Bonus

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Introduction
Bonus occupies a central place in Indian labour law as a statutory entitlement designed to share industrial prosperity with employees. Far from being a mere discretionary “reward for good performance,” bonus under Indian law is a carefully regulated, often litigated entitlement that affects payroll budgeting, labour relations, tax treatment and corporate compliance. For counsel advising employers or representing employees, mastery of the Payment of Bonus regime — its scope, computation, set‑offs, timelines and enforcement mechanisms — is essential.

Core Legal Framework
Primary statute
– Payment of Bonus Act, 1965 (the Act) — the controlling statute for statutory bonus in India.

Key legal features (statutory anchors)
– Applicability: The Act applies to factories and to “every other establishment” in which twenty or more persons are employed on any day during an accounting year (statutory threshold in the principal Act).
– Eligibility (ceiling): The Act restricts eligibility for bonus to those employees whose “wages”/salary do not exceed the statutory ceiling (this ceiling has been amended from time to time; the 2015 amendment increased the wage ceiling to Rs. 21,000 per month). Practitioners must confirm the current ceiling and any applicable state variations before advising.
– Minimum and maximum bonus: The Act mandates a statutory minimum bonus of 8.33% of wages/salary and caps bonus at 20% of wages/salary. If allocable surplus is insufficient, employers must still pay the statutory minimum subject to certain financial conditions in the Act.
– Definitions: The Act defines “employee,” “employer,” “pay” and “wages” for bonus purposes. The meaning of “wages” for the Act commonly includes basic pay and dearness allowance (where forming part of salary), but excludes overtime, commission, bonus (other than the statutory bonus itself) and certain other components — counsel must check the precise statutory language and interpretative case law for each component.
– Allocable surplus and computation: The Act links bonus payable to the concept of “allocable surplus” — a formulaic share of the profits of the employer’s business for an accounting year after prescribed disallowances and set‑offs. The Act provides methods and restrictions for computing allocable surplus and distributing it among eligible employees.
– Time for payment and recovery: The Act prescribes the period within which bonus must be paid after the close of the accounting year (commonly within eight months). Non‑payment attracts recovery proceedings and penal consequences under the statute and read with the Code of Civil Procedure (for recovery) or labour adjudication mechanisms.
– Interaction with other labour laws: Payment of Bonus Act coexists with employment contracts, industrial awards, collective bargaining agreements and state Shops & Establishment Acts. Where a contract or agreement provides for a “higher” bonus than the statutory minimum, the contractual entitlement stands; statutory bonus provides the floor.

Practical Application and Nuances
How bonus is applied in everyday practice — issues counsel encounter repeatedly:

  1. Eligibility assessment at the outset
  2. Verify that the establishment is covered (20+ employees in the accounting year). For employers around the threshold, day‑to‑day attendance records, muster rolls and EPF/ESI returns for the year become critical evidence to prove whether the threshold is met.

  3. Verify individual eligibility: compute each employee’s “wages” for the Act’s purpose and check against the statutory ceiling. For employees whose wages fluctuate, use average or monthly components as required by the Act and relevant rules.

  4. Components of wages — what to include and exclude

  5. Basic pay and dearness allowance (DA) that forms part of pay are typically included.
  6. Overtime, special allowances, commission, conveyance, employer’s contribution to provident fund and retrenchment compensation are typically excluded, but there is lot of litigation over what constitutes “wages” for bonus under a particular employer’s payroll structure. Detailed payroll audits and reconciliations are required.

  7. Practical tip: prepare a schedule mapping payroll components to ‘included’ or ‘excluded’ categories with legal authority to support your position; use the schedule to compute the bonus for each employee and to defend the computation in audits or disputes.

  8. Computation methodology — minimum, maximum and application of allocable surplus

  9. Minimum statutory bonus is 8.33% of eligible employee’s wages (or Rs. ___ where fixed by statute — confirm current figures); maximum payable is 20% of wages.
  10. If the allocable surplus suffices, pay up to 20% per eligible employee (subject to itemized formula). If not, a proportionate distribution limited by the statutory minimum applies. Calculation of allocable surplus requires adjustments for prior years’ set‑offs, brought forward losses, and statutory disallowances (depreciation, certain taxes, etc.).

  11. Practical example (simplified): Company A has allocable surplus X; total minimum payable (8.33% × aggregate eligible wages) is Y. If X ≥ Y but less than the total 20% aggregate liability, distribute proportionately but not below the minimum. Keep a workbook of the calculation and maintain board minutes/management approvals.

  12. Set‑offs, prior year losses and carry forwards

  13. The Act permits set‑offs for brought forward accumulated losses as per prescribed accounting and statutory norms. Employers commonly attempt to reduce allocable surplus by claiming generous set‑offs; employees’ counsel will attack such claims for lack of documentary proof, improper accounting treatment, or non‑compliance with statutory safeguards.

  14. Practical tip: require employers to produce audited financial statements, reconciliation statements and complete working of set‑offs. Conversely, employers should preserve board resolutions, audit memos and tax computations justifying set‑offs.

  15. Timing and mode of payment

  16. Statute prescribes the time limit for payment after the close of the accounting year (commonly within eight months). Late payment attracts interest and penalties; early distribution, especially before formalization of accounts, creates risks if subsequent adjustments arise.

  17. Practical tip: employers should get bonus calculations certified by statutory auditors and documented via board minutes; employee representatives should demand payment receipts and ledger entries.

  18. Contractual and industrial agreements

  19. If a collective agreement or employment contract promises more than the statutory minimum, that higher promise is enforceable. Conversely, an agreement cannot provide less than the statutory minimum.

  20. Practical tip for negotiators: when drafting settlement agreements or standing orders, be precise whether the agreed “bonus” is the statutory bonus or a separate ex gratia/variable pay; specify computation formulae to avoid future disputes.

  21. Enforcement and proof in litigation

  22. Employee’s proof: payslips, attendance, PF/ESIC returns, appointment letters, wage slips, contract terms, and registers under the Factories Act are the frontline evidence.
  23. Employer’s defence: audited accounts, set‑off working papers, statutory compliance records, and proof of payment.
  24. Standard relief: a claim for unpaid bonus is often pursued before labour courts/industrial tribunals or through civil recovery proceedings depending on the facts and remedies sought.

Landmark Judgments
(The following are representative decisions establishing recurring principles. Counsel must verify full citations and subsequent judicial developments before relying on them.)

  1. Interpretation of “wages” and inclusion/exclusion of components

  2. Courts have repeatedly examined whether particular allowances form part of “wages” for bonus calculation. The consistent principle courts apply is substance over label: if an allowance is integrally linked to the service and is payable as part of regular remuneration, it is likely to be included. Conversely, truly contingent or performance‑linked payments have often been excluded.

  3. Computation of allocable surplus and set‑offs

  4. Judiciary has scrutinised employers’ claims for deductions from surplus — demanding proper accounting, contemporaneous records and statutory compliance for depreciation and carry forwards. Courts have held that employers must prove disallowances and set‑offs with credible audited accounts and cannot rely on mere assertions.

(Important: Always confirm and quote the exact case law citations and paragraph references when preparing pleadings or drafting bench memoranda. The Payment of Bonus Act has a vast and evolving case law; cite the latest authoritative Supreme Court decisions on “wages,” “allocable surplus” and “eligibility”.)

Strategic Considerations for Practitioners
For employers (in‑house counsel and outside counsel)
– Pre‑litigation compliance: perform annual bonus audits before accounts are finalized; reconcile payroll to the Act’s definitions; prepare full working papers for allocable surplus. This prevents disputes and provides documentary defenses.
– Conservative approach on ambiguous allowances: where doubt exists whether an allowance is part of wages, treat it consistently across years or obtain an advisory opinion from the company auditors or an authoritative decision through an industrial tribunal to avoid arbitrariness.
– Negotiation posture: in settlements, consider offering a one‑time ex gratia payment in lieu of contested components, but document releases carefully to prevent reopening of claims.
– Documentation: maintain board resolutions approving bonus payouts and auditor certificates; these carry weight in courts and tribunals.

For employees / employee representatives
– Immediate evidence preservation: keep payslips, appointment letters, EPF/ESIC statements, attendance registers and notifications of salary structure. EPF returns are particularly persuasive evidence of the employer’s roster and wage structure.
– Challenge employers’ set‑offs early: request audited accounts and computations. If employers delay production, file interim relief applications for payment of at least minimum statutory bonus (8.33%) pending final adjudication.
– Collective action: where many employees are affected, pursue representative complaints before labour authorities; coordinate preservation of documentary evidence and witness statements.

Common pitfalls to avoid
– Employers: relying on informal payroll practices or verbal approvals; failing to document computation and board approval; recklessly claiming large set‑offs without audit trail.
– Employees: assuming every allowance must be included without analysing its nature; delaying claims beyond limitation periods; failing to secure interim payments when employers’ finances permit partial payment.
– Both sides: ignoring the role of the threshold (20 employees) and failing to check whether the establishment falls within the Act in the contested accounting year.

Practical drafting tips for pleadings and agreements
– Plead precise periods (accounting year), identify eligible employees, set out the payroll components and how each is characterised for the Act, annex computation sheets and audited statements, and specify relief with an alternative claim for minimum statutory bonus if full amount cannot be proved.
– In settlement deeds, include comprehensive release language, state whether the release covers statutory bonus claims and whether the sum is inclusive of statutory entitlements — ambiguities invite litigation.

Conclusion
Bonus under Indian law is a statutory entitlement governed primarily by the Payment of Bonus Act, 1965. For practitioners, success turns on meticulous factual groundwork: precise identification of applicability, rigorous payroll mapping to the Act’s definition of wages, documentary proof of accounting set‑offs, and timely, defensible computations. Employers must institutionalize annual bonus compliance processes; employees should preserve payroll documentation and press for at least minimum payments pending adjudication. In disputes, the decisive battlegrounds are the technical computations (allocable surplus and set‑offs) and the characterisation of pay components — areas where cogent evidence, clear arithmetic work‑ups and authoritative audit trails decide outcomes.