The Payment of Bonus Act, 1965: Constitutional Evolution, Doctrinal Contours and Contemporary Challenges

The Payment of Bonus Act, 1965: Constitutional Evolution, Doctrinal Contours and Contemporary Challenges

Introduction

Enacted to translate the recommendations of the Bonus Commission (1961-1964) into binding law, the Payment of Bonus Act, 1965 (hereinafter “the Act”) converted what had hitherto been a discretionary or adjudicatory perquisite into a statutory right for employees in profit-making establishments. Almost six decades later, the Act continues to occupy a pivotal place in Indian labour jurisprudence, simultaneously reflecting the constitutional mandate of social justice and the intricacies of industrial economics. This article critically examines the constitutional history, doctrinal scope, exemptions, enforcement architecture and emerging challenges of the Act, weaving into the analysis leading judicial pronouncements of the Supreme Court and various High Courts.

Legislative Genesis and Architecture

Sections 1(3), 2(13), 8-18 and 31A–37 embody the operative core of the Act. Section 1(3) confines applicability to (i) every factory and (ii) every other establishment employing at least twenty persons, while Section 32 enumerates exclusions, and Section 36 authorises governmental exemption on public-interest grounds. The Act adopts the “allocable surplus” formula (ss. 2(4), 2(6) and 13) to compute profit-linked bonus, fixes a statutory minimum of 8.33 per cent (s. 10) and a maximum of 20 per cent (s. 11), and fashions “set-on” and “set-off” mechanisms (s. 15) to smoothen cyclical fluctuations. Sections 33-37 deal with transitional, overriding and delegated matters that have periodically attracted constitutional scrutiny.

From Industrial Adjudication to Statutory Mandate

Prior to 1965, bonus was principally awarded through industrial tribunals applying the “Full Bench Formula” propounded in Associated Cement Companies v. Workmen (1959). The Commission, apprehending multiplicity of disputes and uneven bargaining power, recommended statutory codification, culminating first in the Payment of Bonus Ordinance (29 May 1965) and then in Act 21 of 1965, effective retrospectively from the Ordinance date.[1]

Constitutional Scrutiny: Jalan Trading and Beyond

In Jalan Trading Co. Pvt. Ltd. v. Mill Mazdoor Sabha (1967) the Supreme Court invalidated ss. 33, 34(2) and 37 as violative of Article 14.[2] The impugned provisions (a) imposed retrospective liability on establishments with pending bonus disputes as on 29 May 1965; (b) prescribed a rigid “base-year” ratio indifferent to individual profitability; and (c) conferred unguided legislative power on the executive. The Court held the classification devoid of rational nexus to the Act’s object of equitable profit distribution, thereby reinforcing that welfare statutes must nonetheless satisfy constitutional equality.

Jalan Trading had three systemic effects: (i) it signalled that Parliament’s social-welfare agenda, however laudable, is circumscribed by constitutional discipline; (ii) it preserved the remainder of the Act, sustaining the statutory obligation to pay bonus; and (iii) it influenced subsequent drafting—later amendments refrained from employing retrospective triggers lacking objective criteria.

Scope and Applicability: Exhaustive or Concurrent?

Statutory Exhaustiveness

In Sanghvi Jeevraj Ghewar Chand v. Madras Chillies Grains & Kirana Merchants Workers Union (1969) the Supreme Court characterised the Act as comprehensive with respect to profit-based bonus.[3] Employees of small non-factory establishments (fewer than 20 workers) had sought bonus through the Industrial Tribunal. The Court, applying the mischief rule (Heydon’s Case), held that Parliament consciously excluded such establishments; therefore, tribunals could not resurrect profit-bonus claims under the Industrial Disputes Act (“ID Act”) without statutory warrant. The ruling fortified the exclusivity of the Act within its intended field, though it simultaneously left undisturbed customary, contractual or festival bonus falling outside profit linkage.

Profit-Linked versus Customary/Contractual Bonus

The distinction was clarified in Hukam Chand Jute Mills Ltd. v. Second Industrial Tribunal (1979) and reiterated in Modistone Ltd. v. Modistone Employees Union (1999). The courts held that the Act is a “complete code” only for profit-oriented bonus; customary or festival bonus, founded on long usage or settlement, remains adjudicable outside the Act.[4] Similarly, the Supreme Court in State Bank’s Staff Union v. Union of India (2005) upheld statutory exclusion of non-workmen (officers) from bonus despite an antecedent practice, underscoring legislative supremacy over customary benefit where Parliament expressly intervenes.[5]

Exemptions and Conditional Legislation

Section 36: Power, Procedure and Retrospectivity

Section 36 empowers the “appropriate Government” to exempt establishments or classes thereof from the Act if justified by financial position and public interest. In State of Tamil Nadu v. K. Sabanayagam (1998) the Supreme Court labelled s. 36 “conditional legislation”, not delegated legislation, and struck down retrospective exemption orders for want of explicit language and procedural fairness.[6] The Court mandated that (i) objective criteria must demonstrably support exemption, and (ii) affected employees, usually through representative unions, must receive an opportunity to make submissions—a reading that infuses principles of natural justice into ostensibly legislative acts where individual rights are curtailed.

Institutions “Not for Profit” (s. 32(v)(c))

The ambit of s. 32(v)(c) was tested in Tamil Nadu Water Supply & Drainage Board Engineers Assn. v. State of T.N. (1991). The Madras High Court affirmed that the Board’s dominant purpose of providing public utility services, rather than earning profit, placed it within the exemption.[7] The decision underscores that “purpose” rather than “incidental surplus” guides the exemption—a principle consistent with Sabanayagam where the Housing Board’s conduct was treated as waiver of a possible s. 32 exemption.

Computation of “Salary or Wage” and Ancillary Components

Retaining Allowance in Seasonal Industries

In Chalthan Vibhag Sahakari Khand Udyog v. Govt. Labour Officer (1981) the Supreme Court held that retaining allowance paid during the off-season forms part of “salary or wage” under s. 2(21) and must be reckoned for bonus calculation.[8] The ruling widens the financial base for workers in seasonal industries, recognising the allowance as deferred remuneration that secures labour availability and mitigates forced idleness.

Perquisites, Uniforms and Food Allowance

The Madras High Court in Wheel & Rim Co. of India v. State of Tamil Nadu (1971) and the Gujarat High Court in F.M. Kolia v. Industrial Tribunal (1980) indicate a functional approach: only monetary or monetisable benefits directly connected with employment terms qualify as “salary or wage”. Non-remunerative facilities (e.g., uniforms) generally stand excluded, whereas allowances with wage-like character attract inclusion. This jurisprudence maintains consistency with the interpretive logic of Chalthan.

Enforcement Mechanisms and Jurisdictional Interfaces

Inspectorial Powers (s. 27) and Fundamental Rights

In Malabar Tile Works v. Union of India (1967) the Kerala High Court upheld the search-and-examination powers of inspectors under s. 27(2)(b)-(c) against challenges under Articles 19(1)(g) and 20(3).[9] The Court reasoned that the powers are regulatory, reasonable and oriented towards statutory compliance, not criminal prosecution. This validates the administrative backbone that enables effective monitoring of bonus obligations.

Recovery of Bonus as “Existing Benefit”

Section 33C(2) of the ID Act provides a summary mechanism for computation and recovery of due money benefits. The Himachal Pradesh High Court in HPSEB v. Presiding Officer, Labour Court (2010) recognised that statutory bonus vesting under s. 8 of the Act qualifies as an “existing benefit”, thereby amenable to s. 33C(2) jurisdiction.[10] An alternative avenue exists under s. 21 of the Act for direct recovery by the appropriate Government, illustrating a complementary, not conflicting, enforcement matrix.

Collective Wage Disputes and Administrative Limits

The Supreme Court’s judgment in Modi Industries Ltd. v. State of U.P. (1994) delineates the boundary between administrative recovery under special legislation and adjudicatory functions. The Court held that where a bona fide dispute exists—e.g., responsibility for production halt—the Labour Commissioner must refer the matter to an Industrial Tribunal rather than unilaterally order wage (or bonus) recovery.[11] Although rendered under the U.P. Industrial Peace Act, the reasoning resonates with bonus-recovery proceedings, cautioning administrators against usurping quasi-judicial fact-finding.

Interaction with the Industrial Disputes Act

Definitional Alignment

Whether a bonus claim itself constitutes an “industrial dispute” hinges on the direct interest of workmen per Workmen of Dimakuchi Tea Estate v. Management (1958).[12] Where bonus is statutorily comprehended, the dispute ordinarily satisfies the “community of interest” threshold. However, voluntary private arbitration, as seen in Moorco (India) Ltd. v. Government of Tamil Nadu (1992), loses statutory cover absent compliance with s. 10A(3)-(4) of the ID Act, and the resultant decision cannot be enforced as an “award”.[13]

Fiscal Interface: Income-Tax Treatment

Disallowance of bonus payments in excess of statutory limits under s. 36(1)(ii) of the Income-tax Act, 1961 was affirmed in Commissioner of Income-tax v. Shaw Wallace & Co. (1989). The Calcutta High Court held that “reasonableness” is pegged to the Act’s standards; only productivity-linked bonus under s. 31A enjoys plenary deductibility.[14] This illustrates the Act’s spill-over effect into fiscal jurisprudence, influencing employer incentives.

Contemporary Challenges and Reform Prospects

Wage-Ceiling Relevance

The eligibility ceiling for “employees” has incrementally risen from Rs 1,600 (1965) to Rs 21,000 (2015 amendment). Yet litigative episodes such as UCO Bank Employees Assn. v. Union of India (2002) demonstrate recurrent demands for further revision.[15] The jurisprudence accepts legislative competence to calibrate ceilings, but from a policy perspective, inflation-indexation of thresholds on a statutory formula may avert periodic litigation.

Productivity-Linked Bonus and Industry 4.0

Section 31A encourages voluntary productivity schemes. With the advent of digitised workplaces and performance analytics, there is scope for expanding statutory recognition of hybrid profit-productivity models. Integration of environmental, social and governance (ESG) metrics into bonus computation could align labour incentives with sustainable enterprise goals without compromising the distributive justice ethos.

Gig-Economy Workers

The rise of platform-based labour challenges the foundation of “establishment” and “employment” in s. 1(3) and s. 2(13). Judicial expansion of “workman” in welfare statutes (e.g., the Supreme Court’s progressive reading in social-security contexts) may in future spill into bonus law, prompting either purposive reinterpretation or legislative amendment.

Conclusion

The Payment of Bonus Act, 1965 exemplifies dynamic equilibrium between constitutional values, labour-management relations and economic pragmatism. Jurisprudence from Jalan Trading to Sabanayagam ensures that while the statute advances distributive justice, it remains tethered to equality, procedural fairness and rational classification. The Act’s doctrinal clarity on profit-linked bonus, tempered by judicial recognition of customary and contractual entitlements, has forged a balanced regime. Emerging challenges—indexation of ceilings, gig-economy coverage, and productivity integration—invite nuanced legislative attention. Nevertheless, the foundational principle that employees have a legitimate stake in enterprise prosperity endures as a lodestar of Indian labour law.

Footnotes

  1. Statement of Objects and Reasons, Payment of Bonus Bill, 1965; Jalan Trading Co. v. Mill Mazdoor Sabha, AIR 1967 SC 691.
  2. Jalan Trading Co. v. Mill Mazdoor Sabha, (1967) 1 SCR 15.
  3. Sanghvi Jeevraj Ghewar Chand v. Secretary, Madras Chillies Grains & Kirana Merchants Workers Union, AIR 1969 SC 530.
  4. Hukam Chand Jute Mills Ltd. v. Second Industrial Tribunal, (1979) 2 LLJ 329 (SC); Modistone Ltd. v. Modistone Employees Union, 1999 LAB IC 3084 (Bom).
  5. State Bank’s Staff Union (Madras Circle) v. Union of India, (2005) 7 SCC 584.
  6. State of T.N. v. K. Sabanayagam, (1998) 1 SCC 318.
  7. Tamil Nadu Water Supply & Drainage Board Engineers Assn. v. State of T.N., 1991 LLJ (Mad) 394.
  8. Chalthan Vibhag Sahakari Khand Udyog v. Govt. Labour Officer, (1981) 2 SCC 147.
  9. Malabar Tile Works v. Union of India, AIR 1967 Ker 151.
  10. HPSEB v. Presiding Officer, Labour Court, 2010 Lab IC 2107 (HP).
  11. Modi Industries Ltd. v. State of U.P., (1994) 1 SCC 159.
  12. Workmen of Dimakuchi Tea Estate v. Management, AIR 1958 SC 353.
  13. Moorco (India) Ltd. v. Government of Tamil Nadu, 1992 SCC OnLine Mad 42.
  14. CIT v. Shaw Wallace & Co., (1989) 176 ITR 443 (Cal).
  15. UCO Bank Employees Assn. v. Union of India, (2002) 94 FJR 1139 (Mad).