Every worker should be entitled to the benefits of the profits earned by the organisation as a whole. To achieve this end, the Indian government enacted the Payment of Bonus Act, 1965, which has been amended several times since its initial phases.
So should you, as an employer, be bothered about payment of bonus? Or should you, as an employee, be concerned about your rights? Read on to find out.
What is bonus?
In layman terms, bonus means the additional remuneration paid to employees/ workers of an organisation, to compensate them for the performance of the organisation as a whole and for the dedicated work of the employee towards the organisation. Several times, the pay package discussed by organisations discloses this bonus separately, with a remark that such bonus may be paid out only when certain conditions are fulfilled or certain performance metrics are achieved.
Which organisations are covered under the Payment of Bonus Act?
The following organisations are covered under the Payment of Bonus Act, 1965:
- Every factory;
- Every establishment where 20 or more persons are employed on any day during an accounting year (i.e. the period from 1 April – 31 March; or any other accounting period followed from the time of opening of accounts till the closing of accounts)
The term “factory” as per the Payment of Bonus Act, 1965 refers to its definition in The Factories Act, 1948. The same definition has been reproduced below:
Section 2(m) in The Factories Act, 1948
(m) “factory” means any premises including the precincts thereof—
(i) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or
(ii) whereon twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on — but does not include a mine subject to the operation of the Mines Act, 1952 (35 of 1952) or a mobile unit belonging to the armed forces of the Union, railway running shed or a hotel, restaurant or eating place.
Explanation I—For computing the number of workers for the purposes of this clause all the workers in different groups and relays in a day shall be taken into account;
Explanation II—For the purposes of this clause, the mere fact that an Electronic Data Processing Unit or a Computer Unit is installed in any premises or part thereof, shall not be construed to make it a factory if no manufacturing process is being carried on in such premises or part thereof;
To rephrase the above in simple words, if a manufacturing process is carried out with the aid of power and with 10 workers or more; or if a manufacturing process is carried out without the aid of power and with 20 workers or more (apart from certain exceptions), then the organisation shall be covered under the definition of factory and shall be liable under the Payment of Bonus Act, 1965.
Exempted organisations
The following are exempted from the purview of this act:
(i) employees employed by the Life Insurance Corporation of India;
(ii) seamen as defined in clause (42) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958);
(iii) employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948 (9 of 1948), and employed by registered or listed employers;
(iv) employees employed by an establishment engaged in any industry carried on by or under the authority of any department of the Central Government or a State Government or a local authority;
(v) employees employed by—
- the Indian Red Cross Society or any other institution of a like nature (including its branches);
- universities and other educational institutions;
- institutions (including hospitals, chambers of commerce and social welfare institutions) established not for purposes of profit;
(vi) employees employed by the Reserve Bank of India;
(vii) employees employed by—
(a) the Industrial Finance Corporation of India;
(b) any Financial Corporation established under section 3, or any joint Financial Corporation established under section 3A of the State Financial Corporations Act, 1951 (63 of 1951);
(c) the Deposit Insurance Corporation;
(d) the National Bank for Agriculture and Rural Development
(e) the Unit Trust of India;
(f) the Industrial Development Bank of India;
(fa) the Small Industries Development Bank of India established under section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989);
(ff) the National Housing Bank;
(g) any other financial institution [(other than a banking company) being an establishment in public sector, which the Central Government may, by notification in the Official Gazette, specify.
(viii) employees employed by inland water transport establishments operating on routes passing through any other country.
When is an employee/ worker eligible for bonus?
If the employee/ worker has worked at the organisation for atleast 30 days and is drawing a salary of not more than Rs. 21,000 per month, then such employee/ worker shall be eligible.
So, what is the minimum amount of bonus to be paid out?
As per the Payment of Bonus Act, the minimum bonus payable monthly is 8.33% of the monthly salary or 8.33% of Rs. 7,000 (whichever is higher).
As an example, if a person is receiving a monthly salary of Rs. 5,000, then the minimum bonus payable shall be: higher of Rs. 4,165 (8.33% * Rs. 5,000) or Rs. 5,831 *8.33% * Rs. 7,000). Since Rs. 5,831 is highe than Rs. 4,165, Rs. 5,831 shall be paid out as bonus.
And what is the maximum amount of bonus?
The maximum amount of bonus, as per the Payment of Bonus Act, is 20% of the monthly salary or 20% of Rs. 7,000 (whichever is higher).
What is the penalty for contravention?
If a person fails to comply with the provisions of this act, then such person shall be liable to imprisonment of upto six months or with a fine of upto Rs. 1,000 or with both.
In case you wish to refer to the Act, please click here for an updated version: Payment of Bonus Act, 1965
Any further questions? Please discuss below. Thanks for reading!
