Struggling Company Finances: Should Bonuses Still Be Paid to Employees?

Bonus Payment Obligation for Companies Running at a Loss

A company that is running at a loss is still required to pay bonuses to its employees. Please advise on this matter.

Regards,

The answer is yes and no, and it all depends on how the company does its budgeting.

Yes, if bonuses have been budgeted and provision has been made so that the bonus payout will be "prorated" depending on performance achievement.

No, if management never makes provision for this "business cost" in the annual budget.

Regards, Autumn Jane

Bonus Payment After 5 Years of Business

When a company has completed its 5 years of business, then from the 6th year, a bonus must be paid. Regardless of whether the company "made a profit or incurred a loss," the set on and set off are clearly mentioned for bonuses under the Bonus Act.

You need to refer to the Payment of Bonus Act 1965, and I quote: "was enacted to provide for the payment of bonus on the basis of profits." So if the business is running at a loss, then as there are no profits, there is no bonus to be paid; HOWEVER, the accounting practices of the business also matter greatly. Again, I quote: "Where in any accounting year, any amount has been carried forward and set ON or set OFF, then in calculating bonus for the succeeding accounting year the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account."

I suggest you take professional advice. Make sure that any such advice is from a competent person or authority and, in writing, as the penalties are very high. I hope this helps.

Regards, Harsh

I am afraid the posts made by Autumn and Harsh are incorrect in the Indian scenario. The Payment of Bonus Act requires a company to pay a minimum bonus of 8.33% (1 month's salary) irrespective of profits. If the company makes a profit, the bonus will be higher, subject to a maximum of 20% of annual wages. There are some riders in this:

- The Payment of Bonus Act does not cover those with wages of over Rs. 10,000 per month.
- Bonus is payable on actual wages or Rs. 3500 per month, whichever is lower.

So, the minimum bonus in the case of a loss is Rs. 3500 per person. Exemption from bonus is provided to a company not making a profit in the first 6 years of setting up the factory. Further, there is a provision of set on and set off, which means if you have paid a bonus in the previous year despite a loss, you can set that off in the year you made a profit before computing the amount of bonus payable. Hope that clears your doubt.

In addition to Autumn Jane & Banerjee, if the establishment has once started to pay the bonus, the minimum amount should be paid at any cost.

Thanks & Regards,
Sumit Kumar Saxena