Understanding Bonus Allocation: Can Employers Choose Their Own Percentage Under Section 11?

As per Section 11 of the Payment of Bonus Act, 1965:

'Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty percent of such salary or wage.'

Questions Regarding Bonus Allocation

My questions are as below:

1) If the allocable surplus is more than 8.33% bonus liability but less than 20%, can the employer decide his own percentage (e.g., 10%, 16%, etc.)? In other words, does the employer have the discretion to choose the bonus percentage if the allocable surplus exceeds the minimum bonus (8.33%) liability?

2) If the allocable surplus is more than 20% bonus liability, is it compulsory to pay a maximum bonus of 20%, or does the employer still have the discretion to choose the bonus percentage?

3) I read somewhere that the provision of Section 11 of the Payment of Bonus Act does not create any bar for the employer to declare a higher percentage or quantum of bonus above the minimum bonus (8.33%) payable to the employees under Section 10 of the Act, regardless of the amount of available allocable surplus.

Can we consider this interpretation correct?

The Bonus Act mandates a minimum bonus payment of 8.33%, with no cap on the maximum bonus that an employer can provide. Employers have the flexibility to pay bonuses of 10%, 15%, or 20% above the minimum 8.33%.

Answer to point number (1):

No, as per the PB Act, if the allocable surplus is 15 lakhs and the amount required to pay the minimum bonus to all eligible employees is 10 lakhs, then the percentage of bonus will be (8.33/10) * 15 = 12.5%, without considering Set on and Set off.

If the allocable surplus is 30 lakhs in the above calculation, then the bonus percentage will be (8.33/10) * 30 = 25%. In this case, the bonus percentage as per the PB Act will be 20%, and Set on will be 5%, an equivalent amount of money subject to a maximum of 20% equivalent of money.

Answer to point number (2):

Already explained in point number (1). The employer has no right to choose as per the PB Act.

Answer to point number (3):

There are no such provisions under the PB Act.

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

Would like to clarify as follows:

1-3. The establishment does not have the absolute right to decide on the quantum of bonus payable to the workmen, even if it is greater than the minimum bonus. For instance, if the allocable surplus is enough to pay a 12% bonus, but the management orders to pay only a 10% bonus, this could be questioned and even set aside. The percentage of bonus decided must exhaust the allocable surplus; otherwise, the workmen or their trade union can object to the calculation and raise an industrial dispute. Moreover, the establishment has to submit information to the local Labour Office on the bonus paid. Questions can arise. If the allocable surplus is greater than the 20% bonus payout liability, then it can 'set aside' the surplus for future liability.

Would request participants to refer to the attached Bombay HC judgment. Kindly peruse Paragraphs 15 to 20, wherein the Honorable Judge concurs with the view of the Petitioner Employer that Section 11 does not take away the discretion of choosing the percentage or quantum of bonus to be paid out of the allocable surplus. Kindly guide.

Case Study on Bonus Calculation

The case was related to the calculation base of the bonus from ₹2,500 per month to ₹3,500 per month. The employer has paid the bonus by calculating the base amount at ₹2,500 instead of ₹3,500 at 20% on the basis of allocable surplus. If it is calculated on the basis of ₹3,500, the percentage of the bonus may be less than 20%.

The Court has observed that Section 11 of the Payment of Bonus Act has not stopped the management from declaring a higher percentage of the bonus (not a lower rate) as per management discretion, even if the allocable surplus does not permit the same. In this case, due to the wrong calculation, the management has paid a lesser amount and declared a 20% bonus. That is why the court has made the above observation.

In my opinion, this is a specific verdict regarding a situation when the calculation base has been changed. Moreover, paying more than the statutory limit (not less) is a management discretion and is always welcomed by the employees. However, the court has not expressed that even if there is an allocable surplus, the management has the right to apply its discretion to pay a lower percentage of the bonus.

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