PAYMENT OF BONUS ACT, 1965

Objectives of the Act

Maintain Harmony between employer and employee

Employees to share the profits of the establishment

Prescribing Minimum and Maximum Bonus to employees with Set on and Set off Schemes

To which establishment this Act applies ?

Applies to

Every other establishments with at least 20 persons on

any day during the accounting year

Establishments with 10 to 19 persons by CG

notification

Establishment already covered by this act will continue even if number of persons fall short of

20 or 10 as the case may be.

Every Factory irrespective of number of

persons

These classes of Employees are not covered!!!

Universities

Educational Institutions

Inland Water Transport

Note : Seamen defined in Merchant Shipping Act and Employees registered under Dockworkers Actare also not covered under this act.

Accounting year

• Corporation = Year ending on the day of closing books

• Company = Period for which P&L account is prepared

• Other cases = Apr-Mar

Employer

• Factory = (Owner, Occupier) + (Agent & Legal Rep of Owner, Occupier)

• Other cases = Person having ultimate control over the affairs

Employee

• Person other than apprentice

• salary < Rs.10,000/pm

• does skilled, unskilled, manual, supervisory, managerial, administrative, technical or clerical work

• Express or implied terms of employment

Salary/Wages

• Basic + DA + Food Allowance

• Excludes overtime, other allowances, HRA, LTC, Bonus, Employer’s Contribution to PF.

Terms and Meanings

Can all the employees of the establishment, which is covered under this act, be entitled to bonus ?

Only those employees who had worked for at least 30 days in an accounting year &

with salary not more than Rs.10,000/-

Some employees are specifically entitled to bonus !1. A temporary workmen based on total number of days worked

2. An employee of seasonal factory

3. A Part time employee as a sweeper

4. A Retrenched Employee with minimum qualifying period

5. A Probationer

6. A dismissed employee reinstated with back wages

7. A piece rated Worker

Some employees are specifically disqualified to receive bonus !Employee dismissed for

i. Fraud

ii. Violent behavior

iii. Misappropriation of property

Available Surplus & Allocable Surplus Surplus arrived at by adjusting P&L account Net profit with Schedule II adjustments is considered as Available surplus.

67% of available surplus for a company which hasn’t declared dividend and 60% in other cases is considered as Allocable Surplus.

Minimum Bonus

Minimum amount the employer is bound to pay to the employee even if there is no (or) inadequate surplus in a year.

8.33% of salary/wages or Rs.100/- whichever is higher is the minimum bonus payable

Maximum Bonus

Maximum amount the employer can pay to the employee when allocable surplus exceeds minimum bonus payable in a year.

20% of salary/wages is the maximum bonus payable

This extra surplus or 20% of salary whichever is higher should be set onup to of 4 years.

Set on of Allocable Surplus

If allocable surplus exceeds maximum bonus, such maximum bonus should be paid to the employeeand the undistributed extra surplus over and above the maximum bonus (or) 20% of salary whichever is lower should be set on up to of 4 accounting years.

Maximum Bonus

Total Allocable surplus

To be paid to Employees as bonusExtra

Surplus

Set off of allocable Surplus

If allocable surplus falls short of minimum bonus and there are no sufficient ‘set on’ balance to pay the minimum bonus, then pay the minimum bonus and set off the deficiency up to 4 years.

MinimumBonus

Total Allocable surplus

To be compulsorily paid to Employees as bonus

This deficiency over and above the allocable surplus should be set off up to 4 years

What are the three categories of salary for determining the bonus ?

Salary < Rs.3500/pm

• Bonus = a percentage on his actual salary

Salary between Rs.3500/pm and

Rs.10,000/pm

• Bonus = a percentage on Rs.3500/pm

Salary > Rs.10,000/-

• Not eligible for bonus

Whether an employee, who is eligible for bonus, is entitled to 100% bonus ?

Only if he had worked in all the working days.If not ? Then bonus should be paid only for the days worked.

Number of working days is an important element in calculating bonus.So how to calculate number of working days?

All the days he had actually present in the establishment.

Few days, even though not present in the establishment, will be considered as a working day. What are those ?

• Leave with wages• Lay off period as per Industrial Disputes Act• Absent due to temporary disablement due to accident in

the course of employment• Maternity Leave

Provisions for Newly Setup Establishments

In first 5 years

Bonus only when

there are sufficient

profits

Min and Max bonus provisions

apply

Set on and set off

provisions will not apply

In the 6th

Year

Min and max

provisions totally apply

Set on and Set off

applies for 5th and 6th

year

In the 7th

Year

Min and Max

provisions apply

Set on and Set off

applies for 5th, 6th & 7th year

In the 8th

year

Min and Max

provisions apply

Set on and Set off

applies for 5th, 6th, 7th & 8th

year

From 9th

year onwards

This Act fully

applies

Make an application to appropriate government within 1 year of default

The Government issues a certificate to the collector

Collector recovers the bonus in the manner of land revenue

collection

When should the bonus be paid ?

Bonus for every year should be paid within 8 months from the close of accounting year

By making an application by the employer, he may extend to another 8 months

Maximum Period of late payment can be 2 years

What can the employee do if such bonus has not been paid?

Powers of Inspector

For further blogs, visit www.askmvb.weebly.com

Feel free to mail at mvb.vikram@gmail.com