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A Critical Reappraisal of Bonus Laws in India

– Rahul Rajsekar and Aisiri Raj*

Introduction The onset of the 20th century witnessed rapid industrialization due to the extensive reliance on the workforce for various industrial activities. However, the dismal position of employees prompted them to form unions for expressing their concerns regarding wages and the nature of their employment. One such problem was the payment of bonus, which served as a major bone of contention between the employer and the employees. The concept of payment of bonus was initially in the form of ex-gratia payments made by establishments on festive occasions. However, the notion of granting a bonus formalized during the First World War when the establishments paid its employees extra wages based on the profits made in the particular year. The idea of availing bonuses soon became an essential part of labourers’ needs, and non-payment of bonuses, which the employees considered to be their rightful wage, often led to strikes in the establishments. The increase in tensions between the establishments and the employees made way for the enactment of the Payment of Bonus Act in 1965. It drew inspiration from the pre-existing Ahmedabad Textile Mill Bonus Agreement, which is one of the earliest industrial agreements relating to the payment of bonus in India.

Since then, due to the multiplicity of wage-related labour laws in the country, the Second National Labour Commission recommended the amalgamation of four major labour laws, namely (a) the Payment of Wages Act, 1936 (b) the Minimum Wages Act, 1948 (c) Equal Remuneration Act, 1976 and the (d) Payment of Bonus Act, 1965, and thereby, the Code on Wages (hereinafter referred to as the ‘Code’) was enacted in 2019. The structure of the section dedicated to bonus in the Code broadly focuses on providing bonus from the allocable surplus of establishments to every such eligible employee who has worked for the minimum prescribed time-period, in addition to the other constituent criteria. The Code allows the carrying forward of the allocable surplus of an establishment as a payable bonus to the succeeding year only if it exceeds the bonus payable to the accounting year’s employees.

The article first highlights the concerns with bonus distribution in India which is constrained heavily due to the determination of bonus payments being based on profits generated by the businesses. The article then proceeds to explore the problems with the set-off and set-on rule prescribed in Section 36 of the Code which carries forward the bonus payments to the succeeding year, thereby withholding the employee’s rightful payment for that year. Further, the article exposes the failure of the legislative intent to differentiate ex-gratia payments from bonus payments. Finally, the article compares the bonus structure in India with that of the United States and Canada, and analyses the possibility of placing an obligation on the employer to ensure bonus payments to all the employees on their employment roll, irrespective of their status as formal or informal workers.

Concerns with the Distribution of Bonus The Code classifies bonuses as a statutory right of the employees wherein the State rewards and values the productivity of the workers. In the landmark case of Jalan Trading Co. (Private Ltd.) vs Mill Mazdoor Union, the Supreme Court upheld the constitutional validity of the obligation placed on employers to make mandatory bonus payments to employees. Even though the bonuses are guaranteed to the employees, these payments are constrained on multiple levels. First, the payment is contingent on the profits generated by the business, and second, businesses are exempted from payments for the first five years since opening their accounts. In case businesses are unable to generate the required surplus, workers are only paid either Rs. 100 or 8.33% of their wages as bonuses annually, whichever is higher. Finally, if there is a lack of surplus, the percentage is carried forward to the following year. This would create a situation wherein their bonuses would be due for multiple years if the business fails to generate the required surplus in such circumstances. Therefore, the legislation disproportionately affects the employees, which reduces the average workforce happiness and the incentive to work efficiently.

The Problem with the Allocable Surplus Section 36 of the Code prescribes a set-off and set-on principle that is accounted for in the business’s allocable surplus for that year. The concept of set-on under Section 36(1) states that when the allocable surplus exceeds the maximum amount of bonus payable for the accounting year, then the excess will be limited to 20% of the total salary of the employees in the establishment, which would be carried forward to the following year. At the same time, set-off under Section 36(2) states that when there is no available surplus, such deficiency will be added to the next year.

Although set-off carries the deficient bonus amount to the subsequent year, this is contingent on the businesses generating the required surplus for that year. This raises a concern as both the deficiency and the surplus are capped at 20% of the wages even if the business’s profits cross the allocable surplus and can resolve bonus dues from the previous years. Despite both the principles intending to guarantee a bonus pay, the section still functions under a profitability lens wherein businesses can withhold payments if the accounts run in a deficit every year. In such circumstances, employees only receive the minimum specified bonus pay through Section 26 even after five years of entering operations. Businesses should seek to internalize the bonus payment cost into their margins as these payments are guaranteed by law. Since the Central Government prescribes the manner in which the bonus payments can be allocated through set-off and set-on for the following accounting years, the Central Government should be able to determine the maximum possible amount according to their margins and cost of operations of the product or service to ensure that bonus payments are distributed equitably among the employees. When the Code operates from a perspective of profitability, it ignores the actual involvement of the employees in the business. In situations where businesses exceed the expected profit for that accounting year, the bonus payments should reflect such an increase as mentioned above. Even if the businesses do not generate the expected profit, bonus payments should not be reduced or carried forward to the subsequent year.

Since labour is accounted for when determining the final product costs, and employees are paid through the additional surplus, bonuses now need not be contingent on profits. For instance, assume that the operation cost of a business is Rs. 5000, which generally includes pending debts, employee wages, and other expenses of running a business. Currently, bonus payments are mandated only if businesses generate a profit for that year at Rs. 10,000. Rather than basing bonus payments on the profit, which would be the remaining Rs. 5000, businesses should add the bonus amount to the final cost of operations for that year. This would mean that bonuses are internalized to the operation costs in addition to wages, since bonuses should not depend solely on profits generated. The profits derived from a product or service is largely contingent on its demand, supply and marketability. The employees only have control over its production, quality and workspace environment which are independent of one’s salary. Bonus payments tend to value the employees’ connection and involvement in the workspace which is not reflected through profits. In addition to this, a mere increase in the wages or salary of the workers in place of bonus payments would not be feasible for two major reasons, first, the normal wage structure of the employees would be disrupted and secondly, it would not be possible to ensure employee’s union to engage in systematic collective bargaining for a rise in wages every year. [1]

Thus, even if the cost of operating a business increases, the bonuses are still guaranteed to the employees. The employees will now be able to receive their annual bonus without relying on the business’s performance for that year. In case the employees do engage in prohibited acts, they would have their bonuses forfeited under Section 29 of the Code, thus protecting the interests of both the employers and the employees.

Differentiating Ex-Gratia Payments from Statutory Bonus The cultural affinity towards the celebration of festivals in India imposes additional periodic expenditures on employees compared to the employees’ average expenses throughout the year. Section 37 of the Code holds that when the employer provides a festive bonus to the employees, such amount would be deducted from the bonus payable for that year. This is concerning as bonuses during festive seasons are usually ex-gratia payments made as a token of goodwill to the employees, not contingent on businesses’ profitability. It is detrimental to the interest of the employees that their bonuses are reduced as the legislation fails to differentiate between statutory and ex-gratia payments. Instead of capping bonuses at 20% of the allocable surplus in all circumstances, there ought to be a scope to prioritize those businesses that want to additionally reward their employees without cutting into what is prescribed for. Capping bonuses would mean that businesses are not allowed to pay their employees an additional sum even if they wish to. Thus, any payment made out of good faith should not be accounted for while making such a calculation.

Exploring Non-Discretionary Bonus Structures The labour laws of the United States and Canada require businesses to extend non-discretionary employee bonus plans that are paid annually irrespective of the profit generated by them. This means that if the employees reach requisite targets, they are rewarded bonuses according to the plan’s structure. Bonuses are viewed as a part of the employee benefit plan that includes insurance and other similar benefits. The nature of non-discretionary bonuses is in the form of mandatory contractual clauses in the employment agreement, including the implications of constructive dismissal in cases of non-payment of bonuses, making these rights easily justiciable. Employees can receive their pay in all circumstances, including cases where the employer defaults or delays the payment of bonuses. The Canadian Court of Appeal strengthened this stance in Bois v. MD Physician Services Inc, which held that even if the employee is no longer working with the organization, they are still entitled to their dues as part of the bonus plan.

Meanwhile, in India, bonus payments can only be enforced if there is an allocable surplus for that year or if the bonus has been delayed for more than eight months under Section 38 of the Code. Employees do not have a channel to access payments or the ability to strike for amounts that have been carried forward for multiple years if the business continuously runs in a deficit. Although bonuses are constrained by profit for those businesses that the Code on Wages applies to, the Central Government has introduced Non-Productivity Linked Bonus Payments to all non-gazetted temporary or part-time employees. These payments are provided even if the services that the employees are linked to function under a deficit. Although 90% of India’s workforce is characterized as the unorganized sector, a majority of them are a part of the muster rolls of the employers and are considered to be legitimate employees in the eyes of the law. The Sarita Khatri v Government of NCT Delhi judgment laid down that the Government should pay these employees if they are within the industries’ employment roll, strengthening their access to bonuses. This would mean that employers now have the responsibility to ensure that all employees on the employment roll are paid a bonus according to Section 26 of the Code. Thus, businesses should prioritize constructing a plan to ensure that employees always receive their rewards for that year.

Conclusion The Code on Wages is a welfare legislation that should act as a social net which recognizes productivity and safeguards the most vulnerable employees. The Directive Principles of State Policy under Article 39 provide that the State must strive to ensure that labour policies do not disproportionately affect employees. Modern-day welfare legislations aim at redistribution of wealth to intercept the concentration of wealth in the hands of a few. Therefore, it becomes crucial to recognize the needs of the employees who form the backbone of the economy. The average workforce happiness depends on the favourable nature and conditions of employment, and bonus as a concept is not just a means of incentivizing the employees but also ensures the rightful contribution of the workers is recognized and duly rewarded.

COVID-19 has further exposed concerns in the legislative model regulating bonuses which is contingent on profits, with a majority of businesses generating considerably less revenue in light of the pandemic. A reduced market with an increased cost of operations would mean that businesses might not have the requisite allocable surplus to extend bonus payments to their employees, let alone pay their previous year’s deficits and set-on’s. The call for strikes by the railway workers unions is one such example where the Central Government delayed the payment of bonuses, citing the pandemic. The workers union contended that the withholding of bonuses of the previous year in light of circumstances that have arisen this year has put them into an unfavourable position. Although the Central Government reached an agreement to extend their dues, a strong precedent must be set to ensure that such payments are non-negotiable despite varying circumstances. Employees of state-run establishments such as Railways and Post Offices will continue to be hit post lockdowns due to pandemic protocols such as reduced operation of trains and passengers’ safety requirements, which may mount additional tasks on the existing mode of operations, like ensuring compliance with safety guidelines, disinfecting the equipment used etc. Hence, the State must ensure that the rights of the employees are protected in such vulnerable circumstances, and their contribution to these services is valued despite all odds.

The pandemic has further strengthened the case for internalizing bonus payments to the businesses’ cost of operations since employees continue to show up to work, despite outbreak concerns and lockdown guidelines. Therefore, extending bonus payments not only recognizes the employees’ efforts but ensures that bonuses are paid in all circumstances, which should be the priority of a welfare state.

*Rahul Rajsekar and Aisiri Raj are III Year, B.A. LL.B. (Hons.) students at the School of Law, Christ University.

[1] G. S. Sharma, Economic justice and the Indian Constitution: Some implications of the “Bonus” case, Journal of the Indian Law Institute, 8(3), 459.


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