Are Contract Workers Entitled to Bonuses? Seeking Your Insights on Our Approach

In one of the workshops related to contract labor management, one speaker queried if contract labor is eligible for a bonus or not. The question was raised in light of the fact that the Payment of Bonus Act does not specify payment to contract labor. Furthermore, the Contract Labor (Regulation and Abolition) Act is also silent on the payment of a bonus.

In our organization, we include the bonus component in the minimum wages payable, which is then paid to the contract labor. However, we would like to request our friends to share their opinions on this subject.

Why do you pay bonuses to your contractors' employees who are engaged in your establishment? Bonuses should be paid by the contractor. As far as you are concerned, you just have to ensure that bonuses have been paid to all employees of the contractor who are eligible for them. If you find that contract employees have not been paid bonuses, then you can intervene and arrange to give bonuses either by instructing the contractor or by doing so directly, pending recovery from the contractor.

Now, the practice of you fixing the wages of contractors' employees is very dangerous. If you fix them, that means your relationship with the contractor's employees is that of employer and employee. If so, the contract employees can claim employment in your establishment.

Furthermore, it is not by adding bonuses or other variables that you should determine wages as per the Minimum Wages Act.

Regards,

Madhu.T.K

We pay bonuses to contract laborers, but how can we ensure that the bonuses are being paid to all contract employees? The contractors provide bonuses for all their contract workers who have been working in the organization under their contract for more than 30 days. However, those who leave the job within 30 days do not receive the bonus. In some cases, the contractor submits a bonus disbursement statement to us, showing fake signatures of contract employees acknowledging receipt of the bonus.

Brijesh

You have to instruct the contractor to disburse the payment of bonus in the presence of an authorized representative of the Principal employer.

Dear All,

Could you please clarify whether the contractor labor is eligible for bonus under the Payment of Bonus Act? If so, who is responsible for paying it, and is it mandatory?

Regards

Primarily, it is the obligation of the contractor to pay bonuses to his workers.

Regards,
Madhu.T.K

Contract labor are not employees of the Contractor. They are a special category who acquire the status of 'contract-labor' under the Contract Labor Act-1971. If they were the employees of the Contractor, they would be eligible for bonus, gratuity, retrenchment compensation, etc., as the normal employees of an employer would be entitled to. However, 'contract-labor' are a special species who trace their origin and existence under the Contract Labor Act. Therefore, they are entitled to only those benefits as are specified for 'contract-labor' in the Act, which are wages, PF, and ESI. Nothing more, nothing less.

rhari

Hi Chaitra, I have a doubt. If we add a bonus to the monthly wage just to increase their net pay, will this bonus component attract the ESI?

Thank you.

There are two contrary views presented in the above posts. Can somebody please confirm whether contract workmen should be paid a bonus by the contractor or not?

Understanding Bonus Payment for Contract Workers

The Payment of Bonus Act, 1965 does not differentiate between a contract worker and other workers. It casts responsibility on all employers covered by the Act to make payment of bonus to their employees, subject to conditions mentioned in the Act.

The Principal Employer, not being the employer of contract workers, is not liable for payment of bonus. The contractor who engages the contract labor has to make payment of bonus, if applicable, as he is actually their employer.

Loading of the bonus amount in the contractual payment made to the contractor by the Principal Employer is quite natural. But don't mention that component as a bonus component.

In the event the contractor does not pay a bonus to his workers, the responsibility to pay the unpaid amount of bonus will not fall on the Principal Employer. Such responsibilities of the Principal Employer arise only in the case of non-payment of wages. As bonus (as per the Act) is excluded from the definition of 'wages' as defined under the Payment of Wages Act, 1936, bonus will in no situation be the Principal Employer's responsibility. Such contract workers may have to make a complaint against their employer before the authority under the Act for relief.

There is no legal requirement on the part of the Principal Employer to ensure that the contractor makes payment of bonus to his workers; however, morally, it is desirable to do so, as the contract workers are also working within our premises and any disruption in normal work by them might adversely affect our interests.

Entitlement of Contract Laborers to Gratuity

Viewers may note that contract laborers are entitled to gratuity as per the decision of the High Court of Judicature at Madras dated 20.11.2006. The Honorable Mr. Justice P.D. Dinakaran and The Honorable Mr. Justice P.P.S. Janarthana Raja ruled in the case of The Management of Cruickshank & Company Ltd. vs. The Appellate Authority under the Payment of Gratuity Act, 1992, and Regional Labour Commissioner (Central), Shastri Bhavan, Chennai. The Court held:

"The entitlement of contract laborers for gratuity cannot be dislodged or denied on account of tussle between the principal employer, who engaged the service of the contract laborers, and the contractor, who employed the contract laborers."

Furthermore, the Court stated:

"The gratuity claimed by the claimants herein, being a welfare benefit created and payable by operation of law under the provisions of the Payment of Gratuity Act which are included under clause (d) of Section 2(vi) of the Payment of Wages Act within the meaning of wages payable to the contract laborers, it would be the basic responsibility of the petitioner (i.e., the Principal Employer) to make payment of gratuity to the claimants in full or in part as per Section 21(4) of the Contract Labor Act, without prejudice to the right of the petitioner (i.e., the Principal Employer) to recover the same from the third respondent, contractor. Even though the initial responsibility to make such payment of gratuity lies with the third respondent, contractor, as the welfare legislations such as:

(i) Payment of Wages Act, 1936;

(ii) Contract Labor (Regulation and Abolition) Act, 1970; and

(iii) Payment of Gratuity Act, 1972,

are to be interpreted liberally and in the widest possible construction in favor of the laborers, the claimants herein."

Therefore, by virtue of this judgment, employees of the contractor deployed at the place of the Principal Employer became entitled to gratuity as per the Payment of Gratuity Act. In case the contractor fails to settle it, the employees can make a claim on the Principal Employer, who needs to settle it and becomes liable and thereafter recover it from the contractor.

Applying the same analogy, bonus payment may also be reckoned in the same way.

Regards, Rajanassociates

I am aware of the pronouncement by the Chennai High Court. Subsequently, in the year 2004, the Kerala High Court issued a judgment which categorically states that bonus (as per the Act) and gratuity cannot be claimed from the Principal Employer by a contract laborer, as such claims by a contract worker are not legally tenable (Comico Binnani Zinc Ltd vs. Pappachan. LLJ452 Ker).

In the year 2010, the Calcutta High Court, in the matter of Sailen Seth Vs. Dy. Labour Commissioner and others, 2011(1) SLR 417, pronounced a similar judgment. You may like to review the aforementioned judgments.

Bonus Obligation for Principal Employers

The issue seems to be whether, as a principal employer, we have a bonus obligation to the contractor. The answer is NO, except in the case of building operations. Please refer to the case Cominco Benani Zinc Vs Papacchan LLR123 (KER HC).

The Central Government passed an ordinance in 2007 to cover employees working on building operations through contractors. In that case, the principal employer would have to make provisions for a bonus. The calculation of the bonus would be done by the contractor. Therefore, the responsibility of the principal employer is to monitor that, just like wages, the bonus is given.

Dear All,

Could you clarify whether the contractor labor is eligible for a bonus under the Payment of Bonus Act? If yes, who has to pay, and is it compulsory?

Regards,
Sumitha.R

Payment of Bonus Act and Contract Labor

If I remember correctly, during 2007, an ordinance was signed by the then President, Mrs. Pratibha Patil, withdrawing Section 32 of the Payment of Bonus Act, 1965, wherein certain sectors were exempted from the payment of bonus. It was called The Payment of Bonus (Amendment) Ordinance, 2007 (http://www.prsindia.org/uploads/medi..._20To_20be.pdf).

A critical examination of the sectors and industries for which the exemption was withdrawn showed that they are all labor-intensive, such as those employing contract workers in building operations, merchant shipping, dock work, inland water transport, etc. The definition of "employee" covers "any person (other than an apprentice) employed on a salary or wage not exceeding three thousand and five hundred rupees per month in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative, technical, or clerical work for hire or reward, whether the terms of employment be express or implied," which also includes contract workers engaged through contractors.

Therefore, there is "no escape" but to pay a bonus to workmen. However, the procedure for calculating the "allocable surplus" from the business turnover is a tedious process, and thus the calculation of the bonus payable to workmen. This is a different topic altogether, and a financial expert would be able to explain it better.

Regards,

Contractors are not paying bonuses to their employees in the newly established unit. Is this in line with section 32 of the Bonus Act or not?

Regards,
Ranjan

If the contractor's establishment has been in existence for the last five years, he is bound to pay a bonus to his workers.