IS ANNUAL PERFORMANCE BONUS OR PERFORMANCE RELATED INCENTIVE A PART OF WAGE?

Elgin Matt John
(Lawyer, Managing Partner M/s Elgin Matt John & Associate)

Introduction

We will begin with understanding the meaning of the term “Performance Linked Incentive” PLI or also called “Annual Performance Bonus” elsewhere leaving it to the draftsman of an employment contract to give any meaning that he/she may consider suitable to the interest of his employer. Given the ambiguity often employees mistakenly consider PLI or Annual Performance Bonus as a part of their “Annual Bonus” and therefore a liability upon the employer to disburse annually. It is therefore quite understandable that they deem it fit to claim the same from the employer as a part of their salary when either their services are terminated or on the event of their resignation from the company. However nothing can  be further from the truth than to nurse such beliefs.

In the present Article we will attempt to understand the concept of PLI / Annual Performance Bonus etc and whether the assumptions of the same being a part of salary is true or to the contrary untenable under law.

PERFORMANCE RELATED INCENTIVES/ ANNUAL PERFORMANCE BONUS

Then terms “Annual Performance Bonus” or “ Performance Linked Incentive” PLI is not a term defined under law. The term Bonus in fact has also not been specifically defined anywhere either. Therefore we will rely on the definition available under ordinary English dictionary. The meaning given under the Oxford English Dictionary is asunder: Bonus has been defined as “an extra amount of money that is added to a payment, especially to someone’s pay as a reward” similarly the term “Performance Bonus” has been defined as “ a form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets.”Both the meaning can be read together based on the context of use. In general parlance “Bonus” is always something that is given by a company out of its profit as a form of reward given to an individual employee or all employees in the department for their contributions made towards the profits for the company.

Now if one goes by the definition as discussed in the previous para then, it will beg the question as to whether an employee of a company can claim such form of “Bonus” as being an essential part of an employee’s salary or wage. For if it does constitute an essential part of the wage/salary then an employee will be entitled to claim the same as a matter of right and the employer would be obligated to pay.

Since both “wage” and “bonus” both appear to be so intricately connected it will well serve the purpose if we were to broaden the our understanding of the status of PLI etc.. by beginning to delve into the definition of term “wage” as it appears under law.

WAGE

The term “wage” has been defined under Sec 2 (1)(The Payment of Wages Act 1936

Sec 2[(vi) “wages” means all remuneration (whether by way of salary, allowances, or otherwise) expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes—
(a) any remuneration payable under any award or settlement between the parties or order of a Court;
(b) any remuneration to which the person employed is entitled in respect of overtime work or holidays or any leave period;
(c) any additional remuneration payable under the terms of employment (whether called a bonus or by any other name);
(d) any sum which by reason of the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made;
(e) any sum to which the person employed is entitled under any scheme framed under any law for the time being in force, but does not include—
(1) any bonus (whether under a scheme of profit sharing or otherwise) which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of a Court;
(2) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of 2[appropriate Government];
(3) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
(4) any travelling allowance or the value of any travelling concession;
(5) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; or
(6) any gratuity payable on the termination of employment in cases other than those specified in sub-clause (d).]

That a close look at the highlighted portions of Sec 2(vi)(c) & Sec 2(vi)(1) suggest three scenarios Firstly where any additional remuneration given in terms of employment, whether it is termed as bonus or not, becomes payable to an employee as wage. Secondly where the said bonus whether given as a part of the profit scheme or otherwise and which doesnot form part of the remuneration payable to an employee under the terms of employment, will not constitute a part of wage of an employee and Thirdly any form of additional remuneration which an employee is entitled to receive under the fulfilment of the terms of employment will also constitute as wage under the Act.

However in all three scenarios what will make bonus in whatever form it is referred to be included as wage will apply only when “the terms of employment, express or implied, were fulfilled,” as explained under Sec 2(vi) itself.

What constitutes as remuneration though has not been defined under the Act. However, what becomes apparent is that amounts payable as “remuneration” is made a part of the wage when and how it is referred to in the terms of employment contract and the same becomes payable as a matter of right to the employees when he fulfils the said terns. Therefore in the case of  V.B. Godse, Manager, Prabha … vs R.H. Naick, Inspector, Under The Payment of wages Act, Equivalent citations: (1953) IILLJ 577 Bom

“Clearly, the fallacy underlying this argument is that “wages” only refer to those payments which are made obligatory upon the employer by the terms of the contract. If that were the intention of the legislature, the legislature would have defined wages as remuneration capable of being expressed in terms of money payable under the terms of the contract. But that is not the language used by the legislature. The legislature has advisedly used the words if the terms of the contract of employment, express or implied were fulfilled.”

“Therefore the emphasis laid by the legislature is not upon “the terms of the contract,” but upon what liability is imposed upon the employer to pay his employee when the contract has been fulfilled. Therefore, what the court has to consider is whether any amount is payable by the employer by reason of the fact that the employer has fulfilled the contract of employment. In other words, if the employee has served his master, carried out the terms of the contract, fulfilled his obligations, and on that being done certain amount is payable by the employer to the employee, then that sum would be “wages” within the meaning of this definition.”

“Therefore, “wages” do not only include the remuneration payable by the employer by reason of the terms of the contract, express or implied; it also includes any amount which the employer legally becomes liable to pay to the employee on the fulfillment of the contract, and there can be no dispute that once the Industrial Court made this award the employer became legally liable to pay the additional wages and dearness allowance to the employees”.

What stands out from this interpretation given by the court, is that remuneration, payable as wage, may not necessarily amount either expressly or impliedly as a term of the agreement but also any such amount that the employer is liable to pay under law contract or otherwise to the employee.

Therefore remuneration to an employee, which is also termed as his wage, will be the amount/money the employee will be entitled to receive if he fulfills the terms of employment or that which has been prescribed under law and which he will be entitled to receive as wage. Fulfillment of terms suggests fulfillment of obligations made upon the employee.

Given the broad interpretation of wage it is possible that any form of incentive or bonus  which has been mentioned in the terms of employment could possibly be  understood to suggest that the employee may be entitled to receive the same as a matter of right the moment he fulfills the terms of the employment contract. Suggesting thereby that even Bonus that are linked to profit sharing scheme which have been expressly excluded as a part of the definition of wage under Sec 2(vi)(1) of The Payment of Wages Act 1938 may appear to have been included in the wage. This  interpretation however seems to be running contrary to the written statue and thus  it becomes necessary to understand what in law constitutes as Bonus.

BONUS

The Government had enacted  The Payment of Bonus Act 1965 with the object of preventing the employer from siphoning away and profiteering from just share of the employees who have contributed to the profits of the company. The Act is applicable only with regards to employees whose salary is below INR 20,000 per month. The act however also contradicts the idea of Bonus as is normally understood to mean something given as an additional income to the employees.

The Act makes it mandatory on the employer to pay to its employee a fixed amount calculated on a percentage of the employees wage, making bonus, a kind of statutory payment instead of an additional payment or an incentive to the employee. Further the Act also doesnot require the company to make profits in order to make the payment of the Bonus. The corresponding provisions are asunder:

Sec 8. Eligibility for bonus.Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year.  

 Sec 10. Payment of minimum bonus.Subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of the accounting year commencing on any day in the year 1979 and in respect of every subsequent accounting year, a minimum bonus which shall be 8.33 per cent. of the salary of wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year:


Provided that where an employee has not completed fifteen years of age at the beginning of the accounting year, the provisions of this section shall have effect in relation to such employees as if for the words “one hundred rupees”, the words “sixty rupees” were substituted.


Sec 11. Payment of maximum bonus.(1) Where in respect of any accounting year referred to in section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent. of such salary or wage.
(2) In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section.

    The Payment of Bonus Act makes Bonus as a form of statutory payment that a company is liable to pay to the employee while prescribing its determination as being a percentage of actual wage while limiting the minimum and maximum value of the payment. Once again the Act doesnot consider Bonus a part of the Wage itself, as the Act prescribes the determination of the value of the Bonus to be calculated as a percentage of the wage. This also explains why under the Indian Law on Bonus- bonus is not considered as a part of wage but is considered as form of remuneration which is required under law to be given to an employee anyway. Bonus under the Act  is not treaty as a form of incentive which is connected with performance of the employee/department or the organization. This aspect has been clearly mentioned in the definition of Wage under the Payment of Bonus Act 1938.

Sec  2(21) “salary or wage” means all remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment and includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living), but does not include
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of foodgrains or other articles;
(iii) any travelling concession;
(iv) any bonus (including incentive, production and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him;
(vii) any commission payable to the employee.
Explanation.Where an employee is given in lieu of the whole or part of the salary or wage payable to him, free food allowance or free food by his employer, such food allowance or the value of such food shall, for the purpose of this clause, be deemed to from part of the salary or wage of such employee;

The highlighted portion[Sec 2(21)(iv)] clearly indicates that Bonus in the nature of incentives, production and attendance benefits doesnot form part of salary or wage.

This definition however contradicts the definition of “Wage” under Sec  2 (vi)(c) that makes all form of additional remuneration including bonus a part of the definition of wage. Given the contradiction it becomes necessary to understand with clarity the position that the courts have taken on the matter of “Bonus” being or not being a part of wages. Therefore, in the case of Punjab Agro Industries Corp Limited. vs The District Judge Chandigarh, 2014(140)FLR 1068(P&H H.C.) Justice Kannan while dealing with a case where an employee had claimed that target bonus formed a part of his wage as he was entitled to it under the terms of employment. The court however did not agree with this contention and held that target bonus was a form of incentive and therefor stood outside the preview of the term Bonus. The court held:

5. On a point of law, the learned counsel for the respondent contends that the incentive does not fall within the definition of “wages” contained under Section 2(vi)(i) of the Payment of Wages Act. The Act details 6 exceptions and the first clause of exception is reproduced as under:-
“2(vi) (1) any bonus (whether under a scheme of profit sharing or otherwise) which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of a Court……………….

 ….If there is an exception to a definition, the exception must be strictly construed. If the exception lists specifically 6 categories and one category referred to is bonus and in parenthesis it refers to the manner in which the bonus was payable, then it should be applied only for a bonus or anything which is in the nature of bonus. The learned counsel wants to give the explanation that a bonus could be either a scheme of profit sharing or otherwise and the use of expression “otherwise” must include also a situation where a payment in addition to wages is made which is not in a scheme of profit sharing. The bonus itself is not at all times only a share of profit, for, the Payment of Bonus Act itself determines a minimum amount as payable whether a Company makes a profit or not. There are statutory compulsions for payment of bonus under certain circumstances. An employer can decide to pay bonus on a scheme which is not merely in the nature of profit sharing. The expression “otherwise” must be read ejusdem generis. It must be restricted therefore to some payment which is in the nature of bonus. An incentive which is paid at a particular percentage over the targeted sale cannot be treated as bonus or a bonus in any other scheme other than profit sharing. I cannot therefore find that the claim which the petitioner was making ……………

Similarly, the Hon’ble Supreme Court explained the concept of Bonus in the definition of wage under The Payment of Wages Act 1938 in  Bala Subrahmanya Rajaram vs B.C. Patil And Others : AIR 1958 SC 518 : 1958 SCR 1504

Now consider this clause by clause. “‘ Wages’ means all remuneration.” Is bonus a remuneration ? We think it is Remuneration is only a more formal version of ” payment ” and payment is a recompense for service rendered. Now it is true that bonus in the abstract need not be for services rendered and in that sense need not be a remuneration; for example, there is a shareholder’s bonus in certain companies, and there is a life insurance bonus and so forth. But that is not the kind of bonus contemplated here because the kind of remuneration that the definition contemplates is one that is payable ” in respect of his employment or of work done in such employment.”

Therefore, the kind of bonus that this definition contemplates is one that is remuneration for services rendered or work done. Accordingly, it is a ” remuneration ” and as the definition includes all remuneration of a specified kind, we are of opinion that bonus of the kind  contemplated here falls within the clause that says it must be ” remuneration “.

Next comes a clause that limits the kind of remuneration, for, though the opening words are ” all remuneration ” the words that follow limit it to all remuneration of the kind specified in the next clause, that is, to remuneration ” which would be payable if the terms of the contract of employment, express or -implied, were fulfilled. ” Now the question is whether the kind of bonus contemplated by this definition must be a bonus that is payable as a clause of the contract of employment. We think it is, and for this reason.

If we equate ” bonus ” with ” remuneration “, the definition says clearly enough that the bonus must be such that it is payable “if the terms of the contract are fulfilled”, that is to say, it will not be payable if the terms are not fulfilled.

Now, we can understand a position where a statute declares that whenever the terms of the contract of employment are fulfilled the bonus shall be payable; equally, we can envisage a situation in which an employer engages to pay a bonus should the terms of the contract of employment be fulfilled, by a separate and independent agreement that is a part of the contract of employment. In either case, the matter could be said to fall within this part of the definition. But we can see no way in which a bonus can be said to be payable if and when the terms of the contract of employment are fulfilled outside these two cases (namely, legislation, or a separate contract that is not part of the contract of employment), except when it is payable by reason of a term, express or implied, in the contract of employment itself. …..”

The summary of both these judgements can be understood to mean that “Bonus” by whatever name called will constitute a part of the wage as defined under the Payment of Wages Act 1938 only when it constitutes an essential term of the employment contract that is it is something which as per the terms of employment the employer will be liable to pay and the employee entitled to receive if the employee fulfills the terms employment. These amounts though will not form part of the definition of Wage when they are directly linked to profits or profits margins achieved by the company.

The status of PLI therefore will have be examined from this perspective that is whether the amount  becomes payable as per the terms of the contract of employment on the employee fulfilling the terms or whether it is directly related to profits or achieving of profit margins of the company. If the terms of employment  provide that the amount are payable on fulfillment of the terms and the employee has fulfilled those terms then the same becomes payable to the employee in the form of his “Wage” and as a matter of right. However, if the terms of employment provide that the said PLI is linked to profit sharing or achieving targets of profits etc and therefore not part of the regular remuneration it may not form part of the definition of “Wage” under The Payment of Wages Act 1938 and therefore cannot be claimed by the employee as a matter of right.

PLI or Performance related Incentive is a creature of the employment contract and not a part of the Statutory Framework of the Laws of India. Therefore it is the discretion of the company as to whether it wants to include or not to include  Performance related incentive or PLI as part of the employment contract. There is no legal obligation to include it though and therefore it is not  a part of the employees salary.