PAPER-I: LABOUR AND INDUSTRIAL LAW-II Unit-II

IV SEMESTER

PAPER-I: LABOUR AND INDUSTRIAL LAW-II

Unit-II

Q.1. What is the concept of Bonus under labour laws? Discuss the rationale behind granting bonus to employees and the constitutional and legal basis for the right to claim bonus under the Payment of Bonus Act, 1965

Introduction:

“Bonus” is a reward paid to employees over and above their regular salary or wages. Under labour laws, bonus is seen not as a mere gesture of goodwill but as a right, especially when an establishment earns profits. The concept has evolved from being a voluntary incentive to a statutory obligation through various judicial pronouncements and legislative efforts.

Concept of Bonus under Labour Laws:

In industrial jurisprudence, Bonus is a share in the surplus profits of an establishment which is paid to workers as a measure of profit-sharing and social justice. It is based on the premise that:

Labour contributes equally to the success of an enterprise, along with capital and management.
Therefore, when an employer earns profits, a just share should go to the workers.
It promotes industrial peace and increases productivity.

Types of Bonus:

Profit-based Bonus: Based on the net profits of the company.
Productivity-linked Bonus: Based on performance or output.
Statutory Bonus: Mandated by law under the Payment of Bonus Act, 1965.

Rationale Behind Granting Bonus to Employees:

Fair Distribution of Profits:
- Ensures equitable distribution between employer and employee.
- Reflects the principle of industrial democracy.
Employee Motivation and Retention:
- Acts as an incentive for improved performance.
- Boosts morale and reduces labour turnover.
Social Justice and Equity:
- Bonus is not a gift but a rightful share.
- Recognizes labour’s contribution to profitability.
Industrial Peace:
- Prevents disputes and strikes.
- Helps build mutual trust between workers and employers.

Historical Background:

During World War II, many industrial undertakings in India earned excessive profits.
Workers demanded a fair share of the profits.
This led to the famous “Full Bench Formula” (set up in 1950 by the Labour Appellate Tribunal) which provided a method for calculating bonus.
Later, the Bonus Commission (1961) examined the issue and recommended statutory regulation.

Constitutional Basis of Bonus:

Bonus is not directly mentioned in the Constitution, but several Directive Principles of State Policy (DPSPs) justify it:

Article 38: State shall strive to promote welfare of people by securing a just social order.
Article 39: Ensures that wealth is not concentrated and workers receive just remuneration.
Article 43: Promotes living wage and conditions of work ensuring a decent standard of life.

Though not enforceable in a court of law, these DPSPs guide the legislative framework behind labour welfare laws, including the Payment of Bonus Act.

Legal Basis – Payment of Bonus Act, 1965:

The Payment of Bonus Act, 1965 is the key legislation that governs the right to receive statutory bonus.

Objectives of the Act:

Provide a legal right to employees to share in the profits of an organization.
Ensure a minimum bonus even in the absence of profits.
Establish a formula-based system for computing bonus.

Key Provisions:

Eligibility: Employees earning salary/wages ≤ ₹21,000/month and who have worked at least 30 days in the accounting year (Section 8).
Minimum Bonus: 8.33% of salary or ₹100 (whichever is higher), even if no profits (Section 10).
Maximum Bonus: 20% of salary/wages, depending on allocable surplus (Section 11).
Computation of Surplus: Based on gross profit and deductions, following Schedule I/II.
Set-on and Set-off: To adjust bonus over profitable and non-profitable years (Section 15).

Judicial Support:

Courts have recognized bonus as an important tool of distributive justice. In Titaghur Paper Mills Ltd. v. Workmen (1959) and Jay Engineering Works Ltd. v. Staff (1961), the courts emphasized that bonus reflects workers’ participation in the wealth of the nation.

Conclusion:

The concept of bonus under labour laws is rooted in the idea of economic justice, fair treatment, and recognition of workers’ contribution. The Payment of Bonus Act, 1965 legally enforces this right and ensures that workers receive a minimum return on their contribution, regardless of profit. It is a crucial instrument in maintaining industrial harmony and equitable wealth distribution in a developing economy like India.

Q.2. Explain the “Right to claim Bonus” under the Payment of Bonus Act, 1965. Which categories of employees are entitled to bonus and under what conditions?

Introduction:

The Payment of Bonus Act, 1965 is a welfare legislation enacted to provide a statutory right to employees to receive bonus as a share in the profits of an organization. It aims to bridge the gap between labour and capital by ensuring that employees are rewarded not only through wages but also through a share in the economic gains of the establishment.

The “Right to claim Bonus” under this Act is not discretionary, but a legal entitlement provided to eligible employees, subject to the conditions and limits specified in the Act.

What is Bonus under the Act?

Bonus under the Payment of Bonus Act, 1965 means a monetary reward payable annually to the employee, linked with the profits or productivity of the establishment. Even if the establishment does not earn a profit, minimum bonus is payable to eligible employees.

Right to Claim Bonus:

The right to claim bonus under the Payment of Bonus Act, 1965 is based on the following principles:

Statutory Right:
- Bonus is a legal right under the Act and is not dependent upon employer’s will.
- Employers must pay bonus as per provisions, even if the establishment incurs losses (to the extent of minimum bonus).
Profit-sharing and Social Justice:
- Bonus is a recognition of the role of labour in generating profits.
- Ensures just and equitable distribution of the surplus.
Enforceable in Law:
- If an eligible employee is denied bonus, they can file a complaint and seek recovery through legal channels, including Labour Courts.

Eligibility for Bonus (Section 8):

An employee is entitled to claim bonus under the Act if they satisfy the following conditions:

1. Employment Criteria:

Must be an employee as defined under Section 2(13) of the Act.
Includes any person (other than an apprentice) employed on a salary or wage not exceeding ₹21,000 per month.

2. Minimum Days of Work:

Must have worked for at least 30 working days in an accounting year.

3. Types of Employees Covered:

Employees employed in any factory (as defined under Factories Act, 1948).
Employees in other establishments where 10 or more persons are employed with aid of power, or 20 or more persons without aid of power.

4. Salary Limit for Bonus Calculation:

For computation, the salary is capped at ₹7,000 per month or the minimum wage, whichever is higher (as per 2015 amendment).

Disqualification from Bonus (Section 9):

An employee shall be disqualified from receiving bonus if:

He or she is dismissed from service for:
- Fraud
- Riotous or violent behavior
- Theft, misappropriation or sabotage of any property

In such cases, the bonus may be denied for that accounting year.

Minimum and Maximum Bonus:

Minimum Bonus (Section 10):
- 8.33% of the salary or ₹100, whichever is higher, irrespective of profit or loss.
Maximum Bonus (Section 11):
- 20% of the salary/wages if the allocable surplus is sufficient.

When Bonus Becomes Payable (Section 19):

Bonus must be paid within 8 months from the close of the accounting year.
This period may be extended by the government in certain cases.

Illustration:

Suppose an employee named Ramesh earns ₹15,000 per month and has worked for 11 months in a financial year. The company has earned profit and has allocable surplus sufficient to pay 20% bonus. In such a case:

Ramesh is eligible for bonus.
The calculation will be based on ₹7,000 (statutory wage ceiling).
Bonus = 20% of ₹7,000 × 11 = ₹15,400

Important Judicial Decisions:

Muir Mills Ltd. v. Suti Mills Mazdoor Union (1955): Recognized that workers are partners in production and are entitled to share in profits.
State of Maharashtra v. B.E.S.T. Workers Union (1979): Reaffirmed that bonus is not a bounty but a right linked with profits or statutory provisions.

Conclusion:

The right to claim bonus under the Payment of Bonus Act, 1965 is a crucial statutory right for workers in India. It embodies the ideals of fair remuneration, distributive justice, and industrial peace. By laying down clear eligibility criteria and computation methods, the Act provides a transparent and enforceable mechanism through which employees receive a fair share of the economic benefits generated by their labour and the enterprise’s capital.

Q.3. What is the Full Bench Formula? Discuss its origin, objectives, and how it influenced the framing of the Payment of Bonus Act, 1965.

Introduction:

The Full Bench Formula is a landmark concept in the history of Indian labour laws that laid the foundation for statutory bonus payments to industrial workers. It was developed by the Labour Appellate Tribunal of India in 1950 to resolve disputes related to the payment of bonus in a fair, scientific, and uniform manner. This formula eventually formed the basis for the Payment of Bonus Act, 1965.

Origin of the Full Bench Formula:

After World War II, many Indian industries earned substantial profits due to wartime demand.
Workers began demanding a share in profits as bonus, leading to multiple industrial disputes.
There was no statutory provision or uniform guideline for payment of bonus at that time.
To resolve these disputes, the Full Bench of the Labour Appellate Tribunal in the case of Muir Mills Ltd. v. Suti Mills Mazdoor Union (1950) formulated a comprehensive method known as the Full Bench Formula.

Objectives of the Full Bench Formula:

The main objectives behind the creation of the Full Bench Formula were:

Fairness in Distribution:
- To ensure a just and equitable share of profits to workers without adversely affecting the employer’s financial stability.
Standardization:
- To establish a uniform principle applicable to all industries for calculating bonus.
Balancing Interests:
- To balance the interests of employers and employees by ensuring workers’ participation in profits without harming business reinvestment needs.
Prevent Industrial Disputes:
- To reduce the increasing number of bonus-related disputes by introducing a standard method for computation.

Key Features of the Full Bench Formula:

The formula defined how to compute the amount of bonus payable from the available surplus of a company:

Gross Profit:
- Start with the gross profit of the establishment for the accounting year.
Prior Charges to be Deducted: The following items are first deducted from gross profit to determine available surplus:
- Depreciation (as per Income Tax rules)
- Return on capital at the rate of 6% (or more if actually paid)
- Income tax liability
- Development rebate or reserve
- Dividends payable to shareholders
Available Surplus:
- After deduction of the above items, the remaining amount is the available surplus.
Allocation of Surplus:
- A reasonable portion of this surplus was directed to be distributed as bonus among workers.
- The rest could be retained for business expansion or other reserves.

Limitations and Criticism of Full Bench Formula:

It was complex and technical for small establishments.
The 6% return on capital was seen as insufficient by many industrialists.
It failed to account for productivity-based performance, as it was purely profit-linked.
It lacked the statutory force, so employers could still deny payment.

Impact on the Framing of the Payment of Bonus Act, 1965:

The Full Bench Formula played a pivotal role in shaping the Payment of Bonus Act, 1965, in the following ways:

Basis for Calculating Surplus:
- The Act adopted a similar method for determining gross profit, available surplus, and allocable surplus, using schedules that mirrored the formula.
Statutory Recognition:
- What was merely a judicial guideline earlier became law, making bonus a legal obligation.
Bonus Commission Recommendations:
- In 1961, the Bonus Commission was set up to examine the bonus issue.
- It upheld the principles of the Full Bench Formula and recommended a statutory law, which led to the Payment of Bonus Act, 1965.
Standardization and Enforcement:
- The Act standardized bonus calculation across industries and allowed for legal recovery in case of non-payment.
Inclusion of Set-on and Set-off:
- Based on the practical difficulties of the Full Bench Formula, the Act included Set-on and Set-off provisions (Section 15) to smooth bonus payments over different years.

Conclusion:

The Full Bench Formula was a landmark development in Indian industrial jurisprudence that laid the groundwork for profit-sharing through bonus. Though it had its limitations, it introduced a rational and balanced approach to determining bonus liability. Its principles were crucial in the framing of the Payment of Bonus Act, 1965, which gave statutory recognition to employees’ right to receive bonus, thus promoting social justice, equitable distribution of wealth, and industrial peace.

Q.4. Write a detailed note on the Bonus Commission. How did its recommendations shape the provisions of the Payment of Bonus Act, 1965?
[Long Answer]

Introduction:

The Bonus Commission was a landmark committee established by the Government of India in 1961 to examine and recommend a suitable scheme for the payment of bonus to industrial workers in the country. Its formation was necessitated by growing industrial disputes and widespread demands for profit-linked bonus by employees, especially after the introduction of the Full Bench Formula by the Labour Appellate Tribunal in 1950.

The recommendations of the Bonus Commission played a pivotal role in shaping the Payment of Bonus Act, 1965, which gave a statutory right to workers to receive bonus.

Background of the Bonus Commission:

After the Second World War, many industries earned extraordinary profits, which led workers to demand a fair share in the form of bonus.
There was, however, no uniform law to regulate or enforce bonus payments.
The Full Bench Formula served as a judicial guideline but lacked statutory force.
To resolve the issue comprehensively, the Government of India set up the Bonus Commission in 1961 under the chairmanship of Justice P. B. Gajendragadkar (then a Supreme Court Judge).

Objectives of the Bonus Commission:

To examine whether bonus should be paid as a matter of right or remain a voluntary gesture.
To suggest a uniform policy for payment of bonus in industries.
To recommend a system of bonus calculation based on capacity to pay and productivity.
To resolve the conflict between employers and workers relating to bonus claims.

Methodology and Scope:

The Commission studied:

The working of the Full Bench Formula,
Industrial disputes related to bonus,
Practices in both the public and private sectors,
International trends on profit-sharing.

It collected inputs from trade unions, employers, economists, financial experts, and legal professionals.

Key Recommendations of the Bonus Commission:

Statutory Right to Bonus:
- Bonus should be recognized as a legal right, not merely a voluntary payment or goodwill.
Eligibility Criteria:
- All employees drawing salary up to a fixed limit (then ₹1,600/month) and working at least 30 days in an accounting year should be eligible.
Minimum Bonus:
- A minimum bonus of 8.33% of annual wages should be paid to all eligible employees, even if the employer incurs a loss.
Maximum Bonus:
- The maximum bonus payable should be 20% of annual wages, linked to the availability of allocable surplus.
Calculation of Surplus:
- The method of computing gross profit, available surplus, and allocable surplus should be laid down in the law itself.
- The Income-tax rules should be followed for computation of depreciation and tax liabilities.
Set-on and Set-off:
- Introduced the concept of Set-on and Set-off to carry forward excess/deficit bonus payments to maintain stability over the years.
Applicability:
- The Act should apply to all establishments with 20 or more employees, including both private and public sectors.
Productivity Link:
- Bonus may be linked with productivity, but minimum bonus should not be conditional on productivity targets.

Impact of Recommendations on the Payment of Bonus Act, 1965:

Based on the Bonus Commission’s detailed report, the Government of India enacted the Payment of Bonus Act, 1965, incorporating almost all major recommendations.

Key Influences:

Bonus Commission Recommendation	Corresponding Provision in the Act
Legal right to bonus	Section 10 & 11 – Minimum and Maximum Bonus
Eligibility criteria	Section 8 – Eligibility of employees
Disqualification provisions	Section 9 – Dismissal for fraud, etc.
Minimum bonus (8.33%)	Section 10
Maximum bonus (20%)	Section 11
Surplus computation	Schedule I & II of the Act
Set-on and Set-off	Section 15
Time limit for payment	Section 19
Applicability	Section 1 – Factories & establishments with 20 or more employees

Significance of the Bonus Commission:

Framework Builder:
- Provided a clear blueprint for a national law on bonus.
Balance of Interests:
- Balanced the need for economic growth and industrial peace by addressing concerns of both employers and employees.
Legal Certainty:
- Replaced inconsistent case laws and industrial awards with a comprehensive statute.
Social Justice:
- Promoted the constitutional values of equality, dignity of labour, and fair remuneration under the Directive Principles of State Policy.

Conclusion:

The Bonus Commission of 1961 played a decisive role in reforming India’s labour welfare system. Its recommendations not only standardized bonus payments but also ensured justice and equity in industrial relations. The Payment of Bonus Act, 1965, which emerged from this report, continues to serve as a cornerstone legislation in Indian labour law, ensuring that employees get their fair share in the prosperity of the establishment.

Q.5. Discuss the application and scope of the Payment of Bonus Act, 1965. Which types of establishments and employees are covered under the Act?
[Long Answer]

Introduction:

The Payment of Bonus Act, 1965 is a significant piece of labour welfare legislation in India that provides a statutory right to employees to receive bonus from their employers. The Act ensures that workers receive a share in the profits of the establishment, thereby promoting economic justice and industrial harmony.

To achieve this, the Act lays down detailed provisions regarding its applicability, scope, and the categories of establishments and employees covered under its ambit.

Objective of the Act:

To provide a minimum statutory bonus to employees of certain establishments.
To ensure a fair and equitable distribution of surplus profits among employees.
To replace inconsistent practices with a uniform law governing bonus payments.

Application of the Payment of Bonus Act, 1965 (Section 1):

1. Territorial Extent:

The Act applies to the whole of India, including the Union Territories.

2. Date of Commencement:

Came into force on 25th September 1965, but was made applicable retrospectively from 1st April 1964.

3. Applicability to Establishments:

The Act applies to:

(a) Factories:

As defined under Section 2(m) of the Factories Act, 1948.
Includes any premises where manufacturing process is carried on with or without the aid of power and where 10 or more workers are employed.

(b) Other Establishments:

Any other establishment in which 20 or more persons are employed on any day during an accounting year.
This includes shops, commercial establishments, mines, transport undertakings, etc.

4. Voluntary Extension:

Under Section 1(4), the appropriate Government may extend the Act to other classes of establishments (even if they employ less than 20 persons), by notification in the Official Gazette.

Scope of the Act:

The scope of the Act includes:

1. Types of Employers:

Private sector companies.
Public sector undertakings (with certain exceptions).
Co-operative societies (subject to financial conditions).
Government departments operating in commercial or industrial capacities.

2. Types of Employees Covered (Section 2(13)):

The Act covers employees who:

Are not apprentices.
Are employed on salary or wages not exceeding ₹21,000 per month.
Are engaged in skilled, unskilled, manual, supervisory, technical, or clerical work.
Are employed either directly or through a contractor.

Note:
Employees working in a managerial or administrative capacity or supervisors drawing wages more than ₹21,000 per month are excluded from coverage.

Eligibility Conditions (Section 8):

An employee is eligible to receive bonus if:

He or she has worked in the establishment for at least 30 working days in the relevant accounting year.

Exemptions from Application (Section 32):

The Act does not apply to certain classes of employees and establishments, including:

Employees of the Life Insurance Corporation of India.
Employees in Indian Red Cross Society, universities and educational institutions.
Employees employed by the RBI, IFCI, UTI, NABARD, SIDBI, etc.
Employees of establishments exempted under Section 36 by the appropriate Government.

Special Cases:

Seasonal Establishments (Section 16):
In such establishments, the bonus is paid at the rate of 8.33% of the salary or wage for the period of employment during the year.
Newly Set-Up Establishments (Section 16):
Bonus is not obligatory for the first 5 accounting years unless the employer earns profits during that period.

Important Judicial Interpretation:

In Union of India v. Shankaranarayan, the court observed that the purpose of the Payment of Bonus Act is to provide a mechanism for profit-sharing and to benefit the working class by lawfully entitling them to a bonus, even if profits are not made.

Conclusion:

The Payment of Bonus Act, 1965 has a wide and inclusive scope, covering a broad spectrum of industrial and commercial establishments and non-managerial employees across India. It provides a uniform legal framework for bonus payments and ensures economic justice by making bonus not a matter of employer discretion but a statutory obligation. Through its provisions, the Act promotes industrial peace, worker motivation, and a fair share of profits for the labour force.

Q.6. Explain the method of computation of Gross Profit, Available Surplus, and Allocable Surplus under the Payment of Bonus Act, 1965. Support your answer with appropriate formulae and examples.
[Long Type Answer]

Introduction:

The Payment of Bonus Act, 1965 ensures that employees receive a fair share of the profits of an establishment. To implement this, the Act lays down a systematic and formula-based process for calculating:

Gross Profit
Available Surplus
Allocable Surplus

This structured method ensures transparency and uniformity in determining the bonus payable to eligible employees.

✅ 1. Computation of Gross Profit

Gross Profit is the first step in the calculation. The method of its computation varies based on the type of organization.

According to Section 4:

Gross Profit is calculated as per:

Schedule I for Banking Companies
Schedule II for other Establishments

Formula for Non-Banking Establishments (Schedule II):

Gross Profit = Net Profit (as per profit & loss account) + Additions – Deductions

Additions:

Bonus paid to employees
Depreciation admissible under Income Tax Act (if not already deducted)
Income tax
Any other appropriations from profit

Deductions:

Capital receipts
Capital gains
Income from investments
Any income not derived from business operations

Example:

Suppose an establishment shows a Net Profit of ₹10,00,000 and the following adjustments are to be made:

Particulars	Amount (₹)
Bonus already paid	1,00,000
Income tax provision	2,00,000
Depreciation not debited earlier	50,000
Capital gains	70,000

Gross Profit =
= ₹10,00,000 + ₹1,00,000 + ₹2,00,000 + ₹50,000 – ₹70,000
= ₹12,80,000

✅ 2. Computation of Available Surplus (Section 5)

After calculating Gross Profit, the Available Surplus is computed by deducting certain prior charges.

Formula:

Available Surplus = Gross Profit – Prior Charges

Prior Charges include:

Depreciation (as per Income Tax rules)
Development Rebate or Investment Allowance (if claimed)
Direct Taxes payable by the employer
Sums specified in the Third Schedule (if applicable)

Example:

Assume Gross Profit = ₹12,80,000
Less:

Depreciation = ₹1,00,000
Direct Taxes = ₹2,80,000
Development Rebate = ₹20,000

Available Surplus = ₹12,80,000 – ₹1,00,000 – ₹2,80,000 – ₹20,000 = ₹8,80,000

✅ 3. Computation of Allocable Surplus (Section 2(4))

Allocable Surplus is that portion of the Available Surplus which is legally allocable to employees as bonus.

As per Section 2(4):

67% of Available Surplus, if employer is a company (other than foreign company) which has not made arrangements for dividend payment within India.
60% of Available Surplus in all other cases.

Example:

Assume Available Surplus = ₹8,80,000
Employer is a regular (non-foreign) company.

Allocable Surplus = 60% of ₹8,80,000 = ₹5,28,000

✅ Distribution of Bonus:

From the Allocable Surplus, the employer is required to pay at least 8.33% of the salary/wages as Minimum Bonus (Section 10).
If surplus permits, employer may pay up to 20% of salary/wages as Maximum Bonus (Section 11).

✅ Set-on and Set-off (Section 15):

To ensure consistency in bonus payments over different years, the Act allows:

Set-on: If allocable surplus exceeds the maximum bonus limit (20%), the excess can be carried forward for up to 4 years.
Set-off: If there’s insufficient allocable surplus in a year, the deficiency can be adjusted using previous years’ set-on.

✅ Final Illustration (All Steps):

Particulars	Amount (₹)
Net Profit (as per P&L)	10,00,000
Add: Bonus Paid	1,00,000
Add: Income Tax provision	2,00,000
Add: Depreciation	50,000
Less: Capital Gains	70,000
Gross Profit	12,80,000

Less: Prior Charges

Depreciation: ₹1,00,000
Income Tax: ₹2,80,000
Development Rebate: ₹20,000
→ Available Surplus = ₹8,80,000

Allocable Surplus (60%) = ₹5,28,000

Assuming there are 50 employees and total bonus payable (within 20% limit) is ₹4,80,000, then:

→ Excess ₹48,000 can be carried forward as Set-on

Conclusion:

The Payment of Bonus Act, 1965 prescribes a precise and equitable formula for calculating bonus through the steps of computing Gross Profit, Available Surplus, and Allocable Surplus. These calculations ensure that workers get a legitimate share in the organization’s profits, while also allowing employers to retain adequate earnings for reinvestment. It promotes transparency, fairness, and accountability in industrial wage distribution.

Q.7. Who is eligible for bonus under the Payment of Bonus Act, 1965? Discuss the disqualifications for receiving bonus as per Section 9 of the Act.
[Long Type Answer]

Introduction:

The Payment of Bonus Act, 1965 is a social welfare legislation aimed at providing a statutory right to employees to share in the profits of the organization. It ensures that a part of the surplus earned by the establishment is distributed among the employees in the form of bonus. To achieve this objective, the Act clearly defines eligibility criteria for employees and also specifies disqualifications under certain circumstances.

✅ Eligibility for Bonus (Section 8):

According to Section 8 of the Payment of Bonus Act, 1965, an employee is eligible for bonus if the following conditions are satisfied:

1. Employee Definition (Section 2(13)):

The employee must not be in managerial or administrative capacity.
The employee must not be a supervisor drawing salary more than ₹21,000 per month.
Must be engaged in skilled, unskilled, manual, supervisory, technical, or clerical work, whether directly or through a contractor.

2. Wage Ceiling:

The employee’s monthly salary or wages must be ₹21,000 or less (as amended in 2015).
However, for the purpose of calculation of bonus, wages are considered up to ₹7,000 per month or the minimum wage, whichever is higher.

3. Minimum Working Days:

The employee must have worked for at least 30 working days in the accounting year.

✅ Employees Covered:

Permanent employees
Temporary employees
Probationers
Contract employees (if under the direct control of employer)
Part-time employees (if under regular employment)
Seasonal workers (on pro-rata basis as per Section 16)

✅ Illustration:

Example 1: Ravi earns ₹18,000/month and has worked 200 days in the year.
→ He is eligible for bonus.
Example 2: Anita earns ₹25,000/month.
→ She is not eligible due to salary exceeding ₹21,000 ceiling.

✅ Disqualifications for Bonus (Section 9):

As per Section 9 of the Act:

“An employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for:”

1. Fraud

If an employee is found guilty of committing fraud against the organization, he/she is disqualified.

2. Riotous or Violent Behavior

If an employee indulges in violent conduct within or in relation to the workplace.

3. Theft, Misappropriation, or Sabotage of Property

If the employee is involved in theft, misuse, or destruction of the employer’s property.

⚠️ Note:

Disqualification under Section 9 is applicable only for the accounting year in which the misconduct occurred and resulted in dismissal.
The onus of proof lies with the employer.
Dismissal must be a final action, not just a suspension or warning.

✅ Judicial Interpretation:

In Gammon India Ltd. v. Niranjan Dass, it was held that an employee who was terminated for misconduct involving moral turpitude can be disqualified under Section 9 from receiving bonus for that year.

In Rajasthan State Road Transport Corporation v. Krishna Kant, the Supreme Court stated that disqualification under Section 9 must be based on a justified and proven dismissal following due procedure.

✅ Special Cases – Partial Eligibility:

If an employee joins in the middle of the year but works for more than 30 days, he/she is entitled to proportionate bonus.
If an employee resigns or retires after serving more than 30 days in the accounting year, he/she is also entitled to bonus for the duration worked.

✅ Conclusion:

The Payment of Bonus Act, 1965 seeks to ensure fair and equitable distribution of profits among employees who contribute to the success of an establishment. While the Act lays down broad eligibility criteria to maximize employee coverage, it also provides for disqualification under Section 9 to safeguard employer interests and maintain discipline. Hence, the Act strikes a balance between employee rights and employer protections, ensuring justice and fairness in industrial relations.

Q.8. Discuss the provisions relating to Set-on and Set-off of allocable surplus under Section 15 of the Payment of Bonus Act, 1965. Explain its purpose and how it affects the payment of bonus over the years.
[Long Type Answer]

Introduction:

The Payment of Bonus Act, 1965 was enacted to ensure that employees receive a just share of the profits made by an establishment. However, since profits can fluctuate from year to year, the Act introduced the mechanism of Set-on and Set-off under Section 15 to stabilize bonus payments. This mechanism ensures that the employees get consistent and fair bonuses over a cycle of years, even if the profits in a particular year are low or high.

Purpose of Set-on and Set-off:

Smoothing of Bonus Payments:
- To even out the highs and lows in bonus payable due to profit fluctuations.
Preventing Arbitrary Reductions:
- Avoids drastic reduction in bonus in loss-making years if previous years had surplus.
Profit-Sharing over Time:
- Encourages long-term view of bonus entitlement based on profitability trends, not just one year’s performance.
Statutory Record-Keeping:
- Encourages proper record of bonus liabilities and carried forward balances.

Section 15: Set-on and Set-off Explained

✅ Set-on:

If in a particular year, allocable surplus exceeds the amount required to pay maximum bonus (i.e., 20% of wages), the excess amount is carried forward.
This excess is called “Set-on”.
It can be used in the subsequent 4 accounting years to pay bonus in years with insufficient surplus.

✅ Set-off:

If in a particular year, allocable surplus is not sufficient to pay the minimum bonus (i.e., 8.33%), the deficiency is carried forward as “Set-off”.
This shortfall can be adjusted against surpluses in the next 4 years.

✅ Time Limit:

Set-on and Set-off amounts are to be carried forward only for four years.
After four years, the unused balance lapses.

Illustrative Table (Fourth Schedule of the Act):

Suppose the minimum bonus payable is 8.33% and maximum is 20%.

Year	Allocable Surplus	Bonus Payable	Surplus/Shortfall	Action
2021	25%	20%	+5%	Set-on
2022	6%	8.33%	–2.33%	Set-off
2023	22%	20%	+2% (Used to pay Set-off of 2022)	Set-on adjusted
2024	7%	8.33%	–1.33%	Set-off
2025	21%	20%	+1% (Used to offset 2024)	Set-on adjusted

Legal Position:

Section 15 states:

“Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable, then the excess shall, subject to a limit of 20% of the total salary or wage of the employees, be carried forward for being set-on in the succeeding accounting years, up to and inclusive of the fourth accounting year.”

A similar provision applies when there is a shortfall (Set-off) instead of surplus.

Practical Impact of Set-on and Set-off:

Benefits to Employer	Benefits to Employee
Ensures no obligation to pay high bonus every profitable year	Ensures minimum bonus even in loss years
Allows financial planning and reserve management	Brings stability and certainty in income
Reduces litigation due to bonus disputes	Ensures justice and participation in profits

Important Judicial Observation:

In the case of Indian Oxygen Ltd. v. Their Workmen (1967), it was held that the principle of Set-on and Set-off ensures a rational balance between the profit-earning capacity of the employer and the expectations of the employee, thus maintaining industrial peace.

Conclusion:

The Set-on and Set-off provisions under Section 15 of the Payment of Bonus Act, 1965 are vital balancing tools to regulate the payment of bonus. They ensure that employees are not deprived of minimum bonus in lean years and employers are not overburdened in prosperous years. This mechanism reflects a long-term profit-sharing model, contributing to industrial harmony and equitable wealth distribution across economic cycles.

Q.9. Examine the statutory provisions relating to minimum and maximum bonus under the Payment of Bonus Act, 1965. How does the Act ensure a balance between employer’s capacity to pay and employee’s right to bonus?
[Long Type Answer]

Introduction:

The Payment of Bonus Act, 1965 is a key piece of social welfare legislation that seeks to ensure a fair share of profits to employees who contribute to the success of an establishment. The Act introduces the concepts of minimum and maximum bonus to achieve a balance between the rights of employees and the financial capacity of employers. These provisions promote economic justice, equity, and industrial peace.

✅ Minimum Bonus – Section 10

Statutory Provision:

As per Section 10, every employer shall be bound to pay to every eligible employee a minimum bonus of 8.33% of the salary or wages earned by the employee during the accounting year or ₹100 (whichever is higher), whether or not the employer has any allocable surplus in the accounting year.

Key Points:

Minimum bonus is payable regardless of profit or loss.
The term “salary or wage” includes only basic wages and dearness allowance.
The salary ceiling for eligibility is ₹21,000/month.
For computation, bonus is calculated on a wage ceiling of ₹7,000/month or the minimum wage, whichever is higher.

Example:

If an employee earns ₹6,000/month for 12 months:

Annual salary = ₹72,000
Minimum bonus = 8.33% of ₹72,000 = ₹5,997.60

✅ Maximum Bonus – Section 11

Statutory Provision:

Under Section 11, if the allocable surplus is sufficient, the employer shall pay a bonus which may be up to 20% of the salary or wages of the employee.

Key Points:

Bonus exceeding 8.33% is linked to profits.
Maximum ceiling is 20% of annual wages.
If the surplus permits, employer can pay bonus between 8.33% to 20%.

Discretionary Payment:

Employers may choose to pay higher bonus up to the statutory limit.
Any amount beyond 20% is considered ex gratia.

✅ How the Act Balances Employer’s Capacity and Employee’s Rights:

Employee’s Right to Bonus	Employer’s Financial Capacity Considered
Ensures minimum 8.33% bonus even if company makes a loss	Bonus beyond 8.33% is linked to allocable surplus (profit-based)
Promotes economic justice and welfare	Allows deduction of prior charges like depreciation, taxes
Bonus is a statutory obligation, not employer discretion	Provision for Set-on and Set-off smooths surplus fluctuations
Encourages participation of workers in profit	Minimum bonus may be deferred for new establishments (Section 16)

✅ Role of Set-on and Set-off (Section 15):

When surplus exceeds maximum bonus liability, excess can be set-on for future use.
When surplus is insufficient, shortfall can be set-off against future profits.
Ensures bonus stability over multiple years, balancing interests of both sides.

✅ Special Cases – New Establishments (Section 16):

Bonus is not mandatory for the first 5 accounting years unless the company earns a profit.
For the 6th and 7th years, bonus is payable only if there is profit.
This protects startups and new businesses with limited resources.

✅ Judicial Insight:

In Muir Mills Ltd. v. Suti Mills Mazdoor Union, the court emphasized that bonus is not a charity, but a form of profit-sharing rooted in justice and equity.
In State of Mysore v. Workers of Gold Mines, it was held that balancing employer’s paying capacity with workers’ rights was central to the bonus system.

Conclusion:

The Payment of Bonus Act, 1965 effectively balances the interests of employers and employees. It guarantees a minimum bonus to all eligible workers, ensuring economic security, while linking higher bonus to the profitability and surplus of the employer. Through provisions like Set-on, Set-off, and exemptions for new businesses, the Act maintains flexibility and fairness. It is a classic example of a law that aims at inclusive growth, industrial peace, and distributive justice.

Q.10. What are the legal provisions for the recovery of bonus under the Payment of Bonus Act, 1965? Discuss the remedies available to employees in case of non-payment of bonus.
[Long Type Answer]

Introduction:

The Payment of Bonus Act, 1965 confers a statutory obligation on employers to pay bonus to eligible employees. To ensure compliance, the Act provides specific legal remedies for recovery in case the employer fails or refuses to pay the bonus. These remedies are laid down primarily under Section 20 and Section 21 of the Act, along with relevant provisions under the Code of Civil Procedure (CPC) and Industrial Disputes Act, 1947.

✅ Statutory Provisions for Recovery of Bonus:

1. Section 20 – Recovery of Bonus Due from an Employer:

“Where any money is due to an employee by way of bonus, the employee or any other person authorized by him, or in the case of death, his legal heir, may apply to the appropriate Government or any authority specified by it for the recovery of the amount.”

Key Points:

Application must be made within 1 year from the date the bonus became due.
The appropriate Government or authority will issue a certificate for recovery to the Collector.
The Collector will recover the amount as an arrear of land revenue.

Extended Time Period:

The authority may entertain the application even after 1 year, if sufficient cause for delay is shown.

2. Section 21 – Application of Industrial Disputes Act, 1947:

Disputes regarding bonus may be treated as an industrial dispute under the Industrial Disputes Act, 1947.

Implications:

Employees or trade unions can raise a bonus dispute before:
- Labour Commissioner
- Labour Court
- Industrial Tribunal
Such disputes may relate to:
- Quantum of bonus
- Calculation of allocable surplus
- Set-on and set-off adjustments
- Unjustified deductions or disqualification

✅ Other Remedies Available to Employees:

3. Complaint under Section 28 – Offences by Employers:

Non-payment of bonus is a punishable offence under the Act.
Penalties include:
- Imprisonment up to 6 months
- Fine up to ₹1,000, or both

4. Civil Suit for Recovery (as a last resort):

If other remedies fail, the employee may file a civil suit for recovery under the CPC, but this is usually less preferred due to time and cost.

5. Complaint to Labour Inspector or Labour Commissioner:

Labour authorities are empowered to inspect records and enforce compliance.
Failure to maintain registers, submit returns, or disburse bonuses can attract penalties under the Act.

✅ Time Limits for Filing Recovery Application:

Situation	Time Limit
Filing application under Section 20	1 year from the due date
Extension possible	If sufficient cause is shown
Dispute under Industrial Disputes Act	Within prescribed period under ID Act

✅ Important Case Law:

Modi Cement Ltd. v. State of Rajasthan (1993):

The Supreme Court held that the Collector has the legal authority to recover bonus dues based on the certificate issued under Section 20.

Tata Iron & Steel Co. Ltd. v. Workmen:

It was clarified that bonus claims can be adjudicated as industrial disputes and hence, Labour Courts and Tribunals have jurisdiction.

✅ Practical Process for Recovery (Step-by-Step):

Employee applies to appropriate Government for recovery under Section 20.
The Government verifies the claim and issues a certificate for recovery.
The Collector initiates recovery as arrears of land revenue.
Parallelly or alternatively, a bonus dispute can be referred to the Labour Court under the Industrial Disputes Act.
Criminal complaint may be lodged for willful non-compliance.

✅ Conclusion:

The Payment of Bonus Act, 1965 not only mandates the payment of bonus to eligible employees but also provides strong legal mechanisms for recovery in case of non-payment. Through Section 20 (certificate and revenue recovery), Section 21 (industrial dispute mechanism), and penal provisions, the Act safeguards the financial rights of employees. These provisions ensure enforceability, accountability, and justice, thereby upholding the spirit of welfare legislation in India.