The Payment of Bonus Act, 1965

I. Answer in brief:-

1. Explain the object and applicability of Payment of Bonus Act, 1965.

Answer:

• The Payment of Bonus Act, 1965 is a legislation that aims to provide statutory guarantees for
the payment of bonus to employees in India. The act applies to every factory and
establishment employing 20 or more persons and any other establishment that the central
government may notify.
• The object and applicability of the Payment of Bonus Act is to:

a) To provide statutory recognition and legal framework:

The act aims to establish a legal framework that recognizes the right of employees to receive
a bonus for their efforts and contribution towards the organization's profits. It provides a
clear and enforceable mechanism for the payment of bonus.

b) To promote employee welfare:

The act ensures the fair and equitable distribution of profits amongst employees, thereby
promoting their welfare. It recognizes the importance of rewarding employees for their hard
work and motivating them to perform better.

c) To maintain industrial peace and harmony:

By setting standards and regulations for the payment of bonus, the act contributes in
maintaining industrial peace and harmony. It ensures that employees are paid their rightful
share of profits, reducing the likelihood of conflicts and grievances related to bonus
payments.

d) To encourage employee participation and ownership:

The act aims to foster a sense of ownership and participation among employees in the
success of the organization. By providing a bonus based on profits, it incentivizes employees
to work towards the company's growth and profitability.

e) To establish fair and consistent practices:

The act sets guidelines for calculating bonus amounts, making adjustments, deductions, and
exemptions. It ensures that payment of the bonus is done in a fair and consistent manner,
addressing any potential discrepancies and ensuring that all eligible employees receive their
rightful share.

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2. What are the circumstances under which an employee is not eligible for Bonus?
Answer:

• According to the Payment of Bonus Act, 1965, there are certain circumstances when an
employee may not be eligible for a bonus. These circumstances include:

a) Non-fulfillment of eligibility criteria:

To be eligible for a bonus, an employee must have worked in an establishment for a
minimum period of 30 working days in a financial year. According to Sec. 8, if an employee
fails to meet this eligibility criterion, they may not be entitled to the bonus.

b) Dismissal for misconduct:

According to Sec. 9, if an employee is dismissed from service due to misconduct or any act
detrimental to the organization, they may not be eligible for a bonus. This decision is usually
taken by the employer based on an inquiry or disciplinary proceedings.

c) Voluntary resignation or retirement:

If an employee voluntarily resigns from their job or retires from service, they may not be
entitled to a bonus. This is because the bonus is typically linked to the employee's
employment during the particular financial year.

d) Losses incurred by the organization:

According to the act, if an establishment incurs losses in a financial year, the employer is not
obligated to pay any bonus to the employees. The act specifies that only when the allocable
surplus (which is the amount available for distribution as bonus) is positive, the bonus is
payable.

e) Bonus exceeding the statutory limit:

The act sets a limit on the maximum bonus payable to an employee, which is capped at 20%
of the employee's salary (basic wages, dearness allowance, and retaining allowance). If the
bonus amount calculated exceeds this limit, the excess amount will not be payable as per the
act.

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3. In what circumstances an employee is disqualified from receiving a bonus?
Answer:

• An employee may be disqualified from receiving a bonus in various circumstances

depending on the company's policies, employment contract, or specific situations. Some
common circumstances where an employee might be disqualified from receiving a bonus
include:

a) Non-performance or poor performance:

If an employee does not meet the required performance standards or fails to achieve certain goals
or targets, they might be disqualified from receiving a bonus. Many companies tie bonus
eligibility to performance evaluations or specific metrics.

b) Termination for cause:

If an employee is terminated for significant misconduct, violation of company policies, or any
act that breaches the terms of their employment contract, they may be disqualified from
receiving a bonus. This can include actions such as theft, fraud, harassment, or gross negligence.

c) Resignation before the bonus payout date:

Some companies have policies that state an employee must be employed in the organization on
the bonus payout date to be eligible. If an employee resigns or leaves the company before that
date, they might be disqualified from receiving the bonus.

d) Limited employment duration:

Some companies specify that an employee must have completed a minimum period of service to
be eligible for a bonus. If an employee has not been employed for the required period, they may
be disqualified from receiving the bonus.

e) Financial or economic factors:

In certain circumstances, such as severe financial losses or economic downturns, companies may
implement cost-cutting measures and suspend or reduce bonus programs altogether. In these
cases, all employees, regardless of their individual performance, might be disqualified from
receiving a bonus.

• It is important to note that these circumstances can vary depending on company policies and
local employment laws. Therefore, it is advisable for employees to refer to their employment
contracts and company policies to understand the specific circumstances under which they
might be disqualified from receiving a bonus.

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4. State the offences and punishment under the Payment of Bonus Act, 1965.
Answer:

• Under the Payment of Bonus Act, 1965, the following are the offences and punishments:

a) Failure to pay bonus:

If an employer fails to pay the minimum bonus as required under the Act, they shall be
punishable with imprisonment for a term up to six months, or with a fine up to ten thousand
rupees, or with both.

b) Deduction of bonus:
If an employer makes any deduction from the bonus payable to an employee, except in cases
allowed by the Act, they shall be punishable with imprisonment for a term up to six months,
or with a fine up to ten thousand rupees, or with both.

c) Obstructing the Inspector:

If any person obstructs the Inspector appointed under the Act in discharging their duties, they
shall be punishable with imprisonment for a term up to six months, or with a fine up to one
thousand rupees, or with both.

d) False statement:
If any person knowingly makes any false statement or a false representation for the purpose
of avoiding any payment under the Act, they shall be punishable with imprisonment for a
term up to six months, or with a fine up to two thousand rupees, or with both.

• It is important to note that the exact penalties may vary based on the severity of the offence
and applicable regulations in a particular jurisdiction.

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5. What is the meaning of "available surplus" and "allocable surplus" and what is the
connection between allocable surplus and bonus?
Answer:

• In the context of the Payment of Bonus Act, 1965, "available surplus" and "allocable surplus"
are two important terms related to the calculation and distribution of bonus.

a) Available Surplus:
Available surplus refers to the surplus profits earned by an establishment which is available
for distribution as a bonus to the eligible employees. It is calculated after deducting certain
specified sums from the gross profits of the establishment.

b) Allocable Surplus:
Allocable surplus refers to the portion of the available surplus that is allocable as a bonus to
the eligible employees. It is calculated after making certain other deductions and
appropriations from the available surplus.

• The connection between allocable surplus and bonus is that the allocable surplus determines
the amount of bonus that can be distributed among the eligible employees.
• The Act specifies that a minimum percentage of the allocable surplus, usually a certain
percentage of the salary or wages earned by the employees, should be paid as statutory bonus
to the eligible employees.
• The Act also empowers the employer to pay a higher percentage of the allocable surplus as
bonus depending on their discretion and financial capacity.
• However, the allocation of the surplus and payment of bonus should not exceed a certain
percentage of the salary or wages.
• This ensures that the employees receive a fair and equitable share of the establishment's
profits in the form of bonus.

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6. Explain the concept of Set-On and Set-Off under the Payment of Bonus Act, 1965.
Answer:

• Under the Payment of Bonus Act, 1965, the concept of set on and set off refers to the
adjustment of bonus liabilities against certain available surpluses or losses. This concept is
relevant when calculating and paying bonuses to eligible employees in an establishment.

a) Set On:
Set on, in the context of the Payment of Bonus Act, occurs when an establishment has a
surplus in the accounting year. The Act specifies that if an employer has more allocable
surplus than required to pay the minimum bonus to the employees, the excess amount can be
set on against the subsequent years' bonus payments. This allows the employer to utilize the
surplus to fulfill bonus obligations in the future. However, it is important to note that any set
on cannot be carried forward for more than four years.

b) Set Off:
Set off, on the other hand, is applicable when an establishment incurs a loss in a particular
accounting year. The Act allows an employer to set off the loss against any allocable surplus
of the previous accounting year(s). This means that if an establishment has a loss in one year,
it can utilize the surplus from previous years to adjust the loss. The set off provision ensures
that the employer does not have to pay bonus in a year of loss, allowing them to recover from
that financial setback.

• The concept of set on and set off under the Payment of Bonus Act, 1965, helps in
maintaining a balance between the rights of employees to receive bonus and the financial
sustainability of the employer.
• It provides flexibility in the payment of bonuses, allowing surplus amounts to be carried
forward and losses to be adjusted against previous surpluses.
• However, it is important for employers to comply with the provisions and limitations
mentioned in the Act to ensure fair treatment and adherence to the law.

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7. What is the time limit for making payment of bonus to the employees?
Answer:

• According to the Payment of Bonus Act, 1965, the time limit for making payment of bonus
to the employees is within 8 months from the end of the financial year. This means that the
employer should distribute the bonus to the eligible employees by the 8th month following
the completion of the financial year for which the bonus is being calculated.

• It's important to note that the Act allows the employer to obtain an extension of this time
limit from the appropriate authority, such as the Assistant Commissioner of Labour or the
Regional Labour Commissioner. The extension can be granted for a maximum period of 6
months if the employer can provide valid reasons for the delay in payment.

• However, it's advisable for employers to make timely payment of bonus to the employees
within the stipulated time frame to comply with the legal requirements and maintain a
positive employer-employee relationship.

8. Which institutions are exempted from payment of bonus?

Answer:

The Payment of Bonus Act, 1965, exempts the following institutions:

• Public-sector undertakings (government-owned corporations, departments, agencies) are

exempted from the Act's provisions.

• Certain institutions or class of institutions that are notified by the central government and
deemed to be public-sector undertakings are exempted.

• Charitable institutions, organizations engaged in educational, research, or healthcare

activities and universities are exempted from the Act's provisions.

It is important to consult the specific provisions of the Act and any amendments or notifications
made by the central government to determine the exact exemptions applicable at a given time.

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