Are Contract Workers Missing Out on Bonuses? Understanding the Payment of Bonus Act 1956

I am working in a construction company where nearly 500 (contract labor) employees are working. Here, there has been no bonus paid to them for the last three years. Grade-wise, their net salary is more than 10,000 (unskilled, semi-skilled, skilled, high-skilled, chargehand, supervisor & Sr. Supervisor). According to the Payment of Bonus Act, 1956, an employee who works more than 30 days during the accounting year and earns less than 10,000 is entitled to receive a bonus. I want to know what factors to consider for bonus calculation (i.e., Basic, DA, HRA, OT, Project incentives) and whether we should pay them a bonus or not.

Thanks & Regards,
Md. Idreez.

The definition of Salary or Wage under the POB Act 1965 is as follows:

Definition of Salary or Wage

Section 2(21): "Salary or wage" means all remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment. It includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living), but does not include:

• Any other allowance which the employee is for the time being entitled to;

• The value of any house accommodation or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of foodgrains or other articles;

• Any travelling concession;

• Any bonus (including incentive, production, and attendance bonus);

• Any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force;

• Any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him;

• Any commission payable to the employee.

Explanation: Where an employee is given in lieu of the whole or part of the salary or wage payable to him, free food allowance or free food by his employer, such food allowance or the value of such food shall, for the purpose of this clause, be deemed to form part of the salary or wage of such employee.

I hope the above definition of "salary or wage" will make it clear to you.

Thanks and regards.

Keshav Korgaonkar

Please work out the bonus qualifying salary based on basic salary and DA only. Other elements may not be considered for deciding eligibility for the bonus. At the same time, if the salary as derived above is less than the minimum wages fixed by the government, then the amount of bonus should be calculated on those statutory minimum wages.

Regards,
Madhu.T.K

I would disagree. Bonus is payable on the full salary as given in the act, not on basic pay and dearness allowance (DA). If the salary, as computed above, is less than 10,000, then employees are entitled to receive a bonus.

I got it, Mr. Keshav Korgaonkar, sir. Thanks for the explanation about "Salary & Wage." But do we have to pay them a bonus? And when is it applicable?

Currently, we are covered and maintaining registers under the B.O.C.W. Act, Inter-State Migrant Act, EPF Act, and the Contract Labour Act. Additionally, a part of the building is about to start operations.

Could you please suggest what actions need to be undertaken now?

Thanks,
Md. Idreez

Yes, the employees engaged through a contractor are entitled to receive a bonus. Please follow the advice given by Mr. Madhu, who has correctly advised you on the matter.

Best Wishes,
Vasant Nair

Amendments to the Bonus Act for Contractor Employees

By the amendment of 2007, effective from 01.04.2006 onwards, the category of employees employed through contractors on building operations (section 32 (vi)) is deleted from the list of exempted categories. As such, employees engaged through contractors on building operations are now under the purview of the Bonus Act effective from 01.04.2006.

Key Amendments Under Ordinance No. 8 of 2007

Under ordinance No. 8 of 2007, effective from 01.04.2006 onwards, the following amendments also came into force:

- The amendment to Section 2(13) raised the eligibility limit for the payment of bonus, the salary or wage from Rs. 3,500/- to Rs. 10,000 per month.
- The amendment to section 12 raised the ceiling for calculation purposes, the salary or wage from Rs. 2,500/- to Rs. 3,500/- per month.

Even though your establishment is covered under BOCW, Interstate, PF, CLA, etc., the Payment of Bonus Act 1965 is applicable to you.

Thanks with regards,

Keshav Korgaonkar

Mr. Madhu has correctly advised by saying that the bonus needs to be computed on Basic + DA as the definition leaves out all other allowances. Whether any allowance is to be included for computation depends on whether it partakes the character of remuneration. Thus, it leaves one with basic + DA in the ordinary course of wages.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Dear Idreez, you have to pay a bonus of a minimum of Rs 3500 as per the act. But how many principal employers have paid? Industries have been using contract labor like a GULAM until today, and I am sure that after knowing this fact, you cannot grant a bonus for contractor labor. It is the truth. By gaining knowledge on this subject, you may secure a good job in the future. However, my question to you and all the respected experts is, what contributions are being made toward this?

Regards,
Sunil Kumar Chauhan
Managing Director
FGLA Concept Marketing Private Ltd.

The definition of a bonus as explained by Mr. Madhu T. K and Mr. Keshav Korgaonkar is correct. Salary (Basic + DA/VDA) considered for bonus eligibility is up to Rs. 10,000.00 per month. Suppose your basic salary is Rs. 3,000/- and DA/VDA (if applicable to your industry) is Rs. 2,000/- per month, then the salary considered for bonus calculation will be as if your salary is Rs. 3,500/-. That is, your bonus will be calculated based on Rs. 3,500/- per month. To clarify further, if your company has decided to pay 20% of a bonus for the year 2011-2012, then your bonus will be Rs. 8,400/- (20% of Rs. 3,500/- = 700 x 12 = 8,400).

As rightly said above by the members, contractor workmen are also eligible for a bonus from their respective contractors. The Principal Employer needs to ensure that all eligible contract workmen are paid a bonus on time.

Regards,
Rakesh Pd Srivastav

Dear Sunil Kumar Chauhan ji, I appreciate your reply. By law, the employer is liable to pay a bonus. In this forum, we are here to enhance our knowledge by sharing and participating in discussions.

Employer's Legal Obligations

The employer is liable to pay not only a bonus. He is liable to pay as per minimum wage rates as declared by the government. He is also liable to make other statutory compliances. Failure to do so makes him liable for penal action.

An employer may be a contractor. The contractor or any employer cannot take a stand that he cannot make payment as per the minimum wage rate. He cannot avoid paying a bonus or extending minimum facilities to his employees as required by law. He cannot neglect due compliance with applicable laws. All these obligations are not optional for him. He cannot claim that he is not getting a price for all these obligations from his principal employer or that he is not making enough profit to fulfill these statutory duties.

Contractual Agreements

Any contract or agreement is not one-sided. It is mutual. Both parties to it agree to it in totality. You cannot take a stand that your principal, i.e., the other party to the contract, is not paying you sufficiently to discharge your legal liabilities. Such a contract is illegal ab initio. You are liable for this illegal contract.

I hope you are convinced that the principal employer is not liable to make payment of a bonus.

I would appreciate it if you could ask how many contract laborers are actually paid a bonus by their employers (contractors)?

Law does not change even if you get the truth.

Who is responsible for it? You and I, i.e., WE, or the Government who makes the law, or the officers who come to collect money from you?

Now, the Govt. of Maharashtra, via its ordinance dated 17.09.2010, has mandated payment of bonus through a cheque/bank account only. But still, is there any guarantee that the employers involved in illegal contracts will adhere to this ordinance, and if they will not find some way out to recover the amount from employees?

I think we should have more discussion in this regard.

Thanks with regards,

Keshav Korgaonkar

Please read the second last paragraph of the above posting as follows:

Now, the Government of Maharashtra, via its ordinance dated 17.09.2010, has mandated the payment of bonuses through cheque/bank account only. However, is there any guarantee that the employers engaged in illegal contracts will adhere to this ordinance? And if they do, will they not find some way to recover the amount from employees?

The word "ALL" is missing in the original posting. I kindly request the administrators of CiteHr to edit my post accordingly to assist you all.

Thank you once again.

Regards,
Keshav Korgaonkar

Clarification on Bonus Calculation

The definition of a bonus, as explained by Mr. Madhu T. K and Mr. Keshav Korgaonkar, is correct. Salary (Basic + DA/VDA) considered for bonus eligibility is up to Rs. 10,000.00 per month. Suppose your basic salary is Rs. 3000/- and DA/VDA (if applicable to your industry) is Rs. 2000/- per month, then the salary considered for bonus calculation will be as if your salary is Rs. 3500/-. Your bonus will be calculated on the basis of Rs. 3500/- per month. To clarify further, if your company has decided to pay 20% of the bonus for the year 2011-2012, then your bonus will be Rs. 8400/- (20% of Rs. 3500/- X 12 = 8400).

I hope I am clear. As rightly said above by the members, contractor workmen are also eligible for the bonus by their respective contractors. The Principal Employer needs to ensure that all eligible contract workmen are paid the bonus on time.

Regards,
Rakesh Pd Srivastav

Application of the POBC Act

The POBC Act is applicable in your company for all employees drawing Rs. 10,000 or less, subject to a ceiling of 20% of Rs. 3500 = 8400/- and a minimum of 8.33% on 3500, depending on the last three years' balance sheet and provision of available surplus and allocable surplus after observing the process of set on and set off. However, please check whether the company is really operating for the last three years and if the balance sheet for the last three years is published or not. Even if the company is showing a loss in the balance sheet for the last three years and there is no set on available, they still have to pay an 8.33% bonus. The Deputy Labour Commissioner may intervene suo moto if any complaint/dispute is lodged with him, and the company may land in deep trouble.

Contract Labor Regulation and Abolition Act: Responsibilities and Compliance

1. The Contract Labor Regulation and Abolition Act does not state that the principal employer is responsible for paying ESI and PF to contract laborers. In reality, the contractor, also known as the immediate employer, is responsible for complying with the provisions of ESI and PF. However, in case of violations of these acts, the principal employer is also liable to face penal action from the ESI and PF authorities separately.

2. In practice, there is no such thing as a job contract. If a contractor is paid based on measurements (e.g., X Rs for Y Kg/Cubic feet/pieces of work done), the provisions of minimum wages, ESI, and PF acts apply to the contract laborers employed by the contractor. For instance, if the minimum wages set by the state government are Rs 170/- per day per laborer, the contractor must deposit PF at 13.61% and ESI at 4.75% based on the minimum wages. The principal employer must ensure that such contributions are deposited with the PF and ESI departments by the contractors (immediate employer). The act mandates that labor payments must be made in the presence of an authorized representative of the principal employer.

3. ESI and PF are applicable to laborers engaged by canteen contractors as well.

4. Every contractor should have their own PF and ESI registration number, into which they should deposit the PF and ESI contributions of their laborers. However, if any contractor does not have their own PF and ESI code, the principal employer may obtain a subcode in their name and deposit the ESI/PF contributions of the contract laborers.

Regards,
Mihir