BONUS - IMPACT OF RECENT AMENDMENT By: S N MURTHY, SENIOR ADVOCATE

BONUS - IMPACT OF RECENT AMENDMENT

                                                                                       By: S N MURTHY

                                                                                              SENIOR ADVOCATE

This has reference to the recent amendment to the Payment of Bonus Act 1965.  Under the amendment, apart from increasing the notional salary for the purpose of working out the bonus payable to Rs.7,000/-, it is also made clear that where minimum wages are fixed, the notional salary will be Rs.7,000/- or minimum wages whichever is higher.

Section-2(13) of the Act which defines an “employee” as under: [after amendment].

"employee" means any person (other than an apprentice) employed on a salary or wage not exceeding twenty  one 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;

Bonus is payable to all employees drawing monthly salary of Rs. 21,000/- or less. The employees described as staff or executives or officers are also employees under the Payment of Bonus Act, 1965.  As such, all employees, whether called workmen or staff or executives or officers who draw monthly salary of Rs.21,000/- or less are entitled to bonus under the statute. Only apprentices are excluded from the definition of employee, and as such they need not be paid bonus.

Section 2(21) of the Act defines “Salary or Wage” as under.

"salary or wage" means all remuneration (other than remuneration in respect of overtime 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);

(iv)           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;

(v)             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;

It is clear from the above, that “Salary” means basic wages and dearness allowance. Bonus will have to be paid after calculating allocable surplus in the manner prescribed under the statute. Bonus is payable on a notional maximum   monthly salary of Rs. 7,000/- or minimum wages, if any prescribed for the industry, whichever is higher. The minimum wages notifications all over the country fixes varying minimum wages for unskilled, semi-skilled, skilled, administrative position and in some cases managers also. The minimum wages increases with the position held, for example minimum wages for skilled workman is more than that of the minimum wages fixed for semi-skilled workman. As such, what minimum wages should be considered for calculation of bonus should be read with reference to the nature of work carried out by the workman concerned. For example, if a workman carries out skilled work and is paid minimum wages fixed for skilled workman, then the said minimum wages should be taken into account for calculation of bonus payable.   

The amendment has been given retrospective effect from 01-04-2014.  As such, it is necessary for you to pay the differential bonus payable for the year 2014-2015. 

The Payment of Bonus Act provides for computation of gross profits under Section 4 of the Act. In the case of companies other than Banking Companies, gross profit has to be calculated in the manner specified in the Second Schedule.  Thereafter, available surplus is required to be computed in terms of Section 5 of the Act.  67% of the available surplus is allocable surplus, which in effect is the share of the employees to be reserved for payment of bonus. Calculated on this basis, bonus will have to be paid to the employees. If the allocable surplus is nil or not sufficient to pay even 8.33% bonus, the employer has to pay minimum of 8.33% bonus. If the allocable surplus allows payment of more than 20% bonus, payment has to be restricted to 20%. If the allocable surplus results in the employees getting bonus between 8.33% and 20%, the actual figure has to be worked out, and bonus paid accordingly.

There is no option for an employer to decide between 8.33% and 20% at his choice.  Bonus has to paid in accordance with the provision of The Payment of Bonus Act, 1965.

Apart from the above, the Fourth Schedule to the Payment of Bonus Act deals with set-on and set-off of allocable surplus. If the company has made substantially good profits during a year which would entitle the employees to more than 20% bonus, the employees should be paid 20% bonus, and the excess remaining should be carried forward subject to a maximum of 20% of the bonus payable during that year, for paying bonus in subsequent years.

Section 2(4) of the Act defines ‘allocable surplus’ as under:-

(4) "allocable surplus" means,-

(a) in relation to an employer, being a company 6[(other than a banking company) which has not made the arrangements prescribed under the Income Tax Act for the declaration and payment within India of the dividends payable out of its profits in accordance with the provisions of section 194 of that Act, sixty-seven per cent of the available surplus in an accounting year;

(b) in any other case, sixty per cent of such available surplus;”

Section 2(6) defines ‘available surplus’ as under:-

“(6) "available surplus" means the available surplus computed under section 5;”

The computation of available surplus has to be carried out in terms of Section 5 of the Act. 

Section 15 of the Act deals with set-on or set-off on allocable surplus.  It reads thus:-

“15. Set on and set off of allocable surplus

(1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under section 11, then, the excess shall, subject to a limit of twenty per cent of the total salary or wages of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilized for the purpose of payment of bonus in the manner illustrated in the Fourth Schedule.

(2) Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment under section 10, and there is no amount or sufficient amount carried forward and set on under sub-section (1) which could be utilized for the purpose of payment of the minimum bonus, then such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.

(3) The principle of set on and set off as illustrated in the Fourth Schedule shall apply to all other cases not covered by sub-section (1) or sub-section (2) for the purpose of payment of bonus under this Act.

(4) Where in any accounting year any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.]”

The manner in which set-on and set-off should be calculated is also illustrated in the Fourth Schedule to the Act.  A reading of the Fourth Schedule would show as to how set-on and set-off is arrived at.  If you have made sufficient profits during the last four to five accounting years, there should be sufficient allocable surplus, which should be carried forward for payment of bonus during the subsequent years. When allocable surplus is substantially high and available, an amount equal to 20% of the total salary of the employees coverable under the Act will have to be carried forward for the succeeding year and so on upto and inclusive of fourth accounting year to be utilized for the purpose of payment of bonus in the manner illustrated in the Fourth Schedule.

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