How to Calculate Allocable Surplus and Set-on/Set-off for a Contractor with No 2017-18 Operations?

Government Project and Licensing Details

A contractor received a government project after winning a tender. The contractor then entered into an agreement with the government and obtained a Letter of Intent (LOI) to commence work from 18-06-2018. Subsequently, the contractor submitted Form V to apply for a labor license. The license was granted for 300 workers on 15-09-2018 and was valid until 31/12/2018. The contractor later applied for the renewal of the license, which was approved on 10-01-2019, with a validity period until 31-12-2019. By 31/03/2019, the contractor invoiced 0.75 crores, despite incurring expenses of 3.5 crores.

Moreover, the contractor paid a minimum bonus of 8.33% to 35 workers who were part of the workforce. The licensing authority is requesting details regarding the (i) Allocable Surplus amount and (ii) Set-on and Set-Off amount related to the allocable surplus.

Calculating Allocable Surplus and Set-on/Set-off Amounts

Considering the aforementioned details, please advise on the following scenario: If the establishment had no operations in 2017-18, how should the allocable surplus be calculated, and what should be done regarding the set-on and set-off surplus amounts.

Regards

Contractual Obligations and Bonus Clauses

First of all, it is required to check the contract between the Contractor and the Principal Employer (PE). Is there any clause regarding a bonus? If so, analyze that and reply to the authority accordingly.

Determining Allocable Surplus

If there is no such agreement between the PE and the contractor, and the Contractor received payment from the PE and paid the contract labor, which is all-inclusive cost, then the Contractor should maintain a balance sheet (which is very uncommon). Based on the 2018-19 balance sheet, the allocable surplus has to be determined to pay a bonus in 2019-20. If the contractor had a balance sheet for past years, then the set-on and set-off amounts will also reflect.

Role of the Principal Employer

Usually, for contractors, the PE determines the bonus amount and reimburses the same because one contractor is working under several PEs with different terms and conditions.

Considering all the above factors, one should decide how to approach the instant case.

Regards, S K Bandyopadhyay (WB, HOWRAH)

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Licensing Authority's Request Under CLRA Act, 1970

In continuation of Mr. Bandobathyay's reply, I would like to ask first whether the licensing authority under the CLRA Act, 1970 can call for such particulars. If he is designated as an inspector under the Payment of Bonus Act, 1965, of course, he can do so.

In such a situation, the contractor would also be an "establishment in the private sector" as defined under section 2(15) of the CLRA Act, 1970. There cannot be any exemption as to the size of the establishment or the contractual nature of its operations with a single or more number of principal employers. The percentage of bonus payable by the contractor would be assessed not on the basis of the amount he receives from each principal employer under the head of bonus but on the actual profits earned in the totality of his contract services done in a particular accounting year.

Therefore, he has to furnish the accounts relating to his entire business. He should produce the registers pertaining to allocable surplus, the provision for set-on and set-off made periodically, and the particulars of bonus payable to each and every employee, deductions, and actual bonus paid in Form A, B, and C respectively.

Thank you for the reply.

Clarity in Law & Acts

The whole problem is the absence of clarity in Law & Acts. The allocable surplus and set on & set off are meant for the permanent establishment, but the authority under the law wants to bring all under the same canopy. The contract between the Contractor and PE is clear; the directive is to comply with the applicable labor laws that are already in force. The contractor paid @8.33% as envisaged in section 10 of the act as per the contract, despite the loss & work stoppage due to non-availability of various clearances by the PE. The Contractor's profit & loss has to be determined from the income & expenditure on the head of the contract amount to be received as payment from PE. This particular establishment in relation to the Labour license is at a loss in FY 2018-19.

Determining Allocable Surplus

How to determine the allocable surplus and to do set on 2018 and set off for 2019-20. If the contractor had a balance sheet for past years, then the set on, set off amount will also reflect. I have raised all these in line with your suggestion but in vain to make people understand having a blocked mind.

Dear Sri Umakanthanji, thank you for sharing your insights on the subject. I would appreciate it if you could provide your valid insights on the following issue: Where does the problem lie in paying under section 10 when the establishment comes into existence on the date the contractor signs the contract with the PE? In this context, how can the entire business of the contractor be called into question when they are different entities?

The payment of bonuses based on "Profits" to employees working in establishments is in accordance with resolution No. WB-20(9)/61, dated 6th December 1961, following the recommendations of the tripartite commission established by the Government of India.

Therefore, the contractor should present the registers related to allocable surplus to facilitate the provision for set on and set off as per the current balance sheet.

I would appreciate your opinion on this matter. Thank you.

Dear Mr. Prabhat Ranjan Mohanty,

My request to you is to be convinced that basically, any contractor's establishment is independent of any one or all the principal employers' establishments to whom the services of his contract labor are lent out, so as to attract the provisions of the CLRA Act, 1970.

As mentioned earlier, the contractor becomes a private establishment under section 2(15) of the Payment of Bonus Act, 1965 when the number of his employees reaches the threshold limit prescribed under section 1(3) of the Act. All the employees employed by him would be considered employees under section 2(13) for the purpose of the PB Act if their salaries do not exceed the limit prescribed therein. Therefore, it would be immaterial whether such contract labor is deputed to any particular principal employer or rotated among various principals' establishments. Similarly, his profits or losses have to be assessed only with reference to his total earnings in a year, not with reference to a particular contract he has undertaken. Thus, a contract entered into with a new principal employer alone by the contractor cannot be a factor to decide whether the contractor's establishment is newly set up or not to avail of the operational concessions granted under section 16(1-A) of the PB Act, 1965.

It is common for industries like large-scale manufacturing activities to have long gestation periods, unlike a service industry like a contractor's establishment, where he is paid on a periodical completion basis. Therefore, there would be no possibility of enjoying the concession that could be termed a "bonus holiday" for a contractor. One might argue that if a particular person was new to the contract business and the only contract he had on hand in that accounting year was with the Government, the tender rate quoted by him would have included all his statutory liabilities towards his labor. Even if he incurred losses due to his own fault, wouldn't he still be required to pass on the minimum bonus to his contract labor, notwithstanding the concession granted under section 16 of the PB Act, 1965?

Regarding the recommendation of the Bonus Commission, 1961 that you mentioned, it is recommended to fix the minimum bonus at 4% and the maximum at 20% of the earnings of employees, comprising basic and dearness allowance. This recommendation is incorporated in the PB Act, 1965 as a minimum bonus of 8% under section 10, regardless of the presence of allocable surplus, and as a maximum bonus of up to 20% under section 11 when the allocable surplus exceeds the amount of minimum bonus payable.

It is mandatory for every establishment falling under the PB Act, 1965, whether small or large, to properly maintain registers pertaining to allocable surplus, particulars of bonus payable to each employee, and payment details.

However, I firmly believe that the submission of the above documents related to statutory bonus is not necessary for the grant or renewal of a contractor's license under the CLRA Act, 1970.

Thank you for providing additional information to consider. The original issue pertains not to the employee but to the contractor. In the current scenario, a newly appointed contractor has been requested to declare an allocable surplus. However, considering that the contractor has only been working for five months with a loss for the year ending on 31/03/19, it raises the question of how the contractor will be able to set off the payment of the bonus for 2018-19 and set on for 2019-2020.

Bonuses Based on Profits

Bonuses are typically paid based on "Profits" to employees employed in establishments as outlined in resolution No. WB-20(9)/61, dated 6th December 1961, on the recommendation of the tripartite commission established by the Government of India.

Regards

I am also of the same opinion as Mr. Umakanthan that under the CLRA Act, for granting a license to a contractor, there is no need to check compliance under the Bonus Act. Please meet with the higher-ups under the authority and explain the situation to them. Even after all this, if the authority remains rigid, there must be some other agenda which I hope all of you can understand.

S K Bandyopadhyay (WB, Howrah)

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