Detailed Study Notes for Unit II

Unit-II: Bonus – Concept & Payment of Bonus Act, 1965

1. Concept of Bonus & Historical Evolution

A. Understanding the Nature of Bonus

• Origin as Ex Gratia: Historically, bonus was viewed as a voluntary ex gratia payment (a gift or bounty) made by employers to workers at festival times (such as Diwali or Christmas) when the establishment made good profits.
• Transformation into a Legal Right: With the evolution of industrial jurisprudence and the doctrine of social justice, bonus ceased to be a mere bounty. It came to be recognized as a rightful share of workers in the surplus profits of an industrial enterprise, bridging the gap between actual wages and a living wage.
• Types of Bonus:
  • Customary / Traditional Bonus: Paid by long-standing custom on special occasions without regard to profit or loss.
  • Contractual Bonus: Payable as an express or implied term of an employment contract.
  • Statutory Bonus: Mandatory bonus regulated under the Payment of Bonus Act, 1965.

B. The Full Bench Formula (LTI / Labour Appellate Tribunal Formula)

• Background: Prior to 1965, disputes over bonus led to extensive industrial strife. In 1950, the Labour Appellate Tribunal formulated a standard formula—known as the Full Bench Formula—to calculate “available surplus.”
• The Formula Mechanics: Gross Profits of the year $\rightarrow$ Deduct prior charges (such as depreciation, normal reserves, income tax, return on paid-up capital, and working capital) $\rightarrow$ The remainder is the Available Surplus, out of which a reasonable bonus is allocated to workers.
• Limitation: Because the formula was complex and subject to intense litigation over allowable deductions, the Government of India appointed a Bonus Commission in 1961 to rationalize the process, leading directly to the Payment of Bonus Act, 1965.

2. The Payment of Bonus Act, 1965

A. Application and Scope (Section 1 & 2)

• Application:
  • Every factory as defined under the Factories Act, 1948.
  • Every other establishment in which 20 or more persons are employed on any day during an accounting year.
  • The appropriate government may also apply the Act to establishments employing 10 or more persons after giving due notice.
• Exclusions (Section 16 & 32): Certain categories of employees and establishments are exempted, such as public financial institutions, universities, and employees drawing wages above the statutory ceiling or working in newly established enterprises for initial grace periods.

B. Eligibility and Disqualification (Sections 8 & 9)

• Eligibility for Bonus (Section 8): Every employee (drawing wages up to the statutory eligibility ceiling) who has worked in an establishment for not less than 30 working days in an accounting year is entitled to receive bonus.
• Disqualification for Bonus (Section 9): An employee is disqualified from receiving bonus under the Act if dismissed from service for:
  1. Fraud;
  2. Riotous or violent behaviour while on the premises of the establishment; or
  3. Theft, misappropriation, or sabotage of any property of the establishment.

C. Computation of Profits, Available Surplus & Allocable Surplus

• Gross Profits (Section 4 & 5): Calculated in the manner specified in the First Schedule (for banking companies) or Second Schedule (for other companies).
• Available Surplus (Section 5): Gross profits for an accounting year minus prior charges (depreciation admissible under Income Tax Act, direct taxes payable, return on paid-up capital and reserves, etc.).
• Allocable Surplus (Section 2(4)):
  • For undertakings in the public sector: 60% of the available surplus.
  • In any other case (private sector): 67% of the available surplus.

D. Minimum and Maximum Bonus (Sections 10 & 11)

• Minimum Bonus (Section 10): Every employer must pay a minimum bonus of 8.33% of the salary or wage earned by the employee during the accounting year, or Rs. 100 (whichever is higher), regardless of whether the establishment has made any profit or suffered a loss. (For child employees, the minimum is 8.33% or Rs. 60).
• Maximum Bonus (Section 11): If the allocable surplus exceeds the amount required to pay the minimum 8.33% bonus, the employer must pay a higher bonus proportionate to the salary, up to a maximum limit of 20% of the salary or wage.

E. Set-On and Set-Off of Allocable Surplus (Section 15)

• To ensure stability in bonus payouts during lean years (when profits are low or zero) and prevent excessive payouts in high-profit years:
  • Set-On: If in any accounting year the allocable surplus exceeds the maximum 20% limit, the excess amount (up to 20% of total salary) is carried forward (set-on) to be utilized in subsequent years where the surplus is insufficient.
  • Set-Off: If there is no surplus or an inadequate surplus to pay even the minimum 8.33% bonus, the deficiency is carried forward (set-off) against the allocable surplus of subsequent accounting years (up to a block of 4 years).

F. Recovery of Bonus (Section 21)

• If an employer fails to pay bonus due under the Act, the employee, or any person authorized by them, can make an application to the appropriate government (or prescribed authority) for recovery within 1 year from the date on which the money became due.

3. In-Depth Landmark Case Studies

Case Study 1: Customary Bonus vs. Statutory Bonus

• Case Title: Muzdoor Union v. Shree Meenakshi Mills Ltd.
• Citation & Court: AIR 1969 SC 723 (Supreme Court of India)
• Related Statutory Sections: Section 1, Section 8, and Section 39 of the Payment of Bonus Act, 1965.
• The Story & Real-Life Background: Workers demanded a festival bonus based on long-standing tradition (customary bonus), even for years when the company suffered operational losses. The management argued that the Payment of Bonus Act, 1965 was an exhaustive code governing all forms of bonus, thereby extinguishing traditional customary claims.
• Legal Issues Involved: Whether the Payment of Bonus Act, 1965 excludes or supersedes claims for customary, traditional, or contractual bonus.
• Final Judgement & Ratio Decidendi:
  • Ruling: The Supreme Court held that the Payment of Bonus Act is a comprehensive and exhaustive code dealing with profit-based statutory bonus. However, it does not bar or abolish customary bonus or bonus payable under a separate contract or agreement.
  • Ratio: If workers establish a long-standing, uninterrupted custom of receiving bonus at festival times regardless of profit, such customary bonus survives outside the statutory profit-sharing framework.

Case Study 2: Disqualification and Natural Justice

• Case Title: Panitola Tea Estate v. Workman
• Citation & Court: (1971) 1 LLJ 337 (Supreme Court of India)
• Related Statutory Sections: Section 9 of the Payment of Bonus Act, 1965.
• The Story & Real-Life Background: An employee was dismissed from service on allegations of misconduct and theft of estate property. The management withheld his annual bonus under Section 9. The employee challenged the forfeiture, contending that no proper domestic inquiry was held and the allegations were fabricated to deny him bonus dues.
• Legal Issues Involved: Whether an employer can forfeit bonus under Section 9 without conducting a valid domestic inquiry establishing the specific disqualifying misconduct.
• Final Judgement & Ratio Decidendi:
  • Ruling: The Supreme Court ruled that disqualification under Section 9 requires clear proof of dismissal specifically for fraud, riotous behavior, or theft. An employer cannot arbitrarily label a worker as disqualified without a fair departmental or domestic inquiry upholding the charge.
  • Ratio: Principles of natural justice must be observed before depriving an employee of statutory bonus entitlements on grounds of misconduct.

Quick Reference Guide: Unit-II Acts & Sections

Unit Number	Act / Code Name	Relevant Sections Range	Core Description / Subject Matter
Unit-II	Payment of Bonus Act, 1965	Sections 1 to 40	Eligibility, computation of available/allocable surplus, minimum/maximum bonus, and set-on/set-off mechanisms.