any travelling concession;
(iv) any bonus (including incentive, production and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him;
(vii) any commission payable to the employee.
Explanation — Where an employee is given in lieu of the whole or part of the salary or wage payable to him, free food allowance or free food by his employer, such food allowance or the value of such food shall, for the purpose of this clause, be deemed to form part of the salary or wage of such employee;
Section 2(g) of the Minimum Wages Act: “scheduled employment” means an employment specified in Schedule or any process or branch of work forming part of such employment.”
Section 38 of the Act – Power to make rules (1) The Central Government may make rules for the purpose of carrying into effect the provisions of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for—
- the authority for granting permission under the proviso to sub-clause (iii) of clause (1) of section 2;
- the preparation of registers, records and other documents and the form and manner in which such registers, records and documents may be maintained under section 26;
- the powers which may be exercised by an inspector under clause (e) of sub-section (2) of section 27
- any other matter which is to be, or may be, prescribed.
(3) Every rule made under this section shall be laid as soon as may be after it is made, before each House of Parliament while it is in session for a total period of thirty days, which may be comprised in one session 49 [or in two or more successive sessions], and if before the expiry of the session 50 [immediately following the session or the successive sessions aforesaid], both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.
 Karnataka Employers Association and another, WP No.5272 & 5311/2016 dated 2.2.2016.
 United Planters’ Association of Southern India and another vs. Union of India, WP(C) No.3025/2016(C) dated 27.1.2016.
 Article 226 (2) of the Constitution of India: The power conferred by clause (1) to issue directions, orders or writs to any Government, authority or person may also be exercised by any High Court exercising jurisdiction in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories.
Excellent findings on the issue