Payment of bonus Act 1965

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Payment of Bonus Act, 1965

Definition: The Payment of Bonus Act, 1965, is an Indian law that mandates the payment of bonuses to employees based on their performance and the profits of the organization. The Act ensures that employees share in the success of the business and are rewarded for their contributions.

Key Provisions:

  1. Applicability:
    • The Act applies to every factory and other establishments in which 20 or more persons are employed.
    • The government may also apply the Act to establishments with fewer than 20 employees through official notification.
  2. Eligibility:
    • Employees earning a salary or wage of up to Rs. 21,000 per month are eligible for a bonus under the Act.
    • An employee must have worked in the establishment for at least 30 working days in the accounting year to be eligible for a bonus.
  3. Bonus Calculation:
    • The minimum bonus to be paid is 8.33% of the salary or wage, irrespective of the profitability of the establishment.
    • The maximum bonus payable is 20% of the salary or wage.
    • The bonus amount is calculated based on the employee's salary or wage, the profits of the establishment, and the allocable surplus.
  4. Allocable Surplus:
    • The allocable surplus is the amount available for distribution as a bonus from the gross profits of the company after deducting certain allowable expenses and statutory deductions.
    • The calculation of allocable surplus is defined in the Act and includes factors such as direct taxes, depreciation, and reserves.
  5. Time of Payment:
    • The bonus must be paid within eight months from the close of the accounting year.
    • In exceptional circumstances, the government may extend this period by up to two years.
  6. Set-on and Set-off:
    • If the allocable surplus exceeds the maximum bonus payable (20%), the excess amount is carried forward to the next accounting years and is called "set-on."
    • If there is no or insufficient allocable surplus in a particular accounting year, the shortfall is adjusted against the set-on from previous years, known as "set-off."
  7. Disqualification:
    • Employees dismissed from service for fraud, misconduct, or absenteeism without leave are not eligible for a bonus under the Act.
  8. Exemptions:
    • Newly established establishments are exempt from paying bonuses for the first five years, provided they do not make a profit in those years.
    • Non-profit organizations, educational institutions, and certain other establishments are also exempt.
  9. Dispute Resolution:
    • Any disputes regarding the payment of bonuses are resolved by the appropriate labor authorities or through industrial tribunals.

Importance:

  • Employee Motivation: The Act incentivizes employees by linking part of their compensation to the profitability of the establishment, thereby boosting morale and productivity.
  • Profit Sharing: Ensures that employees share in the financial success of the company, promoting a sense of ownership and loyalty.
  • Equitable Distribution: Provides a statutory framework for the fair distribution of profits, helping to reduce income disparity between employees and employers.
  • Economic Stability: By providing additional income to employees, the Act helps improve their standard of living and economic stability.

The Payment of Bonus Act, 1965, is an essential legislation that aims to foster a cooperative relationship between employers and employees by ensuring that workers receive a fair share of the profits generated by their efforts and contributions.