Payment of Bonus — Labour Law I Notes

Payment of Bonus

When a company prospers, should the workers who made the profit share in it? The bonus law says yes — every eligible worker gets at least a floor (8.33%) and up to a ceiling (20%) of wages, tied to the firm’s surplus. But a worker who robs or riots forfeits it.

What bonus is, and eligibility

Bonus is a statutory share of an establishment’s profits (allocable surplus) paid to eligible employees, over and above wages. Under Chapter IV of the Code on Wages, 2019:

Eligibility (s.26). An employee is eligible if he (a) draws wages not exceeding the notified ceiling and (b) has worked at least 30 days in the accounting year.

Minimum and maximum (s.26). Every eligible employee gets a minimum bonus of 8.33% of wages (or ₹100, whichever is higher) even if there is no profit; where the allocable surplus is larger, bonus rises in proportion, up to a maximum of 20% of wages.

Calculation — available and allocable surplus

Gross profit is computed, then prior charges (depreciation, direct taxes, development rebate, and a return on capital) are deducted to reach the available surplus.
The allocable surplus is a fixed share of the available surplus (60% for most establishments), out of which bonus is paid.
Set-on and set-off (s.36). If the allocable surplus exceeds the maximum bonus, the excess is set on (carried forward, up to a limit) to future years; if it falls short of the minimum, the deficiency is set off against future surpluses. This smooths bonus across good and bad years.

Disqualification (s.29)

An employee is disqualified from bonus if he is dismissed from service for —

fraud;
riotous or violent behaviour on the premises; or
theft, misappropriation or sabotage of the employer’s property; or
conviction for sexual harassment (a new ground added by the Code).

Section 29, Code on Wages, 2019 (disqualification — close paraphrase): “Notwithstanding anything contained in this Code, an employee shall be disqualified from receiving bonus … if he is dismissed from service for — (a) fraud; or (b) riotous or violent behaviour while on the premises of the establishment; or (c) theft, misappropriation or sabotage of any property of the establishment; or (d) conviction for sexual harassment.”

Section 26, Code on Wages, 2019 (minimum bonus — close paraphrase): “Every employer shall pay to every employee, who has put in at least thirty days work in an accounting year and draws wages within the notified ceiling, a minimum bonus of eight and one-third per cent of the wages earned or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus.”

In Simple Terms: work 30 days and earn under the wage ceiling and you get at least 8.33% bonus, up to 20% when profits allow; excess and shortfall are carried between years (set-on/set-off) — but a worker dismissed for fraud, violence or theft loses it.

Offences and special provisions

Offences and penalties. An employer who fails to pay bonus due, or who otherwise contravenes the bonus provisions, commits an offence punishable with fine under the penalty provisions of the Code (with an enhanced fine for a repeat contravention). Enforcement is through the claims authority (s.45) and the Inspector-cum-Facilitator (s.51), studied above.

Special provision for newly set-up establishments. For the first five accounting years following the year in which the establishment begins to sell its goods or render its services, bonus is payable only in respect of an accounting year in which the employer derives a profit from that establishment, and the set-on / set-off mechanism does not apply for those years. This is a deliberate concession: a new venture may not be profitable at once, so the law does not burden it with the minimum bonus until it has found its feet.

🧩 WORKED EXAMPLE — dismissed for misconduct, bonus refused

Facts. An employee with over a year’s service is dismissed for misconduct (insubordination) and the employer refuses his bonus; he challenges the refusal.

Rule. s.29 disqualifies from bonus only where dismissal is for fraud, riotous/ violent behaviour, or theft/misappropriation/sabotage — a closed list.

Apply. Mere insubordination is not one of the three listed grounds. Unless his conduct amounts to one of them, the disqualification does not bite.

Conclusion. He is not disqualified merely for insubordination; his claim to bonus (for the period earned) stands, subject to eligibility. (Had he been dismissed for theft, he would forfeit it.)

flowchart TD
    ROOT["Bonus (Code on Wages Ch IV)"]:::root
    ROOT --> A["Eligible: 30 days work + wages under ceiling (s.26)"]:::leaf
    A --> B["Minimum 8.33% (or Rs.100); maximum 20%"]:::good
    B --> C["From allocable surplus (60% of available surplus);<br/>set-on/set-off (s.36)"]:::leaf
    ROOT --> D{"Dismissed for fraud/violence/theft?"}:::leaf
    D --> E["YES = disqualified (s.29)"]:::bad
    D --> F["NO = bonus payable"]:::good
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef good fill:#E8F5E9,stroke:#1B5E20,color:#000;
    classDef bad fill:#FFEBEE,stroke:#B71C1C,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

Jalan Trading Co. v Mill Mazdoor Sabha (1967) — upheld the scheme of statutory bonus tied to available surplus.
Mumbai Kamgar Sabha v Abdulbhai Faizullabhai (1976) — bonus is a right of eligible workers; the beneficial provisions are construed in the workers’ favour.

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