Is Your Company Liable for Bonuses Despite Past Losses? Understanding Compliance and Penalties

Applicability of Payment of Bonus

Please clarify the following query regarding the applicability of payment of a bonus. If the company was incorporated in 2010 and has been incurring losses until 2017, does it still need to pay a bonus under the Payment of Bonus Act to all employees drawing a basic salary below 10k and 21k?

Liability and Penalties

If the company is liable to pay a bonus but has not yet paid such amounts, what recourse does it have, and what are the applicable penalties, if any?

Ensuring Compliance

What can the company do right now to ensure past compliance and adherence?

Please clarify as this is an urgent matter.

Understanding Employer Responsibilities Under the Payment of Bonus Act, 1965

To understand the statutory responsibility of the employer of any establishment covered by the Payment of Bonus Act, 1965, to pay an annual bonus under the Act to his/her employees, I think that you should carefully read the provisions of sections 8, 9, 10, 11, 12, 15, 16, 19, 21, 22, and 28 of the Act, in particular, and understand their import in order to get appropriate answers to your queries.

Minimum Bonus Obligation

Incurring losses ever since inception is not a criterion for exempting the establishment from paying a bonus to its employees, as a statutory obligation is cast upon the employer to pay a minimum bonus at 8.33%, even in the absence of any allocable surplus in a year. Similarly, the concession granted to newly established establishments under section 16(1) is controlled by the rider clause of subsection (I-A) of section 16.

Time Limit for Payment and Extensions

Section 19 of the Act fixes the time limit for payment of the bonus. It can be extended up to 2 years by the authority, namely, the Commissioner of Labor, on a proper application under section 19(b). The modes of recovery and penalties for any violation are provided for in sections 21, 22, and 28, respectively.

Recommendation for Management

Your management may consider paying arrears of the minimum bonus to all eligible employees under the Act for the past years.

Most Respected Umakanthan ji,

In continuation of your elaborate response, I have a specific query. As per Section 16(1) of the Payment of Bonus Act, it will not be applicable for the first 5 years to the establishment. However, if the number of employees remains less than 20 for the first 3 years post incorporation, then will this grace period of 5 years start from the day the act is applicable or from the date of incorporation.

I would be greatly indebted by your thoughtful consideration.

Much Obliged,
Anuradha

Ms. Anuradha,

The five-year period has to be reckoned from the actual date of inception of the establishment as a new one and not from any subsequent date on which the PB Act becomes applicable or the date on which there occurs any change in its ownership due to contingencies like sale, conversion of its constitution, etc.

Query on Payment of Bonus Act Compliance

I have read Sections 21, 22, and 28 of the Payment of Bonus Act. The problem here is that the startup was unaware of its obligations to pay bonuses to its employees and could not pay the same without any ill intention. Now, in 2018, it has realized that beyond the five-year period for which there was no applicability of the Payment of Bonus Act, it needs to pay a bonus for the last 3 years, mainly 2015-16, 16-17, and 17-18.

As per the act, the bonus needs to be paid within 8 months of the close of the assessment year. However, the company has missed that window of opportunity for the preceding two assessment years. To set its records right, the company wants to pay the bonus for the assessment years 2015-16 and 16-17 but is unable to understand if it can do so with a penalty or any adverse consequences. The company in question is also in deep financial losses since its inception in the 6th, 7th, and 8th years too. Hence, considering the perennial accumulating losses suffered by the company, can it plead for exemption of the minimum statutory bonus of 8.33% in the 6th, 7th, and 8th years?

My humble plea to your esteemed authority is to let us know if possible how the company can correct this unknowing error and if there is a penalty, to what extent, as per Section 28, a fine of Rs 1000 and/or 6 months imprisonment.

Thanking you.

Warm regards,
Anuradha

Dear Madam, first and foremost, ignorance of the law cannot be a defense for non-compliance with a legal liability. Before any action is taken against such a lapse, you can correct it suo motu.

Liability to pay bonus

Secondly, please ensure from which year the liability to pay a bonus actually arises following the year of inception, as it varies according to the type of establishment. Different types of establishments, such as large-scale manufactories, mines, shops, commercial establishments, and the like, have varying gestation periods. While some establishments start their business operations soon after inception, others have longer gestation periods. Therefore, the concession granted under Section 16 of the Payment of Bonus Act, 1965, cannot be unconditionally enjoyed by a newly set-up establishment for the entire consecutive five years since its inception. In simple terms, bonus payments should only be made for those years in which profits are generated during the first five years without applying the provisions of set on and set off as outlined in Section 15.

Paying bonus in case of losses

If your statement about the company incurring losses from its inception is true and is also supported by the audited accounts of the company, you can now pay the bonus at the minimum rate from the accounting year 2015-16 as arrears to all eligible employees. Do not worry about the penal action under Section 28 if you comply at least now.

Maintaining compliance records

Additionally, remember to start maintaining the registers prescribed under the Payment of Bonus Rules, 1975.

Rightly explained. But what about the bonus amount? Will the payment be made along with the interest rate? If so, what is the percentage and calculation?