CALCULATING BONUS ACCORDING TO BONUS ACT

INTRODUCTION

Bonus is paid by employers in order to motivate their employees, and to make them strive for
excellence. The payment of statutory bonus is provided for by The Payment of Bonus Act,
1965.

WHAT IS STATUTORY BONUS?

Although often confused with incentive bonus, which is paid by employers, statutory bonus is
different from incentive bonus. Incentive bonus is an ex-gratia payment, or payment by favor,
while on the other hand, statutory must compulsorily be paid by law. Being paid statutory
bonus is not a matter that is left to the employer’s discretion. It is the right of the employee to
be paid statutory bonus. 

PAYMENT OF BONUS ACT, 1965

India has a principle law that regulates the procedure for payment of bonus to employees. The
name of that law is the Payment of Bonus Act, 1965. 
The act covers establishments and factories that employ more than 20 people. The establishments so covered by the Act, must continue to pay bonuses even if the number of employees falls to below 20, in that accounting year.

The objective of the Act is to reward the employees of the organization by giving them a share of the profits earned as this is linked to, and can increase productivity in a positive manner. The employees eligible to receive bonuses through the Act are those who receive Rs. 21,000 or less monthly and have completed at least 30 working days that financial year.

APPLICABILITY OF THE ACT

The Payment of Bonus Act and its provisions apply to every factory and establishment that
employs more than 20 people. Here, the term ‘establishments’ means the same as the Shops
and Establishments Act of various states. ‘Establishments’ includes various states,
departments, undertakings, branches, etc.

ELIGIBILITY OF EMPLOYEES TO RECEIVE BONUS

Only the employees who have worked in the establishment for more than 30 days are eligible
to receive bonuses in that specific year. The employee is deemed to have been working in the
establishment in any accounting year even on the days where they have been on leave with salary, laid off, availing of maternity leave or absent due to temporary disablement caused by an accident in the course of employment.

However, if the employee’s services are brought to an end due to reasons such as fraud,
riotous behavior or violent behavior within the premises of the factory or establishment, or on
account of misappropriation, theft or sabotage of the property belonging to the establishment
then the employee shall not be eligible for receiving the bonus.
Agreements between the employer and employee resulting in non-payment of the bonus shall
be considered invalid.

MINIMUM AND MAXIMUM BONUS

The Payment of Bonus Act, 1965 has laid down a minimum as well as maximum bonus
payable to the employee in an accounting year. The employee should be paid a minimum
bonus of 8.33% of the salary earned by the employee in that accounting year or Rs.100,
whichever is higher. The bonus is paid out of the profits of the factory or establishment. Thus, in a year when the allocable surplus is more than the minimum amount of bonus that is payable to them
employees, the employee must pay a higher bonus.

Here, it is important to note that the Act has also stipulated an upper limit of 20% of the
salary or the wage earned by an employee during that accounting year for the maximum
bonus to be paid.

CALCULATING THE BONUS PAYABLE

The employers must provide their employees with bonus if the employees earn below Rs.
21,000. The bonus can be calculated in the following ways depending on whether the salary is equal
to or less than Rs. 7,000 and if it is more than Rs.7,000: -
Here, ‘salary’ refers to the total of Basic Salary and Dearness Allowance
(Salary= Basic salary + Dearness allowance)

(a) If the employee’s salary is equal to or less than Rs. 7,000, the bonus can be calculated by
using the formula: Bonus= Salary x 8.33/100
(b) If the employee’s salary is more than Rs. 7,000, the bonus can be calculated by using the
formula: Bonus= 7,000 x 8.33/100

EXEMPTED ESTABLISHMENTS

Certain establishments may choose to waive the payment of minimum bonus, after taking
into consideration the relevant conditions of the factory or establishment that is losing money.
For such a decision, it is imperative to thoroughly investigate whether the company is operating in losses and subsequently, what the causes of the losses faced are. Factories and establishments cannot dodge the payment of bonuses by inflating their losses. Also, the variables must be reasonable. Companies must pay bonuses even if they face losses. 

The following sections of employees are not eligible for payment of bonus under the Payment
of Bonus Act: -
(a) Employees who are working for an inland water transport company
(b) The personnel of contractors who work at construction sites
(c) Employees who are working for firms that have been registered or listed under the
Dock Workers Act, 1948.
(d) Employees of industries that are controlled by the Government. This is regardless of
whether it is federal or state controlled.
(e) Employees of the Life Insurance Company as stated under Section 42 of the Merchant
Shipping Act, 1958.
(f) Employees working for the Indian Red Cross Society or other non-profit educational
Institutes.
(g) Employees of the Reserve Bank of India (RBI)
(h) Employees of financial organisations that are governed by Section 3 or Section 3(a) of
the State Financial Corporation Act, 1951

Employees working under the International Finance Corporation, the Deposit Insurance Corporation or the Agriculture Refinance Corporation

EXCEPTION FOR NEW COMPANIES

A new company that sells good or provides services is only liable to pay a bonus if they have
made a profit in the first five accounting years. Thus, if the company does not make profits in
any of the first five years, they are exempt from paying their employees a bonus.

OFFENCES AND PENALTIES

In case a factory, establishment or individual breaches the Act, they shall be penalized with
six months of imprisonment or a fine of Rs. 1,000 or both.
If the Act is breached by a company, firm or corporate body, its directors, partners, or officer responsible for conducting business will be considered guilty, unless proved that such breach was committed without their knowledge and that they exercised all due diligence.

CONCLUSION

Bonuses are paid to employees as incentives. The Payment of Bonus Act makes it compulsory to pay bonuses to employees that earn less than Rs. 21,000. The act covers establishments and factories that employ more than 20 people. In order to be eligible for payment of bonus, the employee must work for 30 days in that accounting year. There are certain establishments that are exempted from payment of bonus such as inland water transport companies, the Reserve Bank of India, the Life Insurance Company, etc. The Act has also instituted several penalties for those who breach the Act.

BY- SHRUTI NAVAYATH