Bonus Liability for Contract Employees: Who's Responsible and Why?

Bonus Liability for Contract Employees

Is a bonus a liability of the principal employer to a contract employee? Please explain with any relevant judgment or rule.

Principal Employer's Liability for Bonus to Contract Labour

The principal employer is liable to pay a bonus to contract labour if the contractor fails to do so. It is the responsibility of the principal employer to ensure that the workers engaged through the contractor are paid minimum wages, ESI, EPF, and other benefits, which include statutory bonuses. Certainly, the principal employer can recover the amount paid by him from the contractor.

Regards,
Madhu.T.K

Mr. Madhu is absolutely correct. If the concerned contractor fails to pay the bonus to their workmen, the ultimate responsibility lies with the Principal Employer (PE). The PE can't escape from such responsibility, as it is a statutory requirement.

Regards,
AK Sharma

As per the definition of an employee in the Payment of Bonus Act, which is reproduced below, other than apprentices, all other employees, including contract labor, are also covered.

Definition of Employee

"Employee" means any person (other than an apprentice) employed on a salary or wage not exceeding [Rs.10,000] 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 are express or implied.

In case the contractor does not pay the bonus, it is the duty of the employer to pay the bonus to contract labor and recover the same from him.

Regards,
U.C. Dalai
Chief Executive Officer
Aparajita Compliance Solution Private Limited

I also agree that the principal employer is liable for the payment of bonuses in case of non-compliance by the contractor.

Principal Employer's Liability for Wages and Benefits

No doubt, a principal employer is liable to pay wages to the employees of the contractor if the latter fails to make payment of wages to his employees. However, it has been held in one case that the gratuity and bonus will not be payable by the principal employer since these do not come within the definition of 'wages'.

Case Law: Cominco Binani Zinc Ltd. vs. Pappachan, 1989 LLR 123 (Ker. HC).

You can find the judgment from the below link: (Search On Cite | Search On Google)

All the best

Regards

I have maintained that the principal employer is not liable for a bonus in my previous post, and I concur with the interpretation held out in the Cominco Binani case as cited by Mr. KVJ Raghunath.

Regards,
B. Saikumar
Mumbai

Every employee is entitled to receive their minimum bonus if they have worked for at least 30 days. So, yes, the principal employer is responsible for paying the bonus.

The question pertains not to the principal employer but to the occupier of the employee's workplace, who occupies the premises. If, in your case, the principal employer is the occupier, then yes, they are liable. Even the agent is accountable if they are the occupier.

I would say the judgment is rather old, but regardless, in any scenario where the individual proves to be an occupier, they will be held responsible for paying the bonus. It does not matter whether they are the owner, employer, agent, or even the government itself. The liability to pay the bonus falls on the occupier, unlike wages.

The principal employer must ensure that contract employees are paid their dues on time, i.e., wages, bonuses, etc. Since the contract employee segment is very dynamic, the principal employer should ensure that statutory bonuses are given on a monthly basis in payroll. Remember, prevention is better than cure, and yes, the principal employer is liable to pay bonuses.

There are two issues:

1. The quantum or the percentage to be declared.
2. Actual Payment.

Role of Principal Employer:

To ensure that all statutory rights of employees are fulfilled, the principal employer must ensure that wages are paid on time, PF and ESI contributions are made, and bonuses as per the Payment of Bonus Act are complied with.

If we interpret that the Principal Employer is liable, then the percentage the Principal Employer declares to his employees must be extended to the contract employees as well. But the Act does not envisage this. The contractor as an employer must prepare his balance sheet, get the allocable surplus calculated, and then declare the bonus. It is the responsibility of the Principal Employer to ensure that the contract employees are paid bonuses as per the provisions of the Payment of Bonus Act. This implies that he must ensure that the contractor maintains records correctly, checks the allocable surplus, and pays the bonus as arrived at. Payment of a minimum bonus of 8.33% is not sufficient.

Actual payment needs to be made once a year. I have come across many outsourcing organizations making 8.33% as a bonus in the payslip, which is not correct.

Regards,
Sivasankaran

The concept of "occupier" is only in the Factories Act and not in other laws like the Shops and Establishments Act, the Plantation Labour Act, the Mines Act, or the Beedi and Cigar Workers (Conditions of Employment Act), or any other law that regulates the working conditions of workers. The Contract Labour (Regulation and Abolition) Act also does not use the term "occupier" to describe the relationship of the person(s) employing workmen through a contractor.

A Division Bench of the Madras High Court has held that the Principal Employer is liable to pay gratuity under the Payment of Gratuity Act to workmen employed by him through a contractor and then recover the amount from the contractor. This judgment of the Madras High Court has not yet been differed from by any other Division Bench of the Madras High Court or overruled by the Supreme Court. This judgment of the Madras High Court is binding on all the authorities under the Payment of Gratuity Act, functioning within the territorial jurisdiction of the Madras High Court.

With regards,

I need your inputs on the query below. If a person is employed in a software company as a General Consultant, drawing a salary of more than 19,000/= per month, is it mandatory for the employer to pay a bonus to this consultant?

Thanks,
Govind

In the case of a service contract, is the Principal Employer (PE) still responsible for the Provident Fund (PF)? If yes, does this mean that the PE is also responsible for the driver's PF when hiring cars from an agency with a driver? Similarly, what about the courier person who picks up courier items daily?

Mr. Madhu and Aparajita have clearly viewed the issue. It is the obligation of the contractor to pay the bonus as applicable to his firm (not on the principal employer). If he doesn't pay the bonus, the principal employer has to pay the minimum bonus as per the act, and the same can be deducted from the contractor's bills. In many cases, the contractors' employees also demanded the bonus on par with the principal employer. However, the Supreme Court upheld that the bonus should be paid based on the contractor's profitability and allowable surplus available with the contractor's firm and not on par with the principal employers.

Regards,
G.K. Manjunath, Sr. Manager-HR.

I have gone through various posts on the subject. There should be a legal basis for a right to be enforceable. It cannot rest on conjectures and surmises. When the issue is about the rights of contract labor to their benefits, the issue needs to be decided with reference to the Contract Labour Act 1970 as well as the specific Act that deals with that particular benefit. For example, if the issue is about the admissibility of P.F. to contract labor, the rights and liabilities need to be decided with reference to the Contract Labour Act as well as the P.F. Act. Thus, when it comes to deciding the liability of paying a bonus to contract labor, the issue needs to be determined within the four corners of the Contract Labour Act and the Bonus Act 1961.

The Contract Labour Act nowhere refers to an occupier as Mr. V, Harikrishnan clarified since the Act may not only be applicable to factories but also to establishments other than factories which may not have an 'occupier' as envisaged under the Factories Act who is in charge of the overall administration of the affairs of the establishment. Therefore, the issue of liability to pay a bonus to contract labor needs to be determined with reference to either the principal employer or the immediate employer.

The Contract Labour Act lists out various obligations of the principal employer with regard to contract labor, and the provision that is relevant to the issue on hand is contained in Sec. 21 of the Act and more precisely sub-section (4) of Sec. 21, which imposes the obligation on the principal employer to pay wages to the contract labor if the contractor fails to pay the same. Thus, the principal employer is not liable to pay, so far as his liability under the Contract Labour Act is concerned, any other monetary benefit which is not a wage. Thus, the Cominico Binanani case clearly excludes a bonus from the definition of wage and ruled that the principal employer is not liable for payment of a bonus to contract labor.

The next question is whether the Payment of Bonus Act fixes any liability on the principal employer to pay a bonus. In the first instance, the Bonus Act does not refer to any entity called principal employer in its definitions under Sec. 2 of the Act. Thus, the concept of principal employer is alien to the Bonus Act. Besides, the definition of 'employee' under Sec. 2(13) of the Payment of Bonus Act nowhere refers to an employee as including a person employed through an outside agency like a contractor. Therefore, the definition of employee under the Bonus Act envisages an employer and employee relationship, and thus the persons to be eligible to claim a bonus from an employer shall be in an employer and employee relationship with him.

It is well settled in law that there is no employer and employee relationship between the principal employer and the contract labor unless the contract is a sham. Thus, in my view, it is the immediate employer (contractor) who hired the contract labor that is liable to pay a bonus to them. If he fails, the liability does not fasten to the principal employer for the reasons stated above, and the contract labor are free to pursue the remedies available either under the Bonus Act or the Industrial Disputes Act against the contractor.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Completely agree with Mr. SaiKumar. It all depends on the arrangement and terms agreed upon between the Principal Employer and Contractors. If the Principal Employer wants to pay, then it's okay; otherwise, legally, it cannot be enforced against the principal employer.

Gratuity and Bonus Liability

Gratuity and Bonus are the liabilities of the Principal Employer, as already decided by various High Courts. A recent judgment of the Kolkata High Court reported in October 2010 LLR stated that the payment of Gratuity is the liability of Contractors/immediate employer and cannot be enforced against the Principal Employer.

Regards

I agree with Mr. Dalai; he is absolutely correct. If a contractor fails to pay any wages, bonuses, or the full and final amount to a contract worker, then the principal employer is liable to pay such amounts to the contract worker. After that, the principal employer can adjust these amounts from the contractor's bill.

Dalai Sir, I want your email ID. Can you provide me your email ID?

Regards,
Jignesh Sisodiya
Asst. Manager HR & IR

I agree that if the contractor does not pay, the principal employer has to pay and can recover from the contractor. But the question is, what percentage does he need to pay? How can he ascertain this? If he pays 8.33% and the workers claim the same percentage as the principal employer has paid, should he pay and can he recover?

Allocable Surplus Statements

In my opinion, the principal employer must insist on getting allocable surplus statements for the contractors duly certified by an auditor. If the contractor does not provide these statements, then take a stand that he would pay only the minimum and recover from the contractor.

Regards,
Sivasankaran

The relationship between the principal employer and the contractor necessarily depends on the terms of the contract for the supply of manpower entered into between the principal employer and the contractor. This contract is subject to the provisions of the Contract Labour (Regulation and Abolition) Act because any contract which is contrary to the provisions of any law is void ab initio. The Contract Labour (Regulation and Abolition) Act does not specifically say that in case the contractor makes a default in the payment of bonus, the principal employer is liable to pay the bonus. However, please see section 21 of the Contract Labour (Regulation and Abolition) Act. This section casts a statutory duty on the principal employer to pay wages to the contract workers if the contractor commits a default in the payment of wages. Of course, the wages so paid by the employer can be recovered from the contractor. The term "wages" used in section 21 is defined in section 2(k) of the Contract Labour (Regulation and Abolition) Act. Section 2(k) of the Contract Labour (Regulation and Abolition) Act, while defining the term "wages," says that the term "wages" will have the same meaning assigned to it in clause (vi) of section 2 of the Payment of Wages Act. I request you to see section 2(vi) of the Payment of Wages Act. This section of the Payment of Wages Act excludes "bonus" whether under a scheme of profit-sharing or otherwise, which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or orders of the court.

Principles Deduced from Legal Provisions

1. The principal employer is not liable to pay a bonus under the Payment of Bonus Act to the workers engaged through a contractor, whether the contractor makes a default in the payment of the bonus or not.

2. If the terms of engagement of the workers by the contractor (that is the appointment orders issued by the contractor to his workers) stipulate that the contractor should pay his employees a bonus, then the principal employer becomes liable to pay the bonus if there is a default by the contractor.

3. If the bonus is payable to the workers of the contractor as a result of an award or a settlement or orders of the court, then the principal employer is liable to pay a bonus to the workers of the contractor in case the contractor commits a default in the payment of the bonus.

Of course, in the case of items 2 and 3, the principal employer can recover the payments made by him from the contractor.

Regards,