In September, 2015, Shri Bandaru Dattatreya, the Minister of State for Labour and Employment took on record the 12 demands put forth by various trade unions and provided assurance that the Central Government is positively working towards resolving at least 9 of such demands. Among others, the trade unions had insisted that for the purposes of payment of bonus, the wage eligibility limit and calculation ceiling be revised to meet current economic trends.

The trade unions proposed that the wage eligibility limit be increased from INR 10,000 to INR 21,000 and the calculation ceiling from INR 3,500 to INR 7,000 or the minimum wage notified by the appropriate Government for that category of employment, whichever is higher.

Taking into due consideration the demands provided by the trade unions in relation to amendments to be carried out to the Payment of Bonus Act, 1965 (Principal Act), the Payment of Bonus (Amendment) Bill, 2015 (Amendment Bill), was introduced in the Lok Sabha on 7 December 2015 and was passed on 22 December 2015. Without much delay thereafter, the Amendment Bill came to be passed by the Rajya Sabha on 23 December 2015 and being called the Payment of Bonus (Amendment) Act, 2015 (Amendment Act), received the assent of the President of India on 31 December 2015.

Background

The Principal Act provides for the mandatory annual payment of bonus to eligible employees of establishments which employ 20 or more persons. In accordance with the terms of the Principal Act, every employee who draws a salary of INR 10,000 or below per month and who has worked for not less than 30 days in an accounting year, is eligible for bonus (calculated as per the methodology provided under the Principal Act) with the floor of 8.33% of the  salary payable to him/her and a cap on the maximum bonus statutorily payable (20% of the salary). Apart from seeking to broaden the eligibility limit, (from INR 10,000 set out under the Principal Act, the Amendment Act also raises the calculation ceiling for payment of bonus and retrospectively places the onus on employers to make payment of bonuses to eligible employees effective from 1 April 2014.

Details of Amendments and Analysis

The Amendment Act has amended the Principal Act in the following manner:

Amendment of Eligibility Limit

By amending Section 2(13) of the Principal Act, the Amendment Act has now widened the scope of employees eligible for payment of bonus from those drawing salary of INR 10,000 per month, to INR 21,000 per month.

The amendment in the eligibility limit appears to be an initiative which forms a part of the Central Government’s pro-labour policy. Interestingly, the last amendment to the eligibility limit was carried out in the year 2007 and over the past decade, the economy has seen significant reforms. These economic reforms have contributed towards an exponential increase in pay-scales making this amendment to the Principal Act very important to the larger populace of the workforce which earns between INR 10,000 and INR 21,000 per month.

Calculation of Bonus

Taking the demands of the trade unions head on, Section 12 of the Principal Act has been amended to state that where the salary or wage of an employee exceeds INR 7,000 per month or the minimum wage for the scheduled employment, the bonus payable to such employee shall be calculated as if his salary or wage were INR 7,000 per month or the minimum wage for the scheduled employment, whichever is higher.

The Principal Act provided that the bonus payable to an employee shall be in proportion to his/her salary. However, where an employee’s salary was over INR 3,500 per month, for the purposes of calculating bonus, the salary was to be assumed to be INR 3,500 per month. With a view to maximise bonus earnings, the Amendment Act has increased the wage ceiling for calculation to INR 7,000 and has also factored in possibilities where the minimum wage payable to such employees may be over INR 7,000, thereby giving employees the flexibility to draw a higher amount as bonus.

While this appears to be yet another attempt made by the Government at ensuring employee satisfaction, the inclusion of the minimum wage component in calculating bonus may hinder with the accounting policies of companies having a national presence. It may be noted that in accordance with the provisions of the Minimum Wages Act, 1948, minimum wage rates may be prescribed at a State as well as a Central level. More often than not, publication of notifications pertaining to minimum wage rates are delayed and have been subject to anomalies. Aggregating relevant data pertaining to minimum wage rates and ensuring that accurate calculations are made, for each state, may obstruct companies in processing the payment of bonuses.

Retrospective Applicability

The Amendment Act is effective from 1 April 2014.

The Amendment Act is certainly a significant step in the interest of the workforce. However, employers should have been provided with a specified timeframe to factor in the increased costs in their accounts in order to comply with the retrospective bonus payment obligations.

Comment

While the Amendment Act has been introduced at an opportune moment and with the intention of ensuring that labour laws progress in tandem with the extensive economic reforms that are underway, it is essential for the Government to be mindful of the employer’s interest and finances when making any statutory amendments that have retrospective implication.

Hopefully, other labour reforms in the pipeline such as the Government’s ambitious plan to reduce the number of labour laws by codifying laws related to industrial relations and social security under uniform codes, will also take into account the employer’s interest and provide them with sufficient leeway to prepare and effectively deal with any retrospective amendments.