Payment of Bonus Act - Decoding the Changes

Payment of Bonus Act – Decoding the Changes

By Namita Bharadwaj & Rajiv Arora*

Understanding the Act – Pre Changes

The payment of Bonus Act 1965 provides for payment of bonus to persons employed in establishments with the purpose of rewarding them for their contribution to the organization.  It extends to the whole of India and is applicable to every factory and to every other establishment where 20 or more workmen are employed on any day during an accounting year.

 

Understanding the Act – Post Changes

On 31 December 2015, the two critical changes were approved by Parliament in the Act which impacts an organization: on the entitlement for and quantum of bonus payouts.

 

Whilst various High Courts have stayed the retroactive nature of the proposed change (the changes were to be implemented retroactively from April 1, 2014), the other changes are in effect and need remedial action by organizations.

The above changes have the following impact on organizations & employees:

  • All employees whose “wages” per month is below INR 21,000 will be entitled to receive statutory bonus payout at the end of the accounting year

  • To calculate the bonus applicable, either INR 7,000 per month or the Minimum wages applicable for the employee category & state – whichever is higher – will be used

  • With the inclusion of Minimum wages as an additional criteria in bonus calculation, organizations will need to keep a close watch on any changes applicable during the applicable year to ensure compliance to the act

Financial Implications of the Amendments

The changes in the act has a two-fold impact for employers:

  1. It increases the coverage with a larger section of employees coming under the act's purview
  2. With the base wage rate doubling to INR 7000 (or more in case of minimum wage being higher), organizations have to budget a larger kitty to fund the bonus payouts.

Additionally, with the inclusion of minimum wages of the state coming into play, organizations which have pan-India operations will need to be more mindful of any changes that may take place in any of the states in which they operate in & make the necessary changes as required.  Example: As an organization operating in Gurgaon (Haryana) & Pune (Maharashtra), the per month minimum wages in the 2 states (assumptions: Highly skilled worker) are INR 9,699 & INR 8,753 respectively. To ensure alignment to the statute, the organization will have to use INR 9,699 & INR 8,753 (assumption: organization covered under Shops & Establishment) for calculation of maximum bonus entitlement to be paid out to employees in each location.

Practioners Perspective

The approach(es) taken by organizations to manage the current & the proposed state sees a variation across industries & within them.

There are two main approaches that we see organizations taking


Mercer sought inputs from our Auto & Manufacturing clients, and the ITeS/Shared Services clients on the changes, as these are the two industry sectors that are most impacted by the changes.

46% of the respondents from the automotive & manufacturing industry, Indicated that the eligible population had increased on average by around 16%. The approaches to applying the new changes are varied. Whilst 49% of the organizations plan to pay the additional bonus over and above the current salary & variable pay/bonus, 14% plan to adjust it from the short term incentives or Diwali bonus already paid and 37% are evaluating legal opinion to determine the payment mechanism.

The ITeS & Shared Services Organizations indicated that the preferred approach is to adjust bonus against variable bonus/performance pay.

What do we see as the way forward?

1. Building clarity on what is called “salary” or “wages”

  • The most common point of disconnect across various legislations is on the definition of "Salary / Wages", as various Acts define them differently
  • The most common definition being(?) used is: Gross Salary – Retirals + Food
  • In the above, Gross Salary = Basic Pay + Dearness Allowance
  • Retirals include Employer’s contribution to Provident Fund, Gratuity & Superannuation (as applicable)
  • Food can cover either the cost incurred by the organization towards provision of food in the office premises or value of food coupons offered to employees in lieu of food facilities in the organization

2. Changing the mix of the constituents of Guaranteed Pay: With the changing labor landscape in India and with the government’s intent to provide greater benefits to employees (already seen in the inclusion of Minimum Wages as one of the criteria in bonus payment calculation), Mercer’s view is that organizations should incrementally move towards changing the mix in the Guaranteed/Gross Salary towards a higher percentage of Basic Pay. The direction in which organizations should move towards is Basic Pay equal to 50% of Gross/Guaranteed Pay.

3. Alignment to the true purpose of the act: Whilst organizations continue to use multiple approaches to comply with the Bonus Act, it is important for the organizations to recognize the overarching intent of the Act to provide additional compensation to employees when the organization makes profits. Therefore, organizations should make statutory bonus a part of compensation structure to ensure appropriate recording & audit trail and communicate this transparently to employees as part of the compensation offer discussion.

Namita leads Mercer's Information Solutions Practice in India for the Automotive & Manufacturing and Engineering industries and is the Lead Consultant for the Talent Consulting Practice in North India

Rajiv is the Human Resource Leader for Mercer Global Operations & Shared Services. He has diverse and in-depth knowledge of the various labour law and HR practices in India. 

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