Is It Legal to Pay Contract Workers a Full Month's Wage as a Bonus Instead of 8.33%?

Dear Sirs, I am ever grateful to this platform and the clarifications received from learned members. I am troubling you once again. I need one more help. I shall be much thankful if my query is clarified, please.

Query Regarding Bonus Payment

This is in connection with bonus payment. The contractor in question is paying a bonus of 8.33% as the minimum bonus under existing laws. Under the principal employer, there are other contractors as well. These contractors are paying one month's wage to their workmen. Is it correct to pay one month's wage to contract labor instead of 8.33% under the CLRA Act or Bonus Act? If it is legal to pay one month's wage as a bonus to contract labor, it will be paid. I require legal provisions in this matter. Hope you can help me in this regard.

Regards

Understanding Bonus Calculation Under the Payment of Bonus Act, 1965

Bonus under the Payment of Bonus Act, 1965, is computed as a percentage of the total wages earned by the employee in the accounting year comprising 12 calendar months. That's why the quantum of minimum and maximum bonus payable under the Act is expressed in terms of percentages as 8.33% and 20%, respectively. By approximation, 8.33% is equal to one month's wages. For example, 8.33 x 12 is 99.66 only. By rounding off, it amounts to 99.70%. It is colloquially expressed as one month's wages because when we divide the annual total wages by 12, we arrive at one month's wage only. Therefore, there is no confusion in this regard.

As Umakanthan sir has explained, 8.33% of annual wages is basically one month's wages. However, please note that whether the contractor is required to pay 8.33% or 20% of wages depends on the profitability of his operations. Therefore, 8.33% minimum wages are not always the correct amount.

The ceiling limit of wage as per the Bonus Act is Rs. 7000. If an employee receives more than Rs. 7000, the bonus is calculated on Rs. 7000 at 8.33%.

In such a scenario, the employee will not receive a bonus equivalent to one month's wage. What should be done in this situation? Please advise.

Regards

You are wrong in reading the act (or you are looking at an older version of the act). The current rule is that the wage ceiling for a bonus is ₹7,000 or minimum wages, whichever is higher. Therefore, the bonus is to be paid on minimum wages (as it is higher everywhere now). This page has the details: https://labour.gov.in/wageboard/info...ent-bonus-1965. Or download the latest copy of the act from codeindia.nic.in.

The ceiling limit of wages as per the Bonus Act is Rs. 7,000. If an employee receives more than Rs. 7,000, the bonus is calculated based on Rs. 7,000 at a rate of 8.33%.

As a result, the employee will not receive a bonus equivalent to one month's wages. What should be done in this situation?

Regards

Bonus Payment Practices in India

Bonus paid by any organization depends on the available surplus of the organization. Contractors in India do not calculate the bonus as per the Payment of Bonus Act; instead, they pay 8.33% or one month's salary (both are the same). Although it is a common practice, in my opinion, it is not the right approach, especially for very large contractors.

Calculation Base for Bonus

Moving on to the calculation base of the bonus, according to the latest amendment, it is INR 7000 or minimum wages, whichever is higher. If the salary is less than INR 7000, then the bonus will be based on the actual salary.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To strive towards excellence with effort and integrity

Dear Sudhakar,

I think that you are a bit obsessed with the phrase "one month's wages," colloquially used for the sake of convenience of understanding. If you please go through Section 10 of the Payment of Bonus Act, 1965, which fixes the quantum of minimum bonus under the Act, it expresses the same in terms of percentage only, i.e., 8.33%.

On the other hand, only Section 12 of the Act, which deals with the quantum of bonus in respect of certain classes of employees, stipulates the calculation of bonus on a notional basis when their salary or wages per month is more than a certain amount, which is fixed at Rs. 7000/= at present. The latest amendment in this regard specifies further that in respect of scheduled employment under the Minimum Wages Act, 1948, where minimum rates of wages are fixed, the bonus for such employees shall be calculated at Rs. 7000/= OR the minimum wages, WHICHEVER IS HIGHER.

Bonus Payment by Contractors

Bonus payment by contractors depends on different factors, especially manpower service providers or labor contractors. It depends on the terms and conditions between the Principal Employer (PE) and the Contractor. If the contract is silent about bonuses for contract workmen, then how will the contractor pay? Normally, the service charges range around 4 to 10 percent, and can we expect a minimum of 8.33% from the contractor?

In all these cases, contractors have the rate of bonus to be paid fixed by the PE, as most of the time, the contractor will not have enough to pay bonuses.

Nowadays, it is observed that PEs are paying bonuses along with monthly wages at 8.33% to avoid future complications of non-payment of bonuses. This practice has come into existence mostly because of the high turnover of contract workers, ranging from one day onwards.

Dear Sitaramsn,

You are absolutely right. However, I have different observations as follows:

Types of Manpower Suppliers

1. There are broadly four types of manpower suppliers:
- Small contractors supplying 50-1,000 contractual employees, mostly proprietary organizations. They receive an 8.33% bonus from the principal employer (PE) and disburse it. The profit margin is low.

2. Medium-sized contractors supply 1,000-50,000 contractual employees to both partnership and proprietary organizations. They follow the same policy as point no. 1, and the profit margin is medium.

3. Large-sized contractors supply 50,000-100,000 contractual employees to either partnership or private limited organizations. They follow the same policy as point no. 1, and the profit margin is high.

4. Very large-sized contractors have more than 100,000 contractual employees and are mostly private limited organizations. They follow the same policy as point no. 1, and the profit margin is very high. Organizations in this group are also MNCs.

Bonus Payment Observations

None of the above category contractors are paying a bonus following the Payment of Bonus Act. It may be acceptable for small and medium-sized contractors. However, for large and very large contractors, if it is calculated based on the Bonus Act—available surplus, allocable surplus, and 8.33% paid by the PE—it may come to approximately 10%, which is my personal feeling.

In most cases, the service charge is approximately 6%.

Thanks & Regards,

S K Bandyopadhyay (WB, Howrah)
CEO-USD HR Solutions
[Phone Number Removed For Privacy-Reasons]
[Email Removed For Privacy Reasons]
USD HR Solutions – To strive towards excellence with effort and integrity