Are Monthly Bonuses and Leave Payments for Contract Workers Subject to ESI & PF Contributions?

Monthly Payments for Contract Labor

Contract labor in some organizations is paid a Statutory Bonus and Leave with wages on a monthly basis instead of an annual basis. This is done to meet statutory compliance since most contract laborers may work for less than a year, making it difficult to locate them when payments are due. It helps in satisfying regulatory auditors, etc.

However, recently, someone raised an objection to this practice and demanded ESI & PF contributions on these monthly payments. Is this correct?

Once statutory bonus and leave salary are paid regularly every month, it assumes the form of a retaining allowance, and hence PF & ESI contributions are payable thereon. It has been repeatedly emphasized in this forum that statutory bonus cannot be paid every month. First of all, no such monthly payment could be made after November every year. Then, also, how could the monthly bonus be paid in anticipation of profit/loss every year? Similarly, if leave payment is made every month, then when there is a real need for the employee to avail leave, all that is left will be LWP. That is not correct. Indeed, such payments make the monthly salary figure bloated and are therefore misleading.

Thank you for your response, sir. Here, I wish to seek clarification due to the transient nature of contract work and the short durations of stays. If we have to wait for a year to complete these payments or to take leave, often the workmen may not be actively working, resulting in unpaid periods. This situation would lead to non-compliance.

This inquiry specifically pertains to contract labor and is not related to regular employees within an organization.

Importance of Full and Final Settlement for Contractual Employment

As the nature of employment is contractual and short-term, it is essential to make a full and final settlement for each case at the time of leaving instead of paying leave pay and bonus along with wages. There is no need to wait for a full year.

Regards, S K Bandyopadhyay

Thank you, sir, for your response. Please understand that the final settlement can be done if the worker informs and leaves. However, in most cases, there is no intimation, and workers leave the job. The advance payment of bonuses and leave wages is to avoid any such shortfall as the workmen leave without any intimation to make any final settlement. Many times, bank accounts will be closed, and we cannot transfer funds.

Legal Implications of Monthly Bonus and Leave Salary Payments

The monthly payment of bonuses and leave salary may not satisfy the Labour Inspector if you are inspected for this practice. First of all, a bonus cannot be paid before it is determined as per the law. Bonus payments must be made by November. There is a willful breach of the Payment of Bonus Act 1965 when payments are made in this manner, along with its consequences. Similarly, there is no legal provision for making leave salary payments every month. Indeed, this will prevent the accumulation of leave and is not in the interest of employees. The proposal is not legal and proper.