Bonuses are paid by employers to encourage their staff to work to their full potential. The Payment of Bonus Act of 1965 establishes a statutory bonus, which is frequently mistaken with the incentive bonus offered by companies. Unlike an incentive bonus, which is paid out of pocket, a statutory bonus is required by law. The payment of a statutory bonus under the Payment of Bonus Act is a matter of entitlement for the employee, not of choice for the employer.
The minimal amount of Statutory Bonus payable to an employee should be in accordance with the Payment of Bonus Act's rates and computations. The Act makes no provision for an employer to give a bigger bonus to his or her employee voluntarily.
The applicability and calculations of Statutory Bonus are discussed in this blog.
The Act's Applicability
The Payment of Bonus Act of 1965 applies to all factories and establishments with a workforce of 20 or more people. Departments, undertakings, branches, and other establishments are all included under the Shops and Establishments Act of various states.
Even if the number of employees falls below 20 after the establishments become subject to the Act, they should continue to pay the incentive.
Bonuses are available to employees who meet certain criteria:
Only employees who have worked in a business for at least thirty (30) days in a calendar year are eligible for a bonus. In any accounting year, an employee is assumed to have worked in an establishment on days when he or she has been laid off, on leave (with pay), or absent owing to temporary disablement caused by an accident arising out of and in the course of his employment, or when taking maternity leave.
If an employee's services are terminated owing to fraud, rioting, or violent behaviour on the grounds of the establishment, or due to an act of theft, misappropriation, or sabotage of the establishment's property, the employee may be barred from earning bonus payments from his employer.
Any agreements between the employee and the employee regarding bonus nonpayment are void.
Deductions in the amount of bonus to be paid
If an employee is found guilty of misconduct during an accounting year that results in a financial loss to the employer, the employer may deduct the amount of the loss from the amount of bonus payable to the employee for that accounting year only, and any remaining balance, if any, shall be remitted to the employee.
Startups and new businesses have special provisions.
For the first five years, startups and new businesses have been exempted from paying bonuses. Employers can only pay Statutory Bonus in the first five (05) years after the accounting year in which the new establishment/ startup begins operations, and only in the years in which the employer makes a profit.
Bonus Minimum and Maximum
An employee should be paid a minimum bonus of 8.33 percent of his or her income or compensation received during the accounting year, or Rs. 100, whichever is larger, according to the Act.
Because bonuses are paid from the establishment's allocable earnings, if the allocable surplus exceeds the amount of the minimum bonus payable to employees in a given year, the employer should pay a bigger bonus. It's worth noting that the Act sets a maximum bonus payout of 20% of the employee's income or compensation earned throughout the accounting year.
Bonus Payable Calculation
Employers must provide bonuses if their employees' gross earnings are less than Rs. 21,000 per month. The bonus will be calculated as follows:
If the salary is equal to or less than Rs. 7000/-, the bonus is determined using the following formula: Salary x 8.33/100 = Bonus
If the salary is more than Rs. 7,000/-, the bonus is computed following the formula: Bonus = 7,000 x 8.33/100 if the salary is more than Rs. 7,000/-
Note: Salary refers to the whole of the basic salary plus the Dearness Allowance.
Example 1: If A's monthly salary is Rs. 6000/-, her bonus will be = 6000 x 8.33/100 = 500 per month (Rs. 6000/- per year).
Example 2: If B's monthly salary is Rs. 7000, his bonus will be Rs. 583 every month (Rs. 6996 per year).
Example 3: If C's monthly salary is Rs. 15000, her bonus will be = 7000 x 8.33/100 = 583 per month (Rs. 6996/- per year).
Method of bonus payout and time limit for bonus payment:
All payments due to the employee as a bonus under the Act's provisions must be paid in cash. This means that bonuses cannot be disguised as perquisites or allowances by the employer.
Statutory Bonuses must be paid within eight months after the year's end. For example, bonuses for the fiscal year ending March 31, 2019 must be paid by November 30, 2019.
Bonuses are not required to be paid:
Payment of the minimum bonus may be waived in specific instances by the competent authorities, taking into account relevant conditions of a particular factory or business that is losing money, and may be given for a limited time only. The reasons for the occurrence of losses to the company, as well as the reasons and cleverness in the occurrence of losses in a row, may be crucial considerations. The variables must be reasonable, and there must be no desire to dodge bonus payment by inflating losses (mens rea).
When a bonus is not given or the Act is broken in any way, there is a penalty:
If a person violates the requirements of this Act in any way, he or she shall be punished by imprisonment for a period not exceeding six (06) months, a fine of Rs. 1000, or both.
Employees in the following categories are exempt from the Bonus Payment Act:
Employees of the Life Insurance Company, as specified under Section 42 of the Merchant Shipping Act of 1958.
Employees employed by firms who have registered or been listed under the Dock Workers Act of 1948.
Employees in any industry under the supervision of the federal or state governments.
Employees of the Indian Red Cross Society or non-profit educational institutes.
Personnel of the contractor who work on the construction site Reserve Bank of India (RBI) employees
Employees covered by Section 3 or Section 3a of the State Financial Corporation Act (SFC) 1951.
Employees of the International Finance Corporation, the Deposit Insurance Corporation, and the Agriculture Refinance Corporation.
Any financial institution that the Central Government has approved is a public-sector establishment.
Inland Water Transport Establishment workers.
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