Government approved amendments to the Bonus Act, 1965 raising the limit for calculations of bonuses. More so, it has also made this act applicable from April 1st, 2014. This implies a “retrospective effect”, which is an added liability for employers. Establishments will now have to pay the unpaid bonus for the previous 2 financial years as well.The amendments have been made with the intention to bring more employees under the eligibility of the Bonus Act.  While this will certainly be cheered by employees, this also creates a financial liability for employers.  

Applicability of Act 

Every factory where in 10 or more persons is employed and other establishments in which 20 or more persons are employed on any day during an accounting year.

Certain States like Maharashtra has made this Act applicable to all the Establishments employing minimum 10 employees. 

Exemption for newly set up Establishments 

Newly set up establishment is exempted from paying bonus for the initial 5 years, provided no profit is made during these years. If the employer derives profit in any of the first five years, he has to pay bonus for that year. 

We came up with 9 questions that would clear all doubts and help you tackle the increase in statutory bonuses head on.  Here are the answers to all the questions that you may have: 

1.        What is Statutory Bonus?

A bonus is an additional payment given to employees with the intention to motivate them.  The Statutory Bonus came into existence with the approval of the Payment of Bonus Act in 1965 by the Government.  According to this act, certain establishments had to pay an amount to their employees based on their profitability each year.  This amount was to be over and above their basic salaries.

The purpose of the act was to enable employees to partake in the profits of their respective companies.   The bonus, when applicable, also gives employees an opportunity to earn more than the minimum wages. 

2. What has changed with the payment of the Bonus Act?

The government has approved amendments that have not only increased the amount paid out but also the number of people who are eligible. Here are the recent changes to the act:

·         Wage limit increased from Rs. 10,000 to Rs. 21,000

Earlier this act only covered employees that were earning up to Rs. 10,000 per month and lower.  However, the amendment has raised this ceiling to Rs. 21,000.  This has been done with the intention of bringing more employees under the eligibility of the Bonus Act. This also means that employers will have to pay employees that fall between the Rs. 10,000 and Rs. 21,000 the pending Bonus amounts since April 1, 2014.

·         Maximum bonus limit increased to 20% of Rs. 7000

Earlier, the maximum statutory bonus that could be paid out was 20% of Rs. 3500.  However, this has been changed to 20% of Rs. 7,000 (or minimum wages, whichever is higher).  This gives companies a chance to allot a greater portion of employees’ CTCs towards bonuses.

·         Minimum Bonus increased to 8.33% of Rs 7,000

Before the amendment, the minimum that could be paid to employee under the bonus act was Rs. 292 (8.33% of 3,500).  However, this amount has been doubled to become Rs. 583(or 8.33% of the minimum wages, whichever is higher).Since, companies are expected to pay all arrears since 2014,this particular change seems to be causing the highest discomfort for employers.  In states where the minimum wage is higher than Rs 7,000, the statutory arrears liability becomes even higher. 

3.   Who is the Bonus Act applicable to?

The Bonus Act 1965, is only applicable when all of the following conditions are met:

  1. The company is at least 5 years old
  2. The company has at least 20 employees
  3. The company has made a profit in that year
  4. The employee’s wages are not more than 21,000 every month

4.   Disqualification & Deduction of Bonus

·         Financial loss to the Employer to the extent that bonus can be deducted for that year.On dismissal of an employee for 

·         Fraud; or

·         Riotous or violent behaviour while on the premises of the establishment; or

·    Theft,misappropriation or sabotage of any property of the establishment or Misconduct of causing

5.   Do you have to pay past employees? 

Yes, employees that have left the organization are still eligible for their arrears.  Employers will have to pay the outstanding bonus of past employees as well.

6.   How do you make the payment?

The payment of Bonus for a financial year has to be made within 8 months of its completion.  Since the financial year in India ends in March, payments have to be made by the end of October of the next financial year.

7.   How do I calculate my liability as an employer? 

Your liability depends on a number of factors like:

  1. The minimum wages applicable in your state
  2. The number of employees with salaries less than Rs. 10,000
  3. The number of employees with salaries between Rs. 10,000 – Rs. 21,000
  4. The amount of Bonus already paid

8.   Penal Provision

For breach of provisions of the Act, the employer shall be punishable with imprisonment upto 6 months and/or fine not exceeding Rs.1,000.

9.   What is the current status of the Amendment Act?

The amendments to the Bonus Act and its retrospective impact puts labour based companies in an unfavourable position.  This is why planters in Kerala decided to file a petition with the Kerala High court, challenging the retrospective effect of the act.  The High Court, in response, has issued an interim order staying the retrospective implementation of the Bonus Act.  In the coming months and weeks, other states may also join Kerala in challenging the amendments of the Bonus Act.