Legislation which came into effect at the beginning of this year broadens the number of workers eligible for statutory bonuses and increases the cap on calculating such bonuses. The amendments were to take retrospective effect; however, this aspect of the legislation has been challenged, and orders partially staying the retrospective application of the changes have subsequently been made in various states.
Under the Payment of Bonus Act 1965 (Act), certain categories of employees are entitled to receive a statutory bonus calculated by reference to the employee's salary and the employer's profits.
The Act applies in respect of factories and establishments with 20 or more employees (or in some states, factories and establishments with 10 or more employees). Employees with service of at least 30 working days in the relevant accounting year are entitled to a statutory bonus subject to them meeting certain eligibility criteria.
The minimum statutory bonus that an employer must pay an eligible employee is generally 8.33% of the employee's salary earned during the relevant accounting year and the maximum statutory bonus payable is 20% of the employee's salary earned during the accounting year.
Amendments to the Act which entitle broader categories of employees to a statutory bonus were passed into law on 31 December 2015. The amended Act has been given retrospective effect from 1 April 2014 which has caused consternation amongst many employers.
The key changes to the Act are as follows:
- Eligibility extended: eligibility for bonus has been broadened to include employees earning up to INR21,000 per month (up from INR10,000 per month previously).
- Increased bonus cap: previously, for the purposes of calculating the statutory bonus, a salary cap of INR3,500 per month was applied (so where an eligible employee's salary was more than INR3,500 per month, for the purposes of calculating the statutory bonus, the bonus was calculated using a salary of INR3,500 per month). This bonus cap has been increased to INR7,000 per month or the minimum wage notified for the employment under the Minimum Wages Act 1948, whichever is higher.
- Retrospective effect: the amendments are deemed to have taken effect from 1 April 2014
Challenges to amendments
Industry bodies have publicly expressed concern about the retrospective application of the changes to the Act. The current requirement that statutory bonus be paid within 8 months of the end of the accounting year (generally 1 April to 31 March) means that profits for the 2014/15 accounting year have already been determined and bonus distributed to eligible employees. In particular, the impact on small to medium enterprises which may not have capacity to back pay employees the additional statutory bonus for 2014/15 accounting year has been raised as a key concern.
In a number of states, industry bodies have successfully brought proceedings challenging the retrospective application of the amended Act. Between February and April this year, orders partially staying the retrospective operation of the amended Act have reportedly been made in the State Courts of Kerala, Karnataka, Allahabad, Madhya Pradesh, Gujarat, Punjab and Haryana.
What this means for employers
Employers should consider the application of the amended Act to their workforce including monitoring the status of State Court orders staying the application of the amended Act and looking out for any further guidance material issued by the Government.