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What is Payment of Bonus Act

What is a bonus for an Employee?

A bonus is an extra money that an employee receives on top of his or her wages or salary. The person may receive the extra payment for good performance. All employees in a company receive extra money at a certain time of the year.

 

How does it work?

The Principal Act provides for the mandatory annual payment of bonus to eligible employees of establishments that employ 20 or more persons.

In accordance with the terms of the Principal Act, every employee who draws a salary of INR 10,000 or below per month and who has worked for not less than 30 days in an accounting year, is eligible for the bonus with the floor of 8.33% of the salary payable to him/her and a cap on the maximum bonus statutorily payable (20% of the salary).

 

The Payment of Bonus Act, 1965

1. Applicability: to any establishment with 20 or more employees or any factory with 10 or more employees.

2. Eligibility: for employees drawing ₹21000 per month or less (basic + DA, excluding other allowances). As per the 2015 amendment, when a salary exceeds ₹7000 or the minimum wages fixed by the government, the bonus is payable on whichever is higher.

3. Bonus payable: will be at a min rate of 8.33%, and max at 20 %.

 

Eligibility

In simple terms, Employees drawing ₹21000 per month or less (basic + DA, excluding other allowances) and have completed 30 working days in that financial year are eligible for the bonus payment.

By amending Section 2(13) of the Principal Act, the Amendment Act has now widened the scope of employees eligible for payment of bonus from those drawing salary of INR 7000 per month, to INR 21,000 per month.

The amendment in the eligibility limit appears to be an initiative that forms a part of the Central Government’s pro-labor policy. Interestingly, the last amendment to the eligibility limit was carried out in the year 2015 and over the past decade, the economy has seen significant reforms. These economic reforms have contributed towards an exponential increase in pay-scales making this amendment to the Principal Act very important to the larger populace of the workforce which earns between INR 7000 and INR 21,000 per month. However, if you are a startup, there is no requirement to pay a bonus for the first five years.

Components of bonus

It is to be noted that salary or wages include only basic and DA for the bonus payment, and the rest of the allowances (e.g. HRA, overtime, etc.) are excluded.

Contracted Bonus Payments

The bonuses for employers may also base them on different criteria such as sales, employee retention, or meeting growth goals.

Executive bonus payments are not always tied to performance results. Contracted bonus pay is not common outside of the executive suite. It is not the prerogative of the employer to pay the bonus to the contractors working under him. The bonus liability lies with the vendor who has contracted out the employees.

Calculation of Bonus

As per the amendment on the Payment of Bonus Bill passed in 2015, when wages or salary exceeds ₹7000 or the minimum wages fixed by the government, the bonus will be payable on ₹7000 or the minimum wages as fixed by govt., whichever is higher.

Taking the demands of the trade unions head-on, Section 12 of the Principal Act has been amended to state that where 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.

 

It may be noted that in accordance with the provisions of the Minimum Wages Act, 1948, minimum wage rates may be prescribed at a State as well as a central level. More often than not, the publication of notifications pertaining to minimum wage rates is delayed and has been subject to anomalies. Aggregating relevant data pertaining to minimum wage rates and ensuring that accurate calculations are made, for each state, may obstruct companies from processing the payment of bonuses.

 

Example:  Salary (Basic + DA) = ₹7200, Min Wages = ₹8000, Bonus will be payable on ₹8000

 

Disqualification of bonus

Employees can be disqualified from bonus payments if they are dismissed on the basis of fraud, misconduct, or even absenteeism. Please ensure that on dismissal, the procedures of domestic inquiry, proper documentation, and employee acceptance of the misconduct are all carried out as per the standing orders before disqualifying the bonus payment.