Understanding Bonus Payment Obligations: Do Employers Have Flexibility Between 8.33% and 20%?

I came across this section of the Payment of Bonus Act, Section 11, which says:

"In any accounting year, if the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay a bonus (maximum bonus) equivalent to the amount which shall not exceed 20% of the salary or wages earned by employees."

Question on Bonus Payment Range

Now the question is:

1. Whether we have to pay anywhere in the range of greater than 8.33% and less than 20% OR
2. Do we have to pay 20% flat?

My understanding was that it's the choice of the employer to give between 8.33% to 20% in case the allocable surplus is more than the amount of the minimum bonus.

I need your help urgently for decision-making.

Dear Sunnydays, please read Section 11 carefully, which is given verbatim below:

"Section 11 of the Payment of Bonus Act"

"Where, in respect of any accounting year referred to in Section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year a bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year, subject to a maximum of twenty percent of such salary or wage."

In the above verbatim, "in proportion to" is very important. You need to pay the bonus in proportion to the allocable surplus, subject to a maximum of 20%.

Thank you.

Dear Sunnydays,

Please read Section 11 carefully, which is given verbatim below:

Section 11: Bonus Payment Proportion

Where, in respect of any accounting year referred to in Section 10, the allocable surplus exceeds the amount of the minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year a bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year, subject to a maximum of twenty percent of such salary or wage.

In the above verbatim, "in proportion to" is very important. You need to pay the bonus in proportion to the allocable surplus, subject to a maximum of 20%.

Dear Sir, it's very confusing to understand the proportion. An example would help immensely because the last line says "subject to a maximum of twenty percent of such salary or wage," which means not more than 20%, but less than that would also be compliant in the eyes of the law.

Regards,

It is to be interpreted as any percentage above 8.33%, subject to a maximum of 20%, depending upon the profit.

Regards,
Madhu.T.K

An organization has a practice of giving a bonus based on the basic salary ceiling of Rs. 10,000. This means an employee receives 10% of their basic salary (10000 * 12 * 10%), equating to Rs. 120,000 per year. The same amount is recorded in the accounts book (Balance Sheet). Now, please guide me on the following:

Example:

1. An employee's basic salary is Rs. 12,000. His 10% bonus is recorded in the balance sheet for the FY 2013-14 and in the Bonus Register 'Form C'. Subsequently, the employee leaves the organization on 30.06.2014. When preparing the Full and Final settlement, the HR department only gave him an 8.33% bonus instead of the stipulated 10% for the FY 2013-2014 and April 2014 to June 2014. Is the employer obligated to pay him the 10% bonus as mentioned in the Balance Sheet, or can the employer deny the bonus due to the employee's basic salary being over Rs. 10,000? Alternatively, can the employer calculate the bonus based on Rs. 3,500 (as per the law) and provide 10%, disregarding the balance sheet? The employee has lodged a complaint with the Labor Department under the Payment of Bonus Act.

2. How much can this employee demand for the period April 2014 to June 2014, considering the balance sheet has not yet been prepared?

Regards,
Dinesh

Understanding Bonus Eligibility and Payment Under the Payment of Bonus Act

The right of an employee to receive a bonus or the employer's liability to pay it should be as per the Payment of Bonus Act. Currently, an employee whose bonus qualifying salary (e.g., basic salary, dearness allowance) exceeds Rs 10,000 is not eligible to receive any bonus. If the salary does not exceed Rs 10,000, then the bonus shall be calculated as if the salary is only Rs 3,500. The management will determine the percentage, ranging from 8.33% to 20%, based on the allocable surplus. However, paying the specified percentage of bonus on a flat salary, rather than restricting it to a percentage of Rs 3,500, is solely a management prerogative or may require a settlement.

Considering the bonus as deferred wages, for those covered under the Payment of Bonus Act (i.e., those earning a salary of Rs 10,000 or less), the agreed-upon amount should be paid regardless of whether the employee has left during the current year. For example, if the rate is 10%, it becomes payable for the year 2013-14. If no amount has been allocated for 2014-15 and the bonus is paid upon leaving in June, it can be limited to the statutory bonus, as profitability for the year is uncertain. If an employee not eligible under the Act has received a bonus in the past as a practice, the employer can discontinue it once the employee leaves the service.

Moreover, if 10% is indicated as payable as a bonus in the CTC statement, then it should not be paid for this year unless specified otherwise.

Regards,
Madhu.T.K

But sir, as I mentioned, the amount has been entered in the balance sheet and Bonus Distribution Register. If the organization pays less than the amount mentioned in the balance sheet and in FORM C, then the employer has to show it as Unclaimed Wages since the full amount has not been given at the time of F&F. Moreover, if the company does not pay him the amount, then the employee can demand the register and balance sheet in the Labor Court to get his unclaimed amount. Sir, please suggest.

Regards,
Dinesh

Provision and Payment Differences

Making provision and paying are different. You can provide for doubtful debts, and that does not mean that the debtor need not pay it to the company. If the company demands it, the debtor cannot say that since you have shown the amount due from me as doubtful, you cannot demand it.

Similarly, provision for a bonus will always be for a higher amount, and if something less than provided is paid, you can write it back as revenue in the current year. An employee not covered by the Bonus Act cannot sue the company solely based on the provision made in the balance sheet. However, if the employee is covered by the Bonus Act, they can claim it. This is because, concerning employees not covered by the Bonus Act, any payment the employer makes under the heading of a bonus is considered ex gratia, similar to an incentive, and can be disbursed as per the company's policy.

Moreover, if the company's policy is to pay it to all employees, whether continuing in service or not, you can pay it.

Regards,
Madhu.T.K

Thank you very much for clearing all my doubts. However, as I mentioned earlier, the company entered the names in the Bonus Distribution Register "FORM C" of those employees who are not covered under the act (Basic + D.A. > 10000).

For example, if the bonus amount for such an employee entered in the register is 12000, but the employee is only paid Rs. 3499 through his Full and Final settlement (3500*12*8.33%), then the remaining bonus amount is considered as unclaimed wages under the Labour Welfare Fund Act. Since this amount is recorded in the Bonus Distribution Register "FORM C," how can we reconcile it back to revenue?

If a labor inspection reviews this register, they may question this unclaimed amount. It is crucial for us to address this discrepancy appropriately.

Thank you.

Clarification on Employee Entitlement Under the Payment of Bonus Act

While discussing the recovery of amounts due by way of bonus from the employer in Section 21 of the Payment of Bonus Act, it has been clarified that an employee means a person entitled to a bonus under the Act. This implies that a person not entitled to a bonus will not be able to claim it if denied. In the instant case, the claim is from an individual who is not considered an employee under the Payment of Bonus Act. Therefore, there is nothing wrong in denying it and writing it back.

Regards,
Madhu.T.K

Respected Madhu ji, if I am paying a bonus to all the employees, including those who are not covered under the Payment of Bonus Act for years together, can I stop it? Is it not a practice that became law?

Hope the members will get more insights from your answer to the above questions.

I am also of the opinion that everyone should get a bonus at a uniform rate. However, I also support the idea that workers who earn lower salaries should receive their "deferred wages," which is not applicable to supervisors and managers who receive higher salaries and other benefits. If non-workers are paid a bonus, it should be to retain them in the company and should not be viewed as deferred wages.

Regards,
Madhu.T.K

Hello, please guide me. If my basic is 15000, then is my bonus calculated as 7000*8.33 or can the employer give me 15000*8.33?

Basically, my question is: Is the minimum bonus 8.33 percent on 7000, or can we pay 20% on more than 7000?