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Bonus under Express Agreement

Production Productivity Linked Bonus


By Payment of Bonus (Amendment) Ordinance, Section 31A was inserted in 1975 in the
Payment of Bonus Act, enabling the employees to receive bonus on a formula different from what was
contemplated in the Payment of Bonus Act. The Section 3i-A was further modified by an Ordinance in
1977. The Section 31-A which came into effect on 25th September 1975 read as follows:
"Notwithstanding anything contained in this Act.
I. Where an agreement or a settlement has been entered into by the employees with their employer before
commencement of Payment of Bonus (Amendment) Act, 1976 or
II. Where the employees enter into an agreement or settlement with their employer after such
commencement, for payment of annual bonus linked with production or productivity in lieu of bonus
based on profits payable under this Act, then such employees shall be entitled to receive bonus due to
them under such agreement or settlement as the case may be.
Provided that any such agreement or settlement whereby the employees relinquish their right to
receive the minimum bonus under Section 10 shall be null and void in so far as it purports to deprive
them of such right. Provided further that such employees shall not be entitled to be paid such bonus in
excess of twenty per cent of the salary or wages earned by them during the relevant accounting year
The section makes a distinction between the agreements or settlements entered into between
employer and his employees before the commencement of 1975 Amendment and those entered into after
the commencement of 1975 Amendment that is 25th September 1975. However, the Section 31A covers
both the situations (1A).
After the 1975 amendment only the agreements or settlements making provision for the following will
exempt the employer and employees from the provisions of Payment of Bonus Act:
1. It should be annual bonus, that is payable on annual basis.
2. Such annual bonus should be linked to production or productivity.
3. The bonus agreed to should be in lieu of bonus based on profits payable under the Payment of
Bonus Act.
4. The employee should still get the minimum bonus under the agreement or settlement as provided
in Section 10 of the Bonus Act.
5. The employees should not, however, get more than twenty per cent of their salary or wages under
such agreement or settlement.
In the years preceding the 1975 amendment, employees of some of the establishments by virtue of
their bargaining power were able to reach agreements for payment of bonus much in excess of twenty per
cent of their salaries and wages. Many such agreements had no relevance to production or productivity in
those undertakings.
The implications of Section 31A are the following:
a) Where the employees enter into an agreement with their employer before the commencement of
the 1975 amendment that is, before September 25 1975 for payment of bonus in lieu of the bonus
payable under the Payment of Bonus Act, 1965. These agreements would continue to be valid, till

they expire, subject to restriction that the employees would not get more than twenty per cent of
their salary or wages as bonus. It means even if the agreement was entered into for payment of
minimum bonus of twenty per cent of their salaries or wages and was to be valid for long number
of years after the commencement of the 1975 amendment, it would continue to be valid just
because agreement was entered into before the commencement of the 1975 amendment, that is
25th September, 1975.
b) Where the employees enter into an agreement, after the commencement of the 1975 amendment,
for payment of bonus. In this case, it should be linked to production or productivity. Such an
agreement would be valid even if it provides for payment of minimum bonus of twenty per cent,
provided a clause is inserted that bonus is linked to production or productivity. An undertaking in
the agreement on the part of the employees, for example, that in consideration to the minimum
bonus payable by the employer, they will maintain production or productivity (may be even at the
present level) is sufficient enough to validate an agreement. In this case also the maximum limit
is twenty percent of the salary or wages.
Though the section was incorporated in 1965 no serious and sustained efforts have been made to
promote agreements and settlements for payment of bonus linked to production or productivity. In fact
trade unions have been arguing that bonus should be paid even to civilian employees irrespective of their
contribution to production or productivity.
The Supreme Court in Workmen of Bata Shoe Co. (P) Ltd. v. Bata Shoe Co. (P) Ltd. 1972 II LLJ
197 held that the agreement entered into between employees and Bata Shoe Company which inter alia
provided for payment of General Bonus at the rate of twenty percent of the total salary or wages at the
end of each quarter to those who are in the employment on the last date of quarter and have given regular
and approved service, as an agreement for payment of annual bonus linked with production or
productivity in lieu of bonus based on profit covered under the exemption Section 32 (vii) (now Section
31-A) of Payment of Bonus Act and they are not entitled to any additional bonus. The Court noted that
the labour union itself wanted payment of bonus every quarter. The Court observed that the amount is
paid as an incentive to production and therefore it is paid as production bonus or as a wage incentive. The
Court referred to its observation on the nature of production bonus to Titaghar Paper Mills Co. Ltd. v. Its
Workmen (2) 1959 (Suppl. 2) SCR 1012, where it has observed that payment of production bonus is in the
nature of an incentive wage. The extra payment depends not on extra profits but on production. It was
further held that in order to attract Section 32 (vii) (now Section 31A) the company has to establish:
a) That there has been an agreement of settlement entered into between the workmen and the
employer before May 29, 1965 (the date after the 1975 amendment is 25th September 1975).
b) The said agreement or settlement was one for payment annual bonus;
c) The said payment of bonus was linked With production or productivity ;
d) The said payment was in lieu of bonus based on profits.
The payment made to employees under an agreement were held do not attract the provisions of
Section 31A of the Payment of Bonus Act though it was called despatch material bonus scheme' for the
following reasons:
(1) Payments were made quarterly and not annually,
(2) Payments were in addition to and not in lieu based on profits
(3) Part of the Payments made under the scheme was treated as part of wages for calculating the
gratuity.
(4) The Payments became due under the scheme even in years of loss.

It is only an incentive wages and not bonus (IC Bombay in New India Industries Employees' Association
v. New India Industries Ltd., 1976 I LLJ 528.)
The agreement (dated 17th September, 1974) entered into prior to enactment of Payment of
Bonus (Amendment) Act, is not superseded by Payment of Bonus (Amendment) Act of 1976. Though the
Act is a complete code on the question of payment of bonus linked with profit or production or
productivity, it cannot be said that the Act is all embracing enactment and no bonus whatsoever can be
paid or settled beyond the provisions of the Act. The employees can recover bonus due to them under
Section 33-C (2) of the Industrial Disputes Act, 1947 (Central Government Industrial Tribunal-cumCourt, New Delhi in S. Sundaram v. American Express International Banking Corporation, 1977 I LLJ
374.)
Section 31A of Payment of Bonus Act applies only to the settlement -arrived at on the basis of
production or productivity. It is not applicable to the settlements arrived at on other considerations. The
agreement based on a formula which is different from under the Payment of Bonus Act is neither
precluded nor prohibited, of course with the maximum and minimum quantum prescribed under the
Bonus Act.
The High Court, Mysore in A. Munivenkataiah v. General Manager, Government Soap Factory
1972 I LLJ 355) held that if there was a subsisting valid agreement between the employer and the
employees under Section 31-A for payment of bonus, the employees can claim bonus under that
agreement. In this case there was a subsisting agreement dated 30th March 1964 for payment of bonus
entered into between the employer and the employees. Whether the court opined that though the
employees of Government undertaking as such are exempted from operation of the Bonus Act, they can
still claim bonus by virtue of Section 31-A under the agreement is not clear. The court considered the
judgment of the Supreme Court in Sanghvi Jeevaraj Ghewarchand v. Madras Chillies, Grains and
Kirana Merchants' Workers Union, 1969 I LLJ 719) which held that the units and establishments
exempted by the Bonus Act cannot claim bonus under any other Act or law like the Full Bench
Formula, as the Payment of Bonus Act was a comprehensive legislation.
The position is more clear now after the 1975 amendment, Section 31-A clearly says that
employees are entitled to get bonus under an agreement notwithstanding anything contained in this Act
which means even the employees who are exempted from the applicability of the Bonus Act, can get
bonus if they can make their employers enter into an agreement to pay bonus linked with production or
productivity and limit it to twenty percent of their salary or wages. Such an agreement would be
enforceable under the law.
In one case the Supreme Court held that the workers are not precluded from raising an industrial
dispute by the mere fact that there was a binding contract between them and the employer. In case of such
a dispute the industrial tribunal is not bound to give an award consistent with such an agreement. It has
the power to modify or discard the terms of agreement. But if the employees base their claim on such a
subsisting contract, the tribunal should not modify or discard the agreement. It would not be open to an
industrial court or tribunal to ignore the law established under the Full Bench Formula and to extend an
agreement for payment of bonus which is against the basic concept of bonus under the Full Bench
Formula (SC in Management of Consolidated Coffee Estate Ltd. v Their Workmen, 1970 II LLJ 576; in
New Manek Chowk Spinning and Weaving Co. Ltd. v. Textile Labour Association, 1691 I LLJ 521).
In another case the Orissa High Court held that any valid and solemn agreement in the settlement
of a dispute must be given effect to and the parties must not be permitted to re-agitate the dispute. The
peace brought about in the industry as a result of the settlement cannot be disturbed. In this case the trade

union, which was registered after the agreement was reached under Section 34 (3) of the Bonus Act
(before 1975 amendment), for payment of bonus, disputed the said agreement (HC Orissa in Management
of J. K. Paper Mills v. Workmen, 1973 I LLJ 518).
In one case it was held that where there was an express contract between employees and the
employer, which may be individual or collective, covering payment of bonus. In such case, the terms of
such contract shall be strictly adhered to and no extraneous factor which was not mentioned in the
contract should be taken into account. Nor such a contract becomes void for reasons like that the
agreement was entered into under the threat of a strike, which is legal ( HC Madras in Dalmia Cement Co.
Ltd, v. Industrial Tribunal Madras, 1960 I LLJ 628; IT West Bengal in Mahalakshmi Cotton Mills Ltd. v.
Their Workmen, 1952 I LLJ 68.)
The agreements arrived at in the course of conciliation proceedings under Section 12 of the
Industrial Disputes Act, 1947 have special sanctity upon which the law has its imprimatur. Hence, it was
held in one case, under the Full Bench Formula, that if the employees agree to give up their claim for
bonus in such proceedings in consideration of other offers made by the management such an agreement is
binding on the parties to the agreement during the tenancy of the agreement and neither party to the
agreement can challenge such an agreement (IT West Bengal in James Warren and Co. Ltd. v. Their
Workmen, 1958 II LLJ 551).
An agreement does not become invalid and unenforceable just because it was entered into on the
threat of a strike as every strike is neither a threat to commit any offence under the Indian Penal Code nor
is it unlawful. In this case, the employer has written a letter agreeing to implement the agreement arrived
at between the Tea Association and the union of the workers. This letter was written under the threat of a
strike (HC Assam and Nagaland in Workmen of Appin Tea Estate v. Industrial Tribunal, 1967 II LLJ 371;
State of Bihar v. Deodhar Jha, AIR 1958 SC 51).