Payment of Bonus Act and Payment of Gratuity Act
GreytHR arranged yet another Expert Series Webinar with Pratik Vaidya on Payment of Reward and Payment of Gratuity Acts in an attempt to simplify the HR processes. This resourceful webinar described the nitty-gritty of the Bonus and Gratuity Payment Actions in depth and helped to answer our audience's queries.
Here are the highlights for those who skipped it or those wanting to visit the webinar again.
Payment of Bonus Act Objective: The aim of the Payment of Bonus Act is to compensate the organization's employee by sharing the benefits received which are linked to productivity.
Applicable to: Any establishment with 20 or more employees or any factory with 10 or more employees is subject to the Payment of Bonus Act.
Eligibility: Workers drawing 21000 or less per month (basic + DA, excluding other allowances) and completing 30 working days in that financial year are liable for bonus payment.
Bonus components: Please note that wages or salaries only contain basic and DA for bonus payments, and the remaining deductions (e.g. HRA, overtime, etc.) are omitted.
Min / max and incentive payout time limits: Reward will be charged at a fixed rate of 8.33% and a maximum rate of 20%. It has to be billed within eight months of the accounting year's end.
Benefit disqualification: Workers may be excluded from bonus payments if they are fired on the grounds of theft, incompetence or even absenteeism. Please ensure that the domestic enquiry procedures, correct reporting and employee acknowledgement of the wrongdoing are all carried out on dismissal as per standing orders prior to disqualification of the bonus award.
Bonus calculation: According to the amendment to the Bonus Payment Act passed in 2015, if salaries or salaries reach a limit of 7000 or the minimum wages set by the government, bonuses will be available on a limit of 7000 or the minimum wages set by the government, whichever is higher.
Examples: salary (Basic + DA) = 6000, min wages = 08000, bonus payable for 06000 wages (Basic + DA) = 06000, min wages = 06500, bonus payable for 06000 wages (Basic + DA) = 07200, min wages = 06000, bonus payable for 07200 wages (Basic + DA) = 07200, min wages = 08000, bonus payable for 08000 wages (Basic + DA) = 010000, min wages = 08000, bonus payable for 08000, bonus payable for 08000
Compliance provided by employers: Employers must comply with the following: a register showing the estimate of the allocable surplus is maintained in Form A register showing the set-up and set-off of the allocable surplus is maintained in Form B Information showing the value of the bonus due, the deductions and the actual bonus sum disbursed are maintained in Form C Annual reports to be reported in For
Q&A Some of the common questions that have been answered are listed below: Question 1: Must we pay incentives to contract workers?
Ans: No, it is not the employer's prerogative to pay bonuses to the contractors who work under him. The compensation responsibility lies with the provider who contracts the workers out.
Some companies offer incentives to their vendors when the provider is unable to offer out the payment for their goodwill welfare. That is considered ex-gratia and not bonus, it is the employer's choice in this situation and he is not legally obliged to pay his contractors bonus.
Question 2: Will I pay my workers incentives in the first year if I own a startup?
Ans: Companies do not need to pay incentive for the first 5 years if they have made losses. If in the first 5-year cycle, they have made money in every year, they will have to pay out bonuses for that specific year. After 5 years, companies are expected to pay bonus according to Sec 16-1b, irrespective of whether they are making a profit or loss. For detailed clarifications on the calculation of bonuses in the 6th accounting year and the 10th accounting year see section 16-1b.
Question 3: How will we award salaries when an employee leaves the company before the financial year is over?
Ans: The compensation has to be paid to the employee on a pro-rata basis as part of the settlement when he leaves. If the bonus percentage is subsequently changed due to an increase in earnings, the difference in the bonus amount must be passed to the employee or a check submitted before November 30 of that year.
It is vital to ensure that this is achieved because any payment required to be charged to any employee and not charged will appear on the employer's balance sheet's liability side, which will be deemed to be non-compliance.
Question 4: I paid bonus, but didn't keep records for it. Would that cause an issue?
Ans: This is deemed to be non-compliance and will be monitored during labor inspection. Maintaining the Forms A, B, C and D as required is mandatory.
Payment of Gratuity Act Objective: Gratuity is a benefit paid to employees who have provided continuous service for at least 5 years and is a form of gratitude that the employer gives to the employee in monetary terms for the services rendered.
Applicable to: companies with 10 or more employees will pay for the gratuity.
Eligibility: Companies are entitled to pay gratuitously if: An employee becomes eligible for superannuation (i.e. 58 years) An employee retires An employee resigns after 4 years and 240 days with a single employer An employee suffers disability due to sickness or injury An employee's death The key points emphasized / clarified were: An employee is eligible for gratuity when he completes 5 years. (Note: In the fifth year, 1 year of completed service = 240 days) If an employee suffers from disability / death, gratuity is paid even if the employee has not completed 1 year of completed service If you have your office in more than one country, then the organization is under the responsibility of the central government for gratuity payments (and not the government).
Examples of free payment based on different periods of employment: 4 years 6 months – Free payment (employee has not completed 240 days in the last year) 5 years or 60 months – Free payment 4 years 9 months – Free payment 4 years 7 months with 5 days working week – Free payment (7 months = 210 days and < 240 days, but for organizations with less than 6 days working week)
Compliance: Employers are required to maintain the following: Form A as an Office / Branch opening notice Copy of Form F / Form G – Employee nomination submitted. Please notice that it is HR's and the employee's responsibility to change marital status and fill out the updated Form F or Form G to correct nomination dependents. This is relevant because failure to do so has led to multiple disputes in claiming gratuity among dependents Application for gratuity in Form I-Gratuity must be paid irrespective of whether the employee fills Form I or not Show of notice: Form U – Need to show the abstract of the Act and the rules and the responsible person.
Penalties: 6-month imprisonment or a fine of up to 10,000 for preventing payment by false declaration or representation Imprisonment for not less than 3 months and up to 1 year with a fine for failure to comply with the provisions of the Act or Laws.
Q&A For your reference, some of the key questions discussed are given below: Question 1: What happens when there is a delay in gratuitous payment?
Ans: If there is a delay of more than 1 month, usually at the debt-market rate, interest is charged on gratuity.
Question 2: Should we take out compulsory insurance?
Ans: Only the state of Andhra Pradesh has a requirement for compulsory insurance; that is, if your organization falls within the remit of state government.
Question 3: Is CTC statutory binding to include gratuity?
Ans: There is no binding legal requirement. You can include gratuity in the CTC but make sure you state / clarify that it is a notional benefit and will only be available when the Act applies.
Question 4: Would we be paying contractors for free?
Ans: In this regard the Act here is identical to the Bonus Act. Paying gratuity to its contractors is not an employer's prerogative. It is the vendor's (who contracted them out) duty to pay for its workers. There are also instances in which the vendor paid his client (the employer) 4.81 per cent gratuity to pay for his contractors. Please notice that this is solely at the employer's discretion to do so for the employee's benefit, and is not legally binding. If the company charges for its workers, it is called ex-gratia rather than gratuitous.
Question 5: Is it appropriate to start an account for gratuity payments if we own a startup which is not yet 5 years old? Will we hold a trust for gratuity payments for every organisation?
ANS: Not mandatory. It is solely dependent on the approaches you take to risk management, and is at your discretion. The account / trust is usually opened and handled in such a way that the employers will have enough funds to cough up when they start making gratuity payments. This is entirely the decision of an employer and not a legal binding decision.
Question 6: The component / ratio of the basic pay do we find for the gratuity payment calculations?
Answer: The Grat
Here are the highlights for those who skipped it or those wanting to visit the webinar again.
Payment of Bonus Act Objective: The aim of the Payment of Bonus Act is to compensate the organization's employee by sharing the benefits received which are linked to productivity.
Applicable to: Any establishment with 20 or more employees or any factory with 10 or more employees is subject to the Payment of Bonus Act.
Eligibility: Workers drawing 21000 or less per month (basic + DA, excluding other allowances) and completing 30 working days in that financial year are liable for bonus payment.
Bonus components: Please note that wages or salaries only contain basic and DA for bonus payments, and the remaining deductions (e.g. HRA, overtime, etc.) are omitted.
Min / max and incentive payout time limits: Reward will be charged at a fixed rate of 8.33% and a maximum rate of 20%. It has to be billed within eight months of the accounting year's end.
Benefit disqualification: Workers may be excluded from bonus payments if they are fired on the grounds of theft, incompetence or even absenteeism. Please ensure that the domestic enquiry procedures, correct reporting and employee acknowledgement of the wrongdoing are all carried out on dismissal as per standing orders prior to disqualification of the bonus award.
Bonus calculation: According to the amendment to the Bonus Payment Act passed in 2015, if salaries or salaries reach a limit of 7000 or the minimum wages set by the government, bonuses will be available on a limit of 7000 or the minimum wages set by the government, whichever is higher.
Examples: salary (Basic + DA) = 6000, min wages = 08000, bonus payable for 06000 wages (Basic + DA) = 06000, min wages = 06500, bonus payable for 06000 wages (Basic + DA) = 07200, min wages = 06000, bonus payable for 07200 wages (Basic + DA) = 07200, min wages = 08000, bonus payable for 08000 wages (Basic + DA) = 010000, min wages = 08000, bonus payable for 08000, bonus payable for 08000
Compliance provided by employers: Employers must comply with the following: a register showing the estimate of the allocable surplus is maintained in Form A register showing the set-up and set-off of the allocable surplus is maintained in Form B Information showing the value of the bonus due, the deductions and the actual bonus sum disbursed are maintained in Form C Annual reports to be reported in For
Q&A Some of the common questions that have been answered are listed below: Question 1: Must we pay incentives to contract workers?
Ans: No, it is not the employer's prerogative to pay bonuses to the contractors who work under him. The compensation responsibility lies with the provider who contracts the workers out.
Some companies offer incentives to their vendors when the provider is unable to offer out the payment for their goodwill welfare. That is considered ex-gratia and not bonus, it is the employer's choice in this situation and he is not legally obliged to pay his contractors bonus.
Question 2: Will I pay my workers incentives in the first year if I own a startup?
Ans: Companies do not need to pay incentive for the first 5 years if they have made losses. If in the first 5-year cycle, they have made money in every year, they will have to pay out bonuses for that specific year. After 5 years, companies are expected to pay bonus according to Sec 16-1b, irrespective of whether they are making a profit or loss. For detailed clarifications on the calculation of bonuses in the 6th accounting year and the 10th accounting year see section 16-1b.
Question 3: How will we award salaries when an employee leaves the company before the financial year is over?
Ans: The compensation has to be paid to the employee on a pro-rata basis as part of the settlement when he leaves. If the bonus percentage is subsequently changed due to an increase in earnings, the difference in the bonus amount must be passed to the employee or a check submitted before November 30 of that year.
It is vital to ensure that this is achieved because any payment required to be charged to any employee and not charged will appear on the employer's balance sheet's liability side, which will be deemed to be non-compliance.
Question 4: I paid bonus, but didn't keep records for it. Would that cause an issue?
Ans: This is deemed to be non-compliance and will be monitored during labor inspection. Maintaining the Forms A, B, C and D as required is mandatory.
Payment of Gratuity Act Objective: Gratuity is a benefit paid to employees who have provided continuous service for at least 5 years and is a form of gratitude that the employer gives to the employee in monetary terms for the services rendered.
Applicable to: companies with 10 or more employees will pay for the gratuity.
Eligibility: Companies are entitled to pay gratuitously if: An employee becomes eligible for superannuation (i.e. 58 years) An employee retires An employee resigns after 4 years and 240 days with a single employer An employee suffers disability due to sickness or injury An employee's death The key points emphasized / clarified were: An employee is eligible for gratuity when he completes 5 years. (Note: In the fifth year, 1 year of completed service = 240 days) If an employee suffers from disability / death, gratuity is paid even if the employee has not completed 1 year of completed service If you have your office in more than one country, then the organization is under the responsibility of the central government for gratuity payments (and not the government).
Examples of free payment based on different periods of employment: 4 years 6 months – Free payment (employee has not completed 240 days in the last year) 5 years or 60 months – Free payment 4 years 9 months – Free payment 4 years 7 months with 5 days working week – Free payment (7 months = 210 days and < 240 days, but for organizations with less than 6 days working week)
Compliance: Employers are required to maintain the following: Form A as an Office / Branch opening notice Copy of Form F / Form G – Employee nomination submitted. Please notice that it is HR's and the employee's responsibility to change marital status and fill out the updated Form F or Form G to correct nomination dependents. This is relevant because failure to do so has led to multiple disputes in claiming gratuity among dependents Application for gratuity in Form I-Gratuity must be paid irrespective of whether the employee fills Form I or not Show of notice: Form U – Need to show the abstract of the Act and the rules and the responsible person.
Penalties: 6-month imprisonment or a fine of up to 10,000 for preventing payment by false declaration or representation Imprisonment for not less than 3 months and up to 1 year with a fine for failure to comply with the provisions of the Act or Laws.
Q&A For your reference, some of the key questions discussed are given below: Question 1: What happens when there is a delay in gratuitous payment?
Ans: If there is a delay of more than 1 month, usually at the debt-market rate, interest is charged on gratuity.
Question 2: Should we take out compulsory insurance?
Ans: Only the state of Andhra Pradesh has a requirement for compulsory insurance; that is, if your organization falls within the remit of state government.
Question 3: Is CTC statutory binding to include gratuity?
Ans: There is no binding legal requirement. You can include gratuity in the CTC but make sure you state / clarify that it is a notional benefit and will only be available when the Act applies.
Question 4: Would we be paying contractors for free?
Ans: In this regard the Act here is identical to the Bonus Act. Paying gratuity to its contractors is not an employer's prerogative. It is the vendor's (who contracted them out) duty to pay for its workers. There are also instances in which the vendor paid his client (the employer) 4.81 per cent gratuity to pay for his contractors. Please notice that this is solely at the employer's discretion to do so for the employee's benefit, and is not legally binding. If the company charges for its workers, it is called ex-gratia rather than gratuitous.
Question 5: Is it appropriate to start an account for gratuity payments if we own a startup which is not yet 5 years old? Will we hold a trust for gratuity payments for every organisation?
ANS: Not mandatory. It is solely dependent on the approaches you take to risk management, and is at your discretion. The account / trust is usually opened and handled in such a way that the employers will have enough funds to cough up when they start making gratuity payments. This is entirely the decision of an employer and not a legal binding decision.
Question 6: The component / ratio of the basic pay do we find for the gratuity payment calculations?
Answer: The Grat
