The Payment of Bonus Act, 1965 (“PBA”) is a central labour legislation. The PBA is applicable to every (i) factories; and (ii) other establishments engaging 20 or more persons on any day during an accounting year.
Certain provisions of the PBA have been recently amended vide the Payment of Bonus (Amendment) Act, 2015 (“Amendment Act”). The Amendment Act has been notified to be effective from April 1, 2014.Under the PBA, an employer is required to pay annual bonus to employees drawing “salary or wages” not exceeding INR 21,000 per month (INR 10,000 per month prior to the Amendment Act), based on the profits of the establishment. The PBA prescribes the manner of calculation of profit based bonus payable under the PBA. Further, under the PBA an employer can pay productivity linked bonus or bonus based on productivity, provided there exists an agreement between the employer and employee in this regard. The PBA also allows set off of interim and puja or customary bonus against the annual bonus payable under the PBA.
For the purpose of calculation of bonus, an eligible employee’s salary or wage is limited to INR 7,000 per month or minimum wages applicable to the eligible employee, whichever is higher. (Prior to the Amendment Act, the salary or wages limit for the purpose of calculation of bonus payable to an eligible employee was INR 3,500 per month.)
Pursuant to notification of the Amendment Act, the same has been challenged by various employers and association for employers before different High Courts of India. For the first time, the Hon’ble High Court of Kerala in WP (C). No. 3025/ 2016 (c) stayed the retrospective amendment to the PBA until disposal of the case on merits and held that the Amendment Act will be effective from accounting year 2015-16 onwards. Subsequently, different High Courts followed the decision of the Hon’ble High Court of Kerala and have kept in abeyance the retrospective amendment to the PBA. However, all High Courts have held that the Amendment Act will be effective from the accounting year 2015-16 onwards.
Decision of a High Court whether binding on other states?
The Hon’ble Supreme Court of India (“SC”) in Kusum Ingots and Alloys Ltd. vs. UOI; AIR 2004SCC2321, has observed that “The court must have the requisite territorial jurisdiction. An order passed in writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject to the applicability of the Act.” This Obiter Dictum has been relied on by various courts and based on the same some HCs’ have held that a decision of a HC on the constitutional validity of a law is binding throughout India, as applicable (UOI vs. Textile Technical Tradesman Association; 2014(6)CTC 427; Rehena Begum vs. State of Assam and Ors..; 2015(4)LLN96(Gau.); Shiv Kumar vs. UOI; AIR2014Kant73). In light of the same, the stay order passed by various High Courts will be binding throughout India until further decision or ruling of the SC in this regard.
The Amendment Act has significant effect on financials of an establishment covered under the PBA. Pursuant to the Amendment Act, we have been approached by many clients seeking clarification on set off/ adjustment of various payouts including incentives, performance bonus, etc., against the statutory bonus payable under the PBA.
The set-off / adjustment of any incentives, performance bonus, etc., against the statutory bonus payable under the PBA may be allowed if one can establish that the payouts belong to one of the following categories (i) interim bonus under Section 17 of the PBA; or (ii) customary or puja bonus under Section 17 of the PBA; or (iii) production based or productivity linked bonus (in lieu of profit based bonus) under Section 31A of the PBA. However, one should keep in mind that different criteria should be satisfied to establish a payout under any of the above categories and the risk associated with set off/adjustment depends on facts and circumstances of each case.
- Author: Suma. R. V