CAN INCENTIVE BONUS BE A SUBSTITUTE FOR STATUTORY BONUS UNDER THE PAYMENT OF BONUS ACT, 1965?

The bonus paid to the employees under the Payment of Bonus Act, 1965 (“Bonus Act”, hereinafter) is entirely profit based for the reason that it is a complete-code in itself (1). The Bonus Act does not recognize/mandate the payment of any other bonus except the bonus based on profits under the Scheme provided under the Bonus Act. Even though various other kind of bonuses are recognised in industrial law, they have been left uncovered by the Bonus Act. Even though section 17 of the Bonus Act talks about “customary bonus” and its adjustment against the statutory bonus payable under the Bonus Act in a statutory year, the section in express terms refers to puja bonus and other customary bonus as available for deduction from the bonus payable under the Act, thus making a clear distinction between the bonus payable under the Act and “puja” bonus or other customary bonus.(2)

It has become commonplace to see managements equating bonus payable under the Bonus Act with incentive bonus schemes which they might have in place. For instance, such an incentive bonus scheme might provide for payment of incentives depending upon the completion of specific targets by the employees. The payments of such incentives, for example, might be kept on a bi-annual frequency by some employers and on an annual frequency by the others. The question of whether “incentive bonus” paid under such schemes to the employees is coverable under the Bonus Act is not a vexed question. The answer lies clearly under the provisions of the Bonus Act.

If one takes a look at section 17 of the Bonus Act, it provides for deduction of customary bonus or a part of the statutory bonus already paid before the date on which it becomes payable, from the amount payable under the Bonus Act. Insofar as customary bonus is concerned, it does not require calculation of profits or allocable surplus, because it is a payment founded on long usage and justified often by spending on festivals and the Bonus Act gives no guidance to fix the quantum of festival bonus; nor does it expressly wish away such a usage.(3) For payments to be regarded as customary bonus, the payment has to have been made over an unbroken series of years; it should have been for a sufficiently long period, the period has to be longer than in the case of an implied term of employment; it should have been paid even in years of loss and should not depend on the earning of profits; and should have been made at a uniform rate throughout.(4) In view of these parameters, the incentives paid to the employees would not be customary as they would not be paid at a uniform rate. Even if it were to be assumed that an incentive scheme provides for some fixed payment of bonus (perhaps an amount equivalent to 8.33% of the employee’s salary), it cannot be still be termed as “customary” in the absence of some causal link connecting it with a long-drawn practice. Further, such payments, not having been made based on the company’s profits, cannot also be said to be a part payment of statutory bonus under clause (b) of section 17.(5)

It would also be appropriate to analyse section 31A read with section 34 of the Bonus Act. Section 31A relates to bonus linked with production or productivity in lieu of bonus based on profits. From a bare reading of the said sections, it is clear that while production/productivity bonus paid to employees does not come within the purview of the Bonus Act, but section 31-A of the Bonus Act allows the employees to enter into an agreement or settlement with the employer for payment of annual bonus linked to production or productivity in lieu of bonus based on profits payable under the Bonus Act. The proviso to section 31A also puts an embargo on the employees from entering into any such settlement/agreement which makes them relinquish their right to receive the minimum bonus payable under section 10 of the Bonus Act i.e. 8.33%. The opening words of Section 31A make it clear that notwithstanding anything contained in the Bonus Act, it is open to the parties to have a settlement for payment of bonus linked with production and productivity. That means to say that notwithstanding the provisions for profit sharing bonus under the Bonus Act and the other provisions which empower the workmen to claim minimum and maximum bonus and also the provisions disqualifying the workmen from claiming bonus under the Act or proportionate payment of bonus (see Section 8), the management and the workmen could enter into a settlement for bonus linked with production and productivity in lieu of profit sharing bonus. The second proviso to Section 31A makes it clear that annual bonus linked with production and productivity should not exceed 20 per cent of the salary or wage earned during the relevant accounting year. This bonus is payable to the workmen even if they incur the disqualification under Section 9 or entitled to proportionate bonus under Section 8.(6) Any other agreement for replacing the statutory bonus with any other type of bonus would not be valid, as per section 34 of the Bonus Act.

What constitutes bonus linked to production or productivity was expounded upon by the Supreme Court.(7) It was held that the payment of production bonus depends upon production and is in addition to wages. In effect, it is an incentive to higher production and is in the nature of an incentive wage. Therefore, generally speaking, payment of production bonus is nothing more nor less than a payment of further emoluments depending upon production as an incentive to the workmen to put in more than the performance. Thus, production/productivity bonus is essentially based not out of the standard of the performance of individual employees, but as the cumulative performance put out by all the employees owing to which the productivity of the company as a whole has improved.

It would also be appropriate to refer to a judgment by Division Bench of Calcutta High Court (8), wherein it has been held that mere use of the expression “bonus” will not render it a bonus if it is otherwise clear that what is paid is not bonus but incentive wages. The Bombay High Court took a similar view, elucidating that the use of the expression ‘bonus’ by the company is not enough. It held that the mere use of the expression bonus will not render it bonus if it is otherwise clear that what is paid is not bonus, but incentive wage (9). In one case, the Karnataka High Court had held that an agreement wherein bonus was paid varying amounts per year without sufficient material on the basis of a settlement, it could not be called as bonus based on production or productivity (10). Various kinds of bonus which are not covered by the proviso to section 31A such as incentive bonus, attendance bonus, festival bonus, etc. The only bonus covered by section 31A of the Payment of Bonus Act, 1965, is the bonus which is linked with production as is clear from the very section and the preamble to the said Act (11). The Madras High Court was faced with this question in which the management had introduced an incentive reward/performance scheme and the said scheme explicitly stated that the bonus paid therein will be regarded as statutory bonus. The Madras High Court held that such a bonus is not linked with production or productivity and section 31A will not be attracted (12).

Upon a perusal of the aforesaid, the recognition of incentive bonus paid by the employers in lieu of the statutory bonus appears difficult because; first, incentives paid to the employees cannot per se be regarded as production/productivity bonus as enumerated in the judgments quoted above; secondly, because section 31-A allows the employer to enter into agreement/settlement with all the employees and not a single employee (13); thirdly, because settlements based on production/productivity are based on the productivity of all the employees of the company and not individually with separate employees. Such agreements are usually based on uniform formulae developed by the company for ascertaining the bonus payable commensurate with the production or productivity; fourthly, because section 31-A does not allow the employer to pay to the employees bonus more than 20% of their salaries (14). Since incentive schemes are based on performance, the bonus amount might very well go above 20% of the salary.

As an upshot to the above discussion, it can safely be said that payment of bonus under incentive bonus schemes cannot be regarded as payment of statutory bonus. Not only can such payments not be equated with any custom, but they also do not stand on the same footing as that of an agreement or settlement with the employer for payment of annual bonus linked to production or productivity in lieu of bonus based on profits payable under the Bonus Act.

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