India: Wage Ceiling for Bonus Payments Revised, Minimum Payout Doubled

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By Madhur Singh

Jan. 22— Businesses operating in India must prepare to pay higher bonuses to a larger number of employees as the Payment of Bonus (Amendment) Act of 2015 takes effect. The new law increases the wage ceiling up to which workers are eligible for bonuses from 10,000 rupees ($147) to 21,000 rupees ($312) per month, making more workers eligible for bonuses, mainly nonprofessional and production staff.

The minimum bonus has also been raised—from 3,500 rupees ($52) to 7,000 rupees ($104) “or the minimum wage for the scheduled employment, as fixed by the appropriate government," whichever is higher.

Criteria

The Payment of Bonus Act of 1965 mandates a minimum annual bonus of 8.33 percent of a worker's annual wages, which must be paid even if a business is making no profit or running losses. The maximum bonus allowed under the law is 20 percent, and the percentage the employer applies must be the same for all eligible staff.

The act applies to establishments employing 20 or more people. All employees earning up to 21,000 rupees a month who have worked in the establishment for at least 30 days in a year are eligible to receive the bonus. Employees earning more than the 21,000 rupee ceiling are not statutorily entitled to a bonus but may be paid at the employer's discretion. Payment of bonuses cannot be linked to performance.

Retroactive Application

The changes effected by the Payment of Bonus (Amendment) Act of 2015 will apply retroactively from April 1, 2014, the start of the last fiscal year.

Analysts say the overall number of workers eligible for the bonus will increase, as will the size of the payout. Most newly eligible workers will be in the nonprofessional and production categories, however, which account for relatively small wage expense for large and multinational companies.

According to law firm Trilegal, the amendment could have a significant financial impact on medium-size and small enterprises.

Financial Burden 
In an analysis issued Jan. 13, Trilegal said the reference to the minimum wage as a possible floor for the bonus will complicate the calculation, since state governments set different minimum wages for different scheduled employments ( http://pblabour.gov.in/pdf/acts_rules/minimum_wages_act_1948.pdf ) and even for different categories of employees within scheduled employments (skilled and unskilled, for example).

“Thus, employers would have to carry out an assessment of the applicable wage rates for different categories of employees in order to calculate the statutory bonus payable,” Trilegal said, and bonus calculation would be even more complicated for businesses that operate in multiple states with different minimum wages.

Making matters even more complicated, according to Trilegal, many companies, particularly multinationals, currently follow the practice of calculating the maximum statutory bonus—currently, 20 percent of 3,500 rupees, rising to 20 percent of 7,000 rupees under the Payment of Bonus (Amendment) Act—and paying it out each month on a pro rata basis. Since minimum wages are periodically revised, generally once or twice a year, the amount of the bonuses would vary during the year and annual payments would be hard to predict.

To pay bonuses with retroactive effect, businesses would have to reopen their accounts for the last fiscal year, recalculate the bonuses due and either pay out more or take back excess amounts depending on the reassessment required by the act.

“Therefore, there would be an increase in the financial burden and greater accounting complexities for employers,” Trilegal said, calling on the government to issue clarifications, offer exemptions or make further amendments to resolve these complexities.

To contact the reporter on this story: Madhur Singh in Chandigarh at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information 

For more information on Indian HR law and regulation, see the India primer.