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“The Payment of Bonus Act of 1965 requires firms to pay bonuses to employees in accordance to
the resources available to ensure the smooth operation of the business. The goal of the Act was to
offer employees a say in the company's earnings and allow them to earn little more than the
minimum wage based on their performance.”

History Of Payment Of Bonus Act, 1965

In 1917, certain textile factories granted their employees a 10% wage raise as a war bonus, which
appears to have originated the custom of awarding bonuses in India. The claim for bonus
payment was also included in several situations of labour disputes. In 1950, the Labour Appellate
Tribunal's Full Bench adopted a bonus calculating method. A demand for a revision in the
formula was made in 1959.”

“In March/April 1960, during the second and third sessions of the Standing Labour Committee
(G.O.I) in New Delhi, it was resolved to create a Commission to investigate the subject of
bonuses and develop acceptable regulations. The Indian government appointed a Tripartite
Commission to investigate and give recommendations to the government on the topic of bonus
payments based on earnings to employees working in companies. The Indian government
followed the Commission's recommendations with few adjustments. To carry out these
proposals, the Payment of Bonus Act of 1965 was passed, and it entered into force on September
25, 1965.”

Scope And Coverage Of The Payment Of Bonus Act, 1965

“The Bonus Payment Act applies to the entire country of India. Every institution with twenty or
more employees on any one day during the accounting year, as well as every factory that meets
the requirements of the factories legislation of 1948, is covered by this act. A person employed
under the terms of Section 2 (13) of the Act to perform any skilled or unskilled manual,
supervisory, managerial, administrative, scientific, or clerical work for hire or compensation,
other than an apprentice, is defined as any person (other than an apprentice) who is paid a salary
or wage of not more than twenty one thousand rupees per month in any industry to perform any

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skilled or unskilled manual, supervisory, managerial, administrative, scientific, or clerical work
for hire.”

The Act does not apply to the following classes of employees:

i. Employees employed in:

a. Life Insurance Corporation of India

b. Industry carried on or under the authority of any department of Central Government or a

c. Indian Red Cross Society or any other institution of like nature including its branches;

d. Universities and other educational institutions;

e. Hospital, Chambers of Commerce and Social Welfare Institutions established not for
purposes of profits;

f. employed through contractors on building operations;

g. Reserve Bank of India;

h. Industrial Finance Corporation of India, Deposit Insurance Corporation and other

i. Seamen as defined in Sec. 3(42) of the Merchant Shipping Act, 1958;

j. Inland Water Transport establishment. (Section 32).

Objective Behind The Act

This Act was enacted to provide provision for the payment of bonuses to people engaged in
specific businesses on the basis of profits or output, which is the purpose of the Act. According
to the Supreme Court in Jalan Trading v Mill Mazdoor Sabha1, "the purpose of the Bonus Act is
to maintain peace and harmony between labour and capital by allowing workers to share in the
prosperity of the establishment and prescribing the maximum and minimum rates of bonus, as
well as the scheme of "set-off" and "set - on" to not only secure the labor’s right in the share of
profits but also to enshrine in law the principle of equality between labour and capital."

1
Jalan Trading v Mill Mazdoor Sabha [1967] AIR 691

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Constitutionality Of The Act

“Mill Mazdoor Sabha2, a petition in the Supreme Court challenging the constitutional legality of
the statute on the grounds that it violated Articles 14 and 19 of the Constitution, won the victory.
A majority of the Supreme Court found that the principal element of the Act, which compelled
the payment of a minimum incentive, constituted constitutionally protected free speech. The
payment of a bonus is reasonable since it is in accordance with Articles 39 and 43 of the
Constitution of the Philippines.”

Bonus As Under The Act

“It is not mentioned anywhere in the bonus payment statute what constitutes a "bonus." A bonus
is a monetary incentive that is given in addition to and beyond the regular payment. According to
the Cambridge Dictionary, a bonus is an additional sum of money that is provided to you as a
present or reward for achieving a certain level of success. One of the key goals of awarding
bonuses is to redistribute income generated by the firm to its workers and employees.”

“In its report, the bonus panel stated that "it is impossible to define in precise terms the idea of
bonus, but it is reasonable to argue that if earnings reach a certain threshold, labour should
rightfully be entitled to a portion of those gains." In other words, we believe that the notion of
bonus should be construed as a means for employees to participate in the success of the company
in which they are employed. Moreover, in the case of low-wage workers, participating in
prosperity increases their wages, allowing them to close the gap between their real salary and the
need-based wage, which is a significant benefit. Attempting to raise the living standards of all
industrial and agricultural workers, as envisioned by Article 43 of the Constitution, may not be
feasible; however, there is nothing wrong with attempting to do so in the case of those workers
whose efforts have contributed to the profits of the company for which they have worked.”

“Such a bonus notion is not compromised by the difficulties in identifying or qualifying exactly
the living wage, or even the need-based pay, at any particular moment and location. A well
designed bonus system connected to profit looks to provide a desirable level of salary structure
flexibility as well as a measure of desirable flexibility. The workers are given the opportunity to
benefit from the success of the company without affecting the underlying- fundamental salary
structure.”

Eligibility For Bonus Under The Act

2
East Asiatic Co. Ltd. Vs Industrial Tribunal [1961] ILLJ 720 Cal

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“The payment of bonus is a statutory right under the act and According to the Section 8 of the
act, any employer who has worked for a minimum of 30 days in an accounting year, shall be
eligible for a bonus.”

“In East Asiatic Co. Ltd. Vs Industrial Tribunal 3, it was held that a retrenched employee is
eligible for bonus if they worked for a min of 30 days and have a salary of 10,000 pm in a year.”

“In the case of J. K. Ginning & Pressing Factory v. Second Labour Court, Akola & Others4, a
factory employed ten seasonal employees, and the issue of their bonus eligibility arose. The
Bombay High Court ruled that the Act does not exclude such seasonal workers from
employment; the only criterion for eligibility is that they meet the Section 8 requirements. As a
result, even seasonal employees were deemed to be entitled to bonus payments under the Act.”

Disqualification From Bonus Under The Act

Employees are disqualified from receiving bonuses under the Payment of Bonus Act, 1965, if
they are fired for:

• Fraud

• Riotous or violent behavior while on the premises of the establishment

• Theft, misappropriation, or sabotage of any establishment property, according to section 9 of

“Thisclause is based on the Bonus Commission's proposal that: After all, bonuses can only be
shared by those workers who contribute to the industry's stability and well-being, not by those
who actively disturb it. Without a doubt, bonuses entail an obligation of good behavior.”

“InPandian Roadways Corporation Ltd. vs. Presiding Officer5, the appellant, a bus conductor for
a government of Tamil Nadu undertaking, was discharged from service. The petitioner and
management eventually came to an arrangement, and the petitioner was appointed as a new
entrant. Following that, the petitioner requested an rs 1,842 incentive for the period following his
reappointment. "If an employee is dismissed from employment, he is excluded from collecting
any incentive under the aforementioned Act, not simply the bonus for the accounting year," the
court said in the case.”

“In
Gammon India Ltd vs Niranjan Das 6, the court held that under section 9 of the Payment of
Bonus Act, 1965, an employee who is dismissed from service for fraud, riotous or aggressive
3
J. K. Ginning & Pressing Factory v. Second Labour Court, Akola & Others [1991] 62 FLR 207 (Bom)
4
Pandian Roadways Corporation Ltd. vs. Presiding Officer [1996] 2 CLR 1175 (Mad)
5
Gammon India Ltd Vs Niranjan Das 1984 (1) S.C.C. 509
6
State v. Sardar Singh Majithia [1979] Lab. I.C.

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behavior on the company's premises, or who is guilty of theft, misappropriation, or sabotage of
any establishment's property is disqualified from receiving bonus for the accounting year. A
terminated employee who has been restored with back pay has clearly not committed the
aforementioned offences and has not been fired. As a result, he will receive a bonus.”

Rights Of Employer And Employee

The following are the rights that employees have under the said act:

1. Right to claim bonuses due under the Act, which permits individuals to file a claim with the
government for payment and recovery of bonuses that are not paid to them within one year of
their due date.

2. The right to bring any disagreement before a Labour Court or Tribunal; nevertheless, it is
important to note that employees who are not entitled to bonuses are unable to do so.

3. The right to demand clarification in order to learn more about the items sold under the
company's name so that they may assess if they are being adequately rewarded for their services.

The following are the rights accessible to the Employer in the event of exploitation or for the
defence of their business:

1. The right to take any disagreement to the Labour Court or the Tribunal in order to have any
clause of the Act interpreted.

2. Right to subtract a reasonable amount from an employee's bonus if the bonus was previously
paid as a festival bonus or if the employee's misbehavior resulted in a monetary loss.

3. The right to reduce the amount of a bonus awarded to an employee who was fired for
misbehaviour, obnoxious behavior, or impeding the establishment's property.

Payment Of Minimum Bonus

“Regardless of whether the employer has an allocable surplus in the accounting year, Section 10
of the Act requires each employer to give each employee a minimum bonus equal to 8.33 percent
of the employee's salary or wage received during the accounting year, or one hundred rupees,
whichever is larger. If an employee is under the age of fifteen when the accounting year begins,
the conditions of this Section apply to such employee as if the words "one hundred rupees" were
replaced with "sixty rupees." Articles 19 and 301 of the Constitution are not in conflict with

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Section 10 of the Act. Even if the employer loses money throughout the fiscal year, he is
required under section 10 of the act to pay the minimal bonus.”

“The court concluded in J.K. Chemicals Ltd. vs. Govt. of Maharashtra7 that if the bonus
responsibility is low in proportion to the damage caused, the firm is not released from its need to
pay minimal bonus. The company must pay the statutory minimum bonus if the damages were
not caused by employee misbehavior.”

Payment Of Maximum Bonus

“Ifthe allocable surplus for any accounting year referred to in Section 10 exceeds the amount of
the minimum bonus available to employees under that Section, the employer may give a bonus
equivalent to each employee's salary or remuneration for that accounting year. The amount
placed on or set off under the requirements of Section 15 shall be taken into account in
determining the allocable surplus under this Section in accordance with those provisions.”

Provisions Related To Bonus Under The Code On Wages, 2019

“Similarto the rules of the Payment of Bonus Act, 1965, the chapter on bonus payments under
the wage code applies only to companies employing at least 20 workers on any day during the
accounting year.”

“Allemployees whose salaries do not exceed a specific monthly amount would get an annual
bonus (to be determined by the federal or state governments). Bonuses are based on the higher of
the minimum wage or the applicable government's wage ceiling. The Code on Wages provides
disqualifications for getting bonuses, similar to the Payment of Bonus Act. It should be
emphasized, however, that the Code also says that expulsion from service as a result of a
conviction for sexual assault is a reason for bonus disqualification.”

Case Laws

“The Supreme Court held in Jalan Trading Co. v. Mill Mazdoor Sabha (AIR 1967 SC 691)7, that
Parliament's ability to set minimum bonuses cannot be questioned since the Act's goal is to
provide a fair distribution of surplus earnings among the three components of production. It
stems from the government's authority over industrial and labour conflicts, as well as the welfare
of workers. As a result, the Act is neither a violation of the Constitution nor a tainted use of
authority.”
7
Jalan Trading Co. v. Mill Mazdoor Sabha (AIR 1967 SC 691)

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“The Court held in M/s. J.K. Acrylics v. Union of India (1997 (2) LLJ 608.)8 that where the
Payment of Bonus Amendment Act, 1995, which replaced the Amendment Ordinance of 1993,
was challenged on the grounds that it could not have retrospective effect, the employer had no
right to claim that his liability to pay bonus could not be retroactively increased.”

“The Court held in J.K. Chemicals v. Maharashtra Govt. (1997 (3) Supp. LLJ 578.)9 that the
requirement to pay a mandatory minimum bonus is susceptible to a claim under Section 36 of the
Act. The payment of the mandatory minimum bonus, on the other hand, cannot be avoided just
because the accounting year in question produced a loss. Section 36's phrase "financial status of
the establishment" is broad enough to cover the establishment's loss as well as a variety of other
indicators, the sum of which would depict the establishment's economic situation.”

“A writ of mandamus will be issued forcing fulfilment of a statutory duty, according to Midhani
Workers and Staff Union v. Mishradhatu Nigam Ltd.10, Hyderabad. Regardless of the allocable
excess, responding industry is required by Section 10 of the Act to give a minimum bonus to its
workers.”

Section 36 - The government has the authority to exclude bonus

“The competent government may exclude payment of the minimum bonus in certain instances by
taking into account relevant conditions of a concern factory or business that is losing money.
Bonus exemption may be granted by the competent authorities for a limited time only. Phoenix
Mills v State of Maharashtra11 found that an order is not a legitimate order if the mill requested
for an exemption under section 36 and the minister declined it without taking into consideration
relevant facts.”

“The reasons for the occurrence of losses to the firm, the causes and cleverness in successive
occurrences of losses, the reasons must be justified, and there should not be an aim to evade
payment of bonus by producing false losses are some of the key elements (mens rea).”

Conclusion

“Aiming to legalise the practise of numerous businesses awarding bonuses, the Payment of
Bonus Act of 1965 was enacted. Profit and performance are used to calculate bonuses, and the
system facilitates this process. It enables employees to earn more money than the federally
8
M/s. J.K. Acrylics v. Union of India (1997 (2) LLJ 608.)
9
J.K. Chemicals v. Maharashtra Govt. (1997 (3) Supp. LLJ 578.)
10
Midhani Workers and Staff Union v. Mishradhatu Nigam Ltd.
11
Phoenix Mills v State of Maharashtra

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mandated minimum wage or compensation. This Act specifies a variety of processes for many
sorts of enterprises, including banks and government entities, as well as businesses that are not
organised as corporations or businesses that form partnerships. In addition to the method, this
Act also creates a strict redress process that must be followed.”

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