Navigating Bonus Regulations: Is Your ITES/KPO Startup Exempt from the Payment of Bonus Act?

Dear Seniors, I am working in a company that currently has 300+ employees in the service sector. It is a 5-year-old company and operates in 2 states of India. I would be very happy if I could get solutions to the below queries:

1. I would like to know whether the Payment of Bonus Act is applicable to this ITES/KPO sector?

2. Also, please mention if any startup company can be exempted from the act for a certain period of time?

3. I have also heard that some companies adjust the bonus with monthly salary perks, such as in the Special Allowance component. How feasible is this practice?

I would appreciate your time spent on this matter. Thank you and I am looking forward to your valuable answers.

Since the total number of employees is more than 20, the Act is applicable.

Since your company is a 5-year-old ITES/KPO industry, the question of gestation and its consequential concession provided for under section 16(1-A) of the Payment of Bonus Act, 1965, for the payment of bonus to employees is not available.

Bonus Payment Guidelines

Bonus is a statutory amount payable to eligible employees based on the overall performance of the establishment and the total earnings of the employees during a stretch of 12 months called the accounting year. It must be paid within 8 months from its end. Therefore, it is a deferred payment.

However, employers of establishments who are very certain about their positive performance and strictly adhere to the maximum rate of bonus may pay it on a monthly basis in the name of an interim bonus, to be adjusted against the actual bonus later.

Regards,
[Username]

Many employers, along with employees, strongly believe that the entire labor law in India does not apply to the IT & ITES sector. However, whether a software professional, software engineer, or IT employee can be termed as an employee or a workman is entirely a question of fact. The answer to this question depends on a number of factors, such as the nature of work of the individual, their remuneration, decision-making powers, use of mental faculties, extent of involvement with the business of the company, power of supervision, etc.

Almost all IT/ITES/Bio Tech companies do not pay bonuses as defined under the "Payment of Bonus Act." There are yearly payments like Performance-Linked Bonus, Variable Pay, etc.; however, they are not paid in accordance with the act. Additionally, bonus payments cannot be made monthly as they are purely based on whether the company made a profit for that year, even for startups.

Monthly Bonus Payments and Legal Implications

Many companies have been paying bonuses on a monthly basis. However, while the act is silent on this, a normal and reasonable reading of the provisions would indicate you can't do it. For one thing, it is based on profitability. For another, it is payable within 8 months of the end of the financial year. There is a provision for setting off customary bonuses, which obviously can be a bonus paid once, not 12 times in a year.

Again, under the rules (e.g., in ESIC), and as decided by various courts, any amount paid each month or even bi-monthly is a part of the salary. So, this monthly bonus becomes a component of your monthly salary structure and breakup, and you will be liable again to pay the bonus separately.

Basically, if you have more than 10 employees, a bonus is applicable. If your organization is not more than 5 years old and has incurred a loss in each of the 5 years, you are exempt from the bonus requirement until you cross the 5-year mark. It is suggested that paying bonuses on a monthly basis is not a good idea.

Human nature is such that we either understand or misunderstand, with no in-between. The right effort to understand involves leaving our misunderstandings behind and becoming as receptive as an empty slate. Let me try once more to ensure clarity in your understanding.

The Object of the Payment of Bonus Act, 1965

"The object of the Payment of Bonus Act, 1965, is to maintain peace and harmony between labor and capital by allowing employees to share in the prosperity of the establishment, as reflected by the profits earned through contributions made by capital, management, and labor" - Supreme Court of India in Jalan Trading Company Pvt. Ltd v Mill Mazdoor Sabha... AIR.1967 S.C.691. Section 1(3) of the P.B. Act makes it applicable to (a) every factory and (b) every other establishment in which 20 or more persons are employed on any day during an accounting year. The Appropriate Government can specify this number as not less than 10 in respect of any establishment by means of a notification. Since your ITES/KPO industry is an establishment with more than the minimum number of employees specified, the Act is applicable.

Start-up Provisions Under the Act

The term "Start-up" in your query refers to a "newly-set-up" establishment mentioned in the Act, whose employees are also entitled to be paid a bonus in accordance with the provisions of subsections (1-A), (1-B), and (1-C) of Section 16(1) of the Act. Subsection (1-A) provides for concessional treatment to newly set-up establishments in matters relating to the payment of bonuses. For newly set-up establishments, during the first five years from inception, a bonus is payable only from the accounting year in which the employer derives profits from the establishment, sells the goods produced or manufactured, or renders services, whichever is earlier, without applying the principles of set-on and set-off contemplated under Section 15.

Regarding your third query, I believe my previous answer is sufficient. If it is still not clear, feel free to ask further.

Regards