Brief Background

The Payment of Bonus Act, 1965 provides for the payment of statutory bonus to eligible employees. The bonus payable is to be determined on the basis of profits or on the basis of production or productivity of the establishment. The Act is applicable to factories and establishments employing at least 20 persons, although in some Indian states, the Government has extended the applicability of the law by reducing the threshold to factories and establishments employing at least 10 persons. The Act requires an employer to pay to an eligible employee a minimum bonus at the rate of 8.33% of the salary earned by the employee during the accounting year or INR 100 (USD 1.5), whichever is higher. As per law, the maximum statutory bonus can be limited to 20% of the employee’s salary.

In or about February 2013, the country faced nationwide general strikes by trade unions for removal of all ceilings under the Payment of Bonus Act, 1965. On September 2, 2015, 10 central trade unions were reported to have gone on a one-day strike demanding an increase in the wage ceiling and bonus calculation ceiling. Pursuant to these strikes, the Central Government gave assurances to the public regarding the sought amendment, also in light of the fact that the last revision of the two ceilings were made a long time ago in 2007. The Payment of Bonus (Amendment) Bill, 2015 was introduced in the Lok Sabha (House of People) of the Indian Parliament on December 7, 2015. The amendment was proposed to be made effective from April 1, 2015. However, Indian Prime Minister Mr. Narenda Modi signed off a last moment direction that the benefits should accrue from April 1, 2014, and on December 23, 2015, the Rajya Sabha (House of Ministers) of the Indian Parliament passed the bill, being effective from April 1, 2014, with a voice vote. The bill sought to amend the Payment of Bonus Act, 1965 as existing. The President of India gave his assent on the Bill on December 31, 2015 thus, making it an Act. The Payment of Bonus (Amendment) Act, 2015 as passed was published on the E-Gazette website on January 1, 2016 for notice upon the general public.

Key amendments brought about by the Payment of Bonus (Amendment) Act, 2015:

  1. Eligibility Wage Ceiling increased - under the provisions of the previous Act, an employee who had worked for at least 30 days (in an accounting year) and drew a salary of INR 10,000 (Approx. USD 150) per month, was eligible to receiving statutory bonus. The amendment increases this eligibility limit to a salary threshold of INR 21,000 (Approx. USD 325) per month.
  2. Ceiling for Bonus Calculation increased - under the previous Act, if an eligible employee’s salary were more than INR 3,500 (Approx. USD 55) per month, for the purposes of calculation of bonus, the salary would be assumed to be limited to INR 3,500 per month. The amendment raises this wage ceiling to INR 7,000 (Approx. USD 110) per month or the minimum wage notified for the employment under the Minimum Wages Act, 1948, whichever is higher.
  3. Retrospective amendment - the amendment has been given effect from April 1, 2014.

In the year 2007, through the Payment of Bonus (Amendment) Act, 2007, the salary threshold for eligibility for for payment of bonus was increased from INR 3,500 (Approx. USD 55) to INR 10,000 (Approx. USD 150). Further, through the same amendment, the wage ceiling for computation of bonus was enhanced from INR 2,500 (Approx. USD 39) to INR 3,500 (Approx. USD 55).

Reactions from various Associations on the Retrospective Effect from FY 2014-15

Many were of the view that the retrospective nature of the amendments should have been avoided and employers should have been given adequate time to plan for such increase in their salary costs. The main concern was that employers would not have budgeted for this expense in the previous financial year (2014-2015) for which the books of accounts were already closed and taxes also paid. Such retrospective application from April 2014 would lead to financial stress, especially on the manufacturing sector where the number of workers is high.

As per media reports by The Hindu, an Indian daily, the Confederation of Indian Industries (CII) had written to the Labour Ministry on January 8, 2016 seeking a clarification to be given to allow industries to give bonus installments over the next two financial years to ease off the burden. It also demanded that the excess bonus received by employees, besides the minimum bonus, be adjusted in the next two financial years so as to “accommodate the newer workforce using the same or reduced allocable surplus.” In another report, a FICCI representative had reportedly stated that the industry had urged the government to amend the law prospectively from 2016-17 rather than give it a retrospective effect. The Micro, Small and Medium Enterprises (MSME) chamber, Indian Industries Association (IIA) in the Indian state of Uttar Pradesh is also known to have strongly opposed the retrospective implementation of the amendment, stating that MSMEs have no means to pay such bonus in arrears, while the Government by way of collecting taxes can pay the bonus. Even NASSCOM reportedly made representations on the retrospective applicability, financial impact, administrative challenges and the ambiguities in the revised Act to the concerned ministries.

Stay on Retrospective Effect from April 1, 2014

Upon representations from various industry bodies by way of writ petitions in various State High Courts challenging the retrospective effect from FY 2014-15, several high courts have stayed the retrospective operation temporarily.

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For all of the above stay orders, it is clarified that the amendment would take effect from the financial year 2015-16 onwards, and not 2014-15 as earlier stipulated.

Thus, within a period of two to four months, six states in India have already obtained a stay on the retrospective operation of the amendment from FY 2014-15. It seems it is only a matter of time till all states follow suit. Meanwhile, the Indian Government’s continuing focus on labour law reforms calls for attention to a few important proposed changes to the Indian labour laws including the Labour Code on Wages Bill, 2015 which seeks to consolidate, simplify and rationalise various labour laws in India pertaining to wages, namely, the Payment of Bonus Act, 1965, Minimum Wages Act, 1948, Payment of Wages Act, 1936 and the Equal Remuneration Act, 1976.With the financial management of even private companies at stake, this area of law is surely one to watch out for.