Bonus Payment Timing: Can Employers Legally Pay Bonuses in Parts Throughout the Year?

Please see the attachment below:

Bonus Payment Clarification

(b) An employer has paid a part of the bonus payable under this Act to an employee before the date on which such bonus becomes payable.

Does this clearly mean that we can pay the mandatory bonus in parts in the salary every month or quarterly (ESI included if paid monthly)?

Yes, a bonus can be paid in parts. However, the Act also states that the bonus due for a particular year should be paid within 8 months of the close of the financial year. This means you cannot pay it monthly or even on a quarterly basis because you cannot extend it beyond 8 months. The attraction of ESI is a different issue, and if you pay an advance of the bonus not included in the salary, it will not attract ESI anyway. What is important is the payment of the bonus within 8 months. Moreover, a basic objective of paying a bonus, i.e., a bonus is a deferred wage paid in a lump sum so that the employee would benefit, would be defeated if it is paid in five or even 8 installments.

Yes, we have been provided with options by senior lawyers for a client in Karnataka. You can pay a bonus monthly, but it should not be referred to as a bonus. Instead, it should be called 'Advance Against Statutory Bonus' as the law allows bonuses to be paid in advance, even though you are paying for the next year.

However:

1. Bonus cannot be accurately estimated in advance. Therefore, at the end of the year, you may be required to pay the balance. For instance, if you are paying 8.33% monthly and your payable bonus is 20%, you will still need to pay the remaining amount.

2. ESIC contributions must be paid on this amount, as per ESIC rules that consider any payment made at least every 2 months as part of the salary.

3. It is probable that the courts may take an adverse view and determine that this is essentially basic salary under a different name, resulting in the bonus still being payable the following year.

In the case of ESI, an amount paid as an advance, such as a bonus advance, which will be adjusted against a final payment that is not wages, will not attract ESI. This is because the payment of advance will not be made along with wages but separately. It should be distinguished from payments like incentives, which are part of wages if paid at an interval of not more than two months. An incentive is also interpreted as wages because it will be paid individually or earned by an individual employee by putting in some effort as part of their work. In many cases, it can easily be interpreted as a piece-rate wage. But a bonus is a different concept. It is fixed after considering certain other factors like profits, available surplus, allocable surplus, etc. Therefore, the entire exercise will take time to give a final shape, and that is why the law has allowed 8 months' time to the employer to pay it. Pending a decision, obviously, employees may be given an advance of a bonus. An advance of a bonus is not a bonus, though it has the 'flavor' of a bonus. But when you pay it every month, the objective of giving a bonus will be defeated, I believe.

The question, Madhu, is what the courts are likely to say. It may defeat the purpose of the act, but if it is paid as an advance and falls within the clauses of the act, it will probably escape.

With respect to ESIC, it is not being paid separately; it is being paid along with wages (note, it's in the same transfer and in the payslip too). So it is likely to get dragged into the computation. In fact, that is accepted by most companies, and they pay ESIC on monthly bonuses too.