Legal Guide

Understanding the Payment of Bonus Act 1965

by Digant Sharma · 3 min read

Payment of Bonus Act 1965

Introduction

The payment of bonus is governed by the “Payment of Bonus Act 1965,” as amended by the “Payment of Bonus Rules, 1975” (central rules), the main goal of which is to establish a legal responsibility on the employer to provide for the bonus payment.

The Payment of Bonus Act 1965 applies to every factory or enterprise employing at least 20 people on any day throughout the fiscal year.

What exactly is a Bonus?

A bonus is defined as a “reward” or any additional payment added to the employee’s monthly wage by the employer in any institution. The primary goal of the bonus is to distribute the organization’s earnings among its employees. Any contribution in kind is a must, not a bonus.

The minimum bonus shall be 8.33% of the wage for the year, or one hundred rupees for employees over 15 years old and sixty rupees for employees under 15 years old, whichever is greater. During the fiscal year, the maximum bonus is 20% of pay.

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

The statute covers the entire country of India, and it applies to

  • Every Factory
  • Other Establishments where 20 or more employees are engaged on any day during the year
  • Any Establishment or Class of establishment recognized in the Gazette by the Appropriate Government \sPart-time Employees also included.
  • The establishments covered by the Payment of Bonus Act 1965 must continue to pay the incentive even if the number of employees decreases in the future.

What are the types of establishments to which the Act does not apply?

  • Employees of General Insurance Company or LIC
  • Seamen specified under the Merchant Shipping Payment of Bonus Act 1965
  • Employees of the Reserve Bank of India
  • Employees of Unit Trust of India, IDBI, Deposit Insurance Corporation, and so on

What are the eligibility conditions that employees must meet in order to get a bonus?

Under the statute, anybody is eligible to receive a bonus if they meet the following criteria:

  • The employee must be paid a monthly payment of up to Rs. 21,000/-. (By the Amendment of 2015)
  • The employee must have worked in the plant or facility for at least 30 days throughout the calendar year.

However, some behaviors, such as fraud, aggressive behavior, rioting, theft, misappropriation, or sabotage of property, disqualify an employee from receiving a bonus. (According to Section 9 of the Payment of Bonus Act 1965)

What is the maximum time for Bonus Payment?

The bonus must be paid within eight months after the end of the fiscal year or within one month of the act’s (Payment of Bonus Act 1965) implementation.

How is the amount of Bonus due determined?

The legislation provides a minimum bonus of 8.33% of the employee’s salary/wages, which is the lowest percentage that must be paid by every institution or organization covered by the act (Section 10 of the Payment of Bonus Act 1965); nevertheless, the maximum bonus shall not exceed 20% of the workers’ salary/wages (Section 11 of the Payment of Bonus Act 1965).

The limit amount on which the bonus payment is computed is Rs. 7,000 per month (as of 2015), up from Rs 3,000 before. As a result, if the employee’s gross salary is up to Rs 21,000 per month, the employee is entitled to a bonus.

Only the employee’s salary/wages and Dearness allowance are used for bonus computation.

As a result, if the Basic Salary and Dearness Allowance are less than Rs. 7,000 (calculation ceiling), the Bonus will be calculated on the real amount; if the Basic Salary and Dearness Allowance are greater than Rs. 7,000, the Bonus will be calculated on Rs 7000 only.

What are the Act’s offense and penalty provisions?

If someone violates any term of the Payment of Bonus Act 1965 or rules, he or she will be penalized with “imprisonment” for up to 6 months, or a “fine” for up to Rs 1,000, or both.

If a person gets a direction under the Payment of Bonus Act 1965 and fails to comply with it, he or she will face “imprisonment” for up to 6 months, or a “fine” of up to Rs 1000, or both.

If the corporation commits an offense under the Payment of Bonus Act 1965, every individual responsible for the company’s operations (Managing Director, CEO, CFO, Managerial Head) shall be penalized correspondingly.

What are the most recent Act updates/changes?

In recent years, there has been a modification in the year 2015, which is the Payment of Bonus (Amendment) Act, 2015, which came into force on 1st April 2014, increasing the calculation maximum for payment of bonus to Rs.7,000.

Furthermore, the Payment of Bonus (Amendment) Rules, 2016, which amended the core rules of 1975, were published in the official gazette.

Bonus Disqualification Under the Act

According to section 9 of the legislation, an employee is unable to receive a bonus under the Payment of Bonus Act 1965 if he is fired for: fraud, riotous or violent behavior while on the grounds of the business, or theft, misappropriation, or sabotage of any property of the company.

This rule is based on the Bonus Commission’s suggestion, which said that: After all, bonuses can only be shared by workers who enhance the stability and well-being of the industry, not by those who actively demonstrate disruptive tendencies. Without a doubt, bonuses entail an obligation to good behavior.

Payment of Minimum Bonus

According to Section 10 of the Payment of Bonus Act 1965, regardless of whether the employer has an allocable surplus in the fiscal year, each employer shall give each employee a minimum bonus equal to 8.33 percent of the employee’s salary or wage received during the fiscal year, or one hundred rupees, whichever is larger. If at the commencement of the fiscal year, an employee is under the age of fifteen, the terms of this Section apply to such employees as if the words “one hundred rupees” were substituted with “sixty rupees.” Articles 19 and 301 of the Constitution are not violated by Section 10 of the Payment of Bonus Act 1965. Even if the company loses money throughout the fiscal year, the minimum bonus must be paid.

Payment of Maximum Bonus

If the allocable surplus for any fiscal year referred to in Section 10 exceeds the amount of the minimum bonus available to employees under that Section, the employer may give a bonus equivalent to each employee’s salary or wage earned during that fiscal year. The amount placed on or set off under the requirements of Section 15 shall be taken into account when assessing the allocable surplus under this Section.

Conclusion

The Payment of Bonus Act 1965 was enacted to make the practice of numerous organizations offering bonuses legal. It has a bonus calculation method based on profit and performance. It enables employees to earn more than the minimum pay or income.

Even if the company loses money throughout the fiscal year, the minimum bonus must be paid.To know more, talk to a legal expert now.

Digant Sharma

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Digant Sharma

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