How to Determine Bonus Payable to Labour? | Economics

The dictionary meaning of the word “bonus” is something to the good, “especially extra dividend to the share-holders of a company,” distribution of profits to insurance policy holders or gratuity to workmen beyond their wages. It is the last meaning of the word which acquired significance for labour management relations in India.

Till recently, bonus was regarded as an ex-gratia payment made by the employer to his workers to provide a stimulus for extra- effort by them in the production process; on occasions it also represented the desire of the employer to share with his workers the surplus generated by common endeavour and enterprise.

Payment of bonus has been a regular feature in case of many industries. Bonuses are generally paid out of the industry, and they have come to be regarded as a part of the worker’s wage. As such, the question of bonus payment has formed a subject of numerous industrial disputes.

Therefore, it has been suggested that there must be some definite principles and standards for granting bonus to the workers, and the formulation of that requires examination of certain concepts regarding the nature of bonus.

It has to be decided whether bonus:

(i) Is an ex-gratia payment, which depends entirely on the goodwill of the employers and which cannot, therefore, be claimed as a legal right, unless it forms a part of the contract of service, or

(ii) Is deferred wages payable to the worker to reduce the gap between the wages paid and the living wage standard?

(iii) Is a share in the profits, which workers may claim as a matter or right, in view of the fact that profits are the result of the joint contributions made by both capital and labour, and neither partner can seek to enjoy them to the exclusion of the other.

The first of these concepts, i.e., that bonus in an ex-gratia payment is no longer supported by the consensus of opinion held by economists and reflected in the Awards of Industrial Tribunals.

Also, all recent decisions of the adjudicators tend to support the view that bonus is not an ex-gratia payment and that it could be claimed as of a matter right by workers. The Allahabad High Court observed in 1954, “There can be no doubt that in modern times ‘bonus’ is clearly regarded as deferred wages payable to employees which may be claimed by them as a matter of right under the terms of employment.”

Thus labour’s claim to the payment of bonus has received legal recognition. It rests on the concept of social and economic justice enshrined in our constitution. Hence, granting of bonus is not an act of charity but it is now regarded as worker’s rightful share in the profits which are earned with the aid and co-operation of the workers.

For determining the amount of bonus payable to labour, the amount of available surplus in the hands of the employer has to be determined. According to the Labour Appellate Tribunal formula which came to be known as “Full Bench Formula”, the surplus available for distribution had to be determined by debiting the following “prior charges” against gross profit.

(a) Provision for depreciation,

(b) Reserve for rehabilitation,

(c) Return of 6 per cent on the paid-up capital, and

(d) Return on working capital at a lower rate than the return on paid-up capital.

The formula laid down by Labour Appellate Tribunal was followed all over the country by industrial tribunals in awarding bonus, though demands for its revision continued to be made from time to time. The issue came up for consideration by the Supreme Court in an appeal from the Associated Cement Companies in 1959.

The Supreme Court, while upholding the principles underlying the Labour Appellate Tribunal formula, observed inter alia; “If the legislature feels that claims for social and economic justice made by labour should be re-defined on a clearer basis, it can step in it and legislate on that behalf. If may also be possible to have the question comprehensive considered by a high powered commission which may be asked to examine the pros and cons of the problem in all its aspects by taking evidence from all industries and bodies of workmen.”

The Bonus Commission:

The bonus issue came up for discussion before the Standing Labour Committee in 1960. The Committee recommended that a Bonus Commission should be to go into the question of profit bonus in a comprehensive manner. The committee also laid down the terms of reference of the proposed Commission in December 1961 to enquire into the whole question of bonus payment.

Regarding the concept of bonus, Commission endorsed the view that bonus could be claimed as a matter of right by the workers. The Commission said that bonus should be constructed as a share of the workers in the prosperity of the concern in which they are employed. This will help to bridge the gap between the actual wages and the need based wage in case of low paid workers.

The Commission rejects the view that bonus be incorporated in the wages structure on the ground that while wage rates are fixed on the industry-cum-region basis, profits are variable and linked with the units ability to pay. It also does not accept the view that bonus should be linked with incentives because profit bonus is a very different thing from incentives bonus.

Computation of the Available Surplus:

For the Computation available surplus of the gross profit for years is first determined, than the deductions will be made from the gross profits such as:

(a) Depreciation as admissible under the Income Tax Act,

(b) Income Tax and Super Tax,

(c) Return on Capital at 7% and

(d) Reserves 14%.

The balance left after deduction of the above charges from the gross profit will be available surplus.

Distribution of the Available Surplus:

The Commission then gives a bonus formula, under which an employee, who has worked throughout the year, including periods of leave with pay, would be entitled to a minimum bonus of 4% of his annual earnings made up of basic wage and D.A. or Rs. 40, whichever is higher. For a worker who has worked for a lesser period, the amount payable would be on pro rata basis.

According to the recommendations of the Commission, 60 per cent of the available surplus shall be allocated to bonus to be distributed to workers. However, if the available surplus is less than the amount required for distribution (i.e. at the rate of 4 per cent of the annual basic wage plus dearness allowance or Rs. 40 per individual worker, whichever is higher) a minimum bonus will be a charge on the industry.

This formula is to apply to industries in the private sector and to those industries in public sector whose product competes with the private sector at least to the extent of 20 per cent of the aggregate sales turnover. New concerns have been exempted upto a period of 6 years.

The report of the Commission was not unanimous and there was a note of dissent. It gave rise to a good deal of controversy. The Government, however, announced its acceptance of the recommendations of the Bonus Commission with certain modifications in September 1964, and in order to implement the recommendations, first issued an Ordinance in May 1965, and latter replaced is by the Payment of Bonus Act, 1965, which received the assent of the President on 25th September, 1965.