Bonus – A Legal Right


The dictionary meaning of ‘bonus’ is an extra payment to the workers beyond the normal wage. It is argued that bonus is deferred wage which aims at bridging the gap between actual wage and the need-based wage. It is also agued that bonus is a share of the workers in the prosperity of an organization. The third argument is that bonus is primarily a share in the surplus. But it is only incidentally treated as a source for bridging the gap between the actual wage and the need-based wage.

Bonus: A Legal Right and as paid in India

Employees demanded the payment of bonus with a view to bridging the gap between money wages and real wages, the gap between the actual wage and need-based wage. Some employees were paying the bonus voluntarily out of their increased profits. The Government appointed the Bonus Commission in December, 1961, because of the persisting demands made by the employees and their trade unions. Bonus commission submitted its report in the year 1964 recommending for payment of bonus to the workers. The important recommendations of the commission include:

1. Bonus is a right of worker as the worker has share in the prosperity of the company.

2. Bonus should be paid unit-wise, with a view to creating a sense of belongingness among the workers.

3. Bonus should be paid from the available surplus.

Available surplus = Gross Profit –
(Depreciation + Actual return of Preference Capital + 7% Return on Equity capital + 4% Reserves and Surplus).

4. Allocation of surplus for the payment of bonus should be 60% of the available surplus. Minimum bonus payable to a worker is 4% of the basic +DA or Rs. 400 whichever is higher. If the minimum bonus is more than 60% of the surplus, the industry has to pay Minimum bonus. Maximum bonus allowed is 20% of the basic.

5. The bonus should be paid to employees whose salary is up to Rs. 1,600. In case of employees whose salary is beyond Rs. 700, this salary would be taken as Rs. 700 for the purpose of calculation of bonus.

6. Employees in Public Sector competing with the private sector to the tune of 20% are eligible to get the bonus.

7. Employees working in the factories under the Factories Act, 1948, except the employees of General Insurance Companies, Universities, Colleges, Schools, Hospitals, Government Departments and departments run by Public Sectors, Undertaking are eligible to receive bonus.

The Government accepted the recommendation in September, 1964 with the following modification.

1. All direct taxes should be treated as prior charges.
2. Tax concessions provided for development should be treated as prior charges.
3. Return on capital should be allowed up to 8.5%.
4. Bonus beyond certain limit should be paid in the form of securities.

The Government amended the Act again in 1977. The important provisions of this amendment re:

a) The industrial undertaking covered by the Act to pay the minimum bonus of 8.33%, irrespective of profit or loss from the year 1976.
b) Investment allowance should be taken as prior charge.
c) Banking companies and industrial reconstruction Bank of India are covered by the Act.

The Act was again amended in the year 1980. According to this amendment, all the industrial units covered by the Act have to pay the minimum bonus of 8.33% of salary, irrespective of allocable surplus in that financial year. The maximum bonus is 20% of the salary.

The Act was amended in the year 1985. According to this amendment, the employees whose salary is up to Rs. 2,500 are eligible for bonus. If the salary of an employee is beyond Rs.1,600, it will be taken as Rs.1,600 for the purpose of calculation bonus.

For the executive cadres in private sector the managements started payment as ex-gratia once in a year in lieu of bonus as an encouragement for the good performance of the entire company or that unit belonging to a group of companies. Some companies like Larsen & Toubro were taking an undertaking from employees in supervisory and officer cadres accepting the money on the condition that the ex-gratia is paid for that year only and is not going to be a part of remuneration in the subsequent years. However this was paid regularly year after year.

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