Navigating Bonus Payouts: Can Incentives Replace Bonuses Under the Payment of Bonus Act?

Dear All,

Can the bonus payout be substituted with the incentive schemes so that the incentive scheme can work in lieu of the bonus due to the employees (if any) under the Payment of Bonus Act, 1965.

What is the liability of loss-making companies with respect to bonus payout?

What is the treatment for ex-employees regarding bonus amount payable to ex-associates?

Please treat this very urgently.

Best Regards,
Jitendra

The Payment of Bonus Act will apply to every establishment that employs 20 or more employees. It is mandatory that even if the establishment is running at a loss, it has to pay a minimum bonus at 8.33% to all employees whose monthly salary (Basic Salary + Dearness Allowance) does not exceed Rs 10,000. Certainly, those who receive a gross salary between Rs 3500 and Rs 10,000 need to be given a bonus at the prescribed rate based on a maximum salary of Rs 3500.

If you substitute an incentive for a bonus, it will only be regarded as an additional value to employees, and any incentive given that is not based on the profitability of the firm will not be treated as a bonus. In fact, when the employer can fix the rate of bonus payable depending on the net profit and allocable surplus for the payment of the bonus, why should we opt for an incentive? I do not think that paying incentives will cost less than a bonus.

Regards,
Madhu.T.K

As regards to your points 2 and 3, which Mr. Madhu has not answered, are as follows:

Any company that has completed 5 years of existence comes under the purview of bonus, and the same is relaxable to a maximum extent of 1 year. From the 7th year onwards, the bonus has to be paid by the company whether it is in loss or profit. Also, note that those employees who have resigned but still worked during that financial year will be paid a bonus.

Sanjeev.

Madhu,

Thanks for the reply. Please clarify why payment of bonus should be linked to the profitability of the company. As per the law, after the first five years of a company, it must pay the minimum bonus regardless of losses.

If a company is in losses and has already paid or is in the process of paying incentives based on the production/sales of goods of the company, can the same be treated as a bonus and thus become adjustable against the payment of bonus as per the Payment of Bonus Act, as stated in Section 17?

Thanks again for the help.

Best Regards,
Jitendra

Dear Jitendra,

The preamble to the Payment of Bonus Act, 1965, states that it is "an Act to provide for payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith." Therefore, basically, the bonus is linked to production, productivity, and profitability of the firm. In other words, it is purely based on the capacity to pay. The provisions for determining the available and allocable surplus and for carry forward and set off of the same are provided in the Act with this perspective. The protection granted in the Act for infancy is also a measure to emphasize the scheme linked to profitability.

Section 17 of the Act addresses interim bonus, and the employer can adjust any advance of bonus paid from the final bonus payable. In regions where two major festivals occur, it is common to pay interim bonuses. For instance, in Kerala, interim bonuses are paid in April to enable employees to spend for Vishu, a festival, and the same is adjusted when the final bonus is paid in August/September during which another festival, Onam, takes place.

If you pay a bonus based on sales/production, it will be part of the salary and will be as per an agreement between the employee(s) and the employer. Usually, the incentive terms will be specified in the appointment order itself. To be eligible for deduction under Section 17 of the Payment of Bonus Act, the payment should be made under the head "bonus Advance."

Another important aspect to consider is that incentives vary from employee to employee based on their performance. In contrast, bonuses are based on the employees' salaries, and the salary for calculating the bonus does not include any incentives. Therefore, bonuses are expected to be similar for employees in the same category. If incentives paid are adjusted from the bonus payable, high-performing employees who have received substantial incentives will receive a lesser final bonus, while those who received fewer incentives will get a higher bonus. In such a case, the performance loses its significance, and everyone ends up getting the same total incentive—the declared bonus.

Regards,

Madhu.T.K

Dear Mr. Jitendra,

The conclusion given above by Mr. Madhu is very clear. If you adjust incentive as a bonus, there will be no meaning for the incentive...!!!