Can We Legally Add a Monthly Bonus to Our Salary Sheet? Seeking Advice on Salary Structure Changes

Greetings to all respected seniors,

I have a query. Can we reduce or add current salary sheet heads that are used in the monthly salary process? For example, basic, HRA, and TA are current heads, but we are planning to add a bonus head in the monthly salary sheet. Is it possible in a legal way? Can a bonus be paid on a monthly basis? Can we add a bonus in the monthly salary sheet head and pay on a monthly basis? The company does not have a standing order due to a lack of employees below 50 employees. Please suggest the best legal way to address this issue.

Thanks,
Devendra Gaur

With reference to your query regarding adding a bonus component to the monthly salary structure and paying the same on a monthly basis:

Yes, you can pay the bonus on a monthly pro-rata basis. However, you cannot include the bonus amount to match the minimum wage rate, as the bonus is not considered part of the wages.

Additionally, the same amount will be exempt from ESIC contributions from both the employer and employees.

Thank you.

Dear Devendra,

Please let us know the rationale of payment of Bonus on a Monthly Basis. You have not mentioned the percentage of Bonus Paid Monthly.

Thank you.

How can one pay a bonus monthly along with the monthly salary?

The bonus is payable as per the Payment of Bonus Act. It is payable for the financial year within 8 months of the end of the financial year, depending upon the profit/allocable surplus after adjusting set-off and set-on. Paying the bonus monthly is not in accordance with the Act.

Understanding Bonus Payments and Legal Provisions

The query indicates a lack of knowledge about the concept of bonus and the provisions of the Payment of Bonus Act. The bonus payment is linked to profits during the financial year. There is a formula given in the Act on how to calculate the bonus. Since the financial results are not yet known, how can one pay a bonus in advance based on any assumptions every month? At what percentage will the bonus be paid? If anything, one can imagine paying this as an advance against the final bonus payable, but all logic defies such payment.

Regards,
Vinayak Nagarkar
HR Consultant

Dear colleagues,

I have seen and experienced that many small organizations, manpower service industries, and security agencies have adopted this method. The only condition is that they cannot use the bonus amount to match the minimum wage, and the ESIC shall not be deducted from the bonus amount as it's not part of wages.

About the percentage of bonus

In such cases, it's always a minimum of 8.33% as it's decided and paid by Principal Employers.

About the provision of the act

The minimum bonus prescribed under Section 10 is payable whether or not the employer has any allocable surplus. However, a newly set-up establishment is required to pay a bonus in respect of an account year in the first five accounting years if it only earns a profit in that accounting year (SECTION 16).

In the act, no minimum timeline is defined or restricted. However, the maximum time defined is 8 months to pay the bonus from the close of the accounting year, and such a period is also extended by the Appropriate Government (SECTION 11).

Therefore, according to me, nothing is wrong with paying a bonus on a monthly pro-rata basis; only the employer has to maintain records and register as defined under Section 26, Rule 4.

Seniors are hereby requested to please intervene in the matter and correct me if I am wrong.

With Regards,
Ubaid Raheman
Mumbai, Maharashtra.

Dear colleague,

The question is: What is the need and propriety of paying a bonus prematurely when it is not due?

Regards,
Vinayak Nagarkar
HR Consultant

Problem with Paying Bonus on a Monthly Pro-rata Basis

My question is: What is the problem in paying a bonus on a monthly pro-rata basis? Once the employees are eligible for a bonus, there is no issue in paying the same monthly instead of yearly. In my organization, we are adopting this method for a few of our contractors. To date, we have not faced any non-compliance issues during inspections or audits. Is there any provision under the Payment of Bonus Act that restricts payment of the bonus on a monthly basis? Please provide a reference from the act regarding this matter.

Kindly answer the following questions yourself and decide what is right and what is wrong.

1. What was the object of the Act - PoB Act though it is not included in the Act?

2. What was the reason to keep the due date for payment of bonus within 8 months of closing the financial year?

3. It is a practice to make the payment of bonus generally before Diwali. Why is it so?

4. What do you mean by pro-rata when you do not know the due amount after more than 8 to 19 months and the due amount is depending upon some parameters which are not known to you right now?

5. You adopted a method of paying bonus monthly, and you are through with the inspection. It does not mean that you are right. How many law implementing authorities are aware of set off/set on, allocable surplus, etc.? What do they do during inspections exactly?

I'm sorry for this post. I could not ignore your post since it is by Manager HR & IR, and I don't want the wrong message to go to the business community.

Each person may have their own view, but the same should be supported with due justification.

Dear Ubaid Raheman ji,

I have seen some companies paying monthly advances against bonuses due. It is an advance and not a bonus payment. Once you mention bonus payment and pay it monthly, it will certainly attract ESI.

When you pay any advance, you need to have proper recording while maintaining an advance register. In Register C, after calculating the amount of bonus due, you have to subtract the amount of advance paid to arrive at the net bonus payable.

But why do you need to do all these things?

Dear Mr. Keshav,

About your post:

1. I have already justified my answer by providing appropriate section references and asked one small question: Is there any provision under the Payment of Bonus Act that restricts monthly payments? Please understand my qualification; it’s not about applicability, objectives, Diwali, and Dussehra; it’s about provisions for restrictions on monthly pay under the act.

Regarding pro-rata, it means actual paid days, which are not going to change whether paid on a monthly or yearly basis.

About your 2nd post, if you treat the bonus component as an allowance and include it in wages to match the minimum wage rate, then it affects ESIC. Otherwise, the bonus is not part of wages, and ESIC shall not be deducted on the bonus amount.

And yes, you are correct; if you paid an advance bonus unnecessarily, the employer has to maintain their records and register. However, if you pay bonuses on a monthly basis, the employer only has to maintain the Register of Bonus in Form C. Nowadays, everyone uses payroll software, so with one click, they will get information in Form C.

Why we introduced this for a few of our contractors:

Some of our contractors claimed their employees’ bonuses from us and did not pay them to their employees. After a few months, when we came to know about this, workers’ representatives had filed the matter in conciliation before ALC. To settle the issue for smooth operation at the shop floor, we repaid the same amount to all workers. Later on, we recovered our money from the contractors and terminated them, but unnecessarily, our work and reputation were affected.

The second reason is that in our factories, a few loader and unloader categories of casual laborers demand more take-home salary than they are actually paid by a few employers, but the statutory part was not deducted. In our case, after statutory deductions, they will get a lower take-home salary, and these people are less concerned about the statutory part as they do not want that. To address this issue, we have decided to pay them bonuses and leave salary on a monthly basis.

These are situational-based decisions that we have to make under certain circumstances. Please excuse me, as I am only seeking an answer to my question, and I have asked the same to learned members with all due respect.

Dear colleague, your practice of paying bonuses to workers of contractors on a monthly basis goes against the spirit and provisions of the Payment of Bonus (PB) Act. If the legislature had intended for bonuses to be paid monthly, it would have explicitly stated so, which it has not. The law specifies that bonuses should be paid within 8 months from the closing of the accounting year.

In other words, although the law does not specifically restrict paying bonuses monthly, it is implied that doing so contradicts the intent and purpose of the PB Act.

If you find this irregular practice beneficial and the inspection machinery is allowing it by default, then feel free to continue. However, it is important to note that this practice runs counter to the PB Act.

Your reasoning for paying bonuses monthly may be to prevent contractors from pocketing the amount paid to them by the Principal Employer (PE) by taking advantage of worker turnover. However, nothing prevents you from implementing proper checks and balances. After the contractor submits a statement of bonuses actually paid to eligible workers on a yearly basis as required by law, you can release the payment to them following verification.

It is crucial to understand that these concerns, shared by other knowledgeable members, stem from the commitment to ensuring proper compliance with the law, a responsibility that falls on the HR/IR Manager.

Regards, Vinayak Nagarkar HR Consultant

Dear Ubaid Raheman ji,

Can you please clarify what is the percentage of bonus paid on a monthly basis to contract employees? What is the practice followed for regular employees - percentage of bonus paid, paid monthly? Are you preparing Bonus A&B Register? The percentage of bonus paid is in line with the contents of your Balance Sheet, from an academic perspective.

Dear Mr. Srinath,

The percentage paid to the contract employees is 8.33% (minimum) paid on a monthly pro-rata basis. The bonus register in Form C is maintained by contractors.

For on-roll workers, it's 20% and paid on a yearly basis at the end of the financial year [as per MOS]. Register A & B are maintained by the Finance department. However, Register C is maintained by HR.