PROFIT BONUS: FROM THE DEBRIES OF BOON TO THE CRESCENDO OF RIGHT IN PAKISTAN

By:
IFTIKHAR AHMAD TARAR*

Abstract

There is enhanced recognition of monetary rights of the workers in contemporary jurisdictions but this doesn’t always reflect enhanced enjoyment of the rights on ground. With this background, this article ventures upon the dogmatic analysis of the parameters laid down by the legislature pertaining to the payment of bonus in Pakistan. It is true that the provisions seem to be pro-labour but it is also true that they fall far short of establishing a friendly atmosphere and are utterly bemused. For this purpose, the article has been bifurcated into three parts. Part first gives historical development of payment of bonus in pre-portioned India; part second relates to contours of bonus before the incorporation of Standing Order No.10-C and third part encompasses different aspects of bonus in post insertion of Standing Order No.10-C. Consequent upon the analysis of the legislative and judicial context, the paper argues that necessary amendments should be incorporated in the law relating to the payment of bonus to ensure the prompt enjoyment of this right in Pakistan.

Historical Background

The dawn of July 1917 can be reckoned as epoch making in the history of Indian workers due to a couple of factors: firstly, the Bombay and Ahmadabad textile mill owners decided to keep their workers contended and fully productive and to offset the bad effects of high food prices, and secondly, decided to pay them “war bonus” of percent of their wages[1]. This practice remained in vogue until 1923, when thinking it be inadequate, the workers decided to strike in 1924 which ultimately resulted in the constitution of bonus dispute committee[2]. Albeit, the committee realized that the workers had begun to look on the bonus as n integral part of their wages, to which they had a right but, at the same time, the committee concluded that the mill owners were also justified in refusing to give bonus[3]. The issue of payment of bonus re-emerged during World War II as a result of handsome profits earned by the employers and abrupt rise in the cost of living and this time the Bombay Mills Association on the pursuance of the local government had to agree the payment of cash bonus of 12.5 percent of actual earnings[4]. Thus a precedent, although transitory, was established which prompted not only the other employers to hold it to be the best way of keeping the workers contended and achieve the production targets but also relieved the government of the irksome task of periodical revision of the wages[5]. After that, there ushered an era of trial and error and the pressing nature of the bonus was once again jeopardised by a decision given by the bonus dispute committee in1924 by holding that workers had no enforceable claim to annual bonus[6]. However, at the end of second quarter of the twentieth century, there emerged a couple of decisions which besides bringing about tranquility in troubled circles streamlined the issue of payment of bonus to the workers. Firstly, in 1946 the Industrial Court in Bombay decided a case more favorable to the workers. The award of the said court runs as under:

The justification for such demands (more earnings, better conditions of work, etc.) arise especially when wages fall short of the living wage standard and the industry makes huge profits, part of which are due to the contribution which workers make in increasing production. The demand for bonus is therefore an industrial claim when either or both these conditions are satisfied. In the present case there is no doubt that both these conditions are satisfied…. It is to be remembered that adequate wages and dearness allowance, it any, for increased cost of living are a first charge on the industry, but the workers may reasonably ask for a bonus when there are enhanced profits, when dividends are paid out after providing for taxation and depreciation, especially when their wages are below the living wage standard[7].

The dicta corroborated the assertion of the labour that bonus was a deferred wage and was further galvanized by the decision of the Bombay High Court in 1948 that bonus could be demanded as a right. Another hallmark of the said decision was that a more detailed formula for calculating “prior charges” before granting bonus was worked out in 1948. It was called the Full Bench Formula of Labour Appellate Tribunal or LAT formula[8]. Rendering it to be a benchmark for onward calculation of bonus through out the country, the court related bonus to the actual and living wage:

So long as the living wage standard has not been attained the bonus partakes primarily of the character of the satisfaction…. Of the deficiency in the legitimate income of the average worker in an industry, and once such income has been attained it would also partake of the character of profit-sharing. Owing to this dual character of bonus it would be a mistake to regard a demand for bonus as a demand for profit-sharing pure and simple[9].

The industrialization of Pakistan, which had proceeded at a fairly rapid pace in the decade since partition, had engendered new and growing problems for industrial labour[10]. Surprisingly, Consequent upon getting independence from the colonial regime in 1947, no proper attention could be focused on legal reforms especially the welfare legislation. Last quarter of the twentieth century may be regarded as emblematic of numerous critical developments because the areas like workers’ participation in the management, extension in the scope of labour laws, enactment of laws relating to employees old-age benefit, workers’ children education, introduction of statutory bonus and group insurance schemes were given due space in legislation[11]. Albeit, it may be termed as a benevolent step on the part of the then democratic government but still the provisions seem to be replete with lacunae. For instance, the provisions relating to the payment of bonus have not been tailored in an exhaustive manner. So, it has become a multi-pronged issue and the areas like concept of bonus and relation thereof with the remuneration, its calculation and the conditions for its payment and, of course, its quantum are utterly bemused. Growing corpus of case law on the subject reveals that the legislative snare requires complete revamipication.

In this context, the law relating to the payment of profit bonus can best be understood by dividing it into two phases: firstly, from 1947 to 1972 and secondly from 1972 to onwards. The principal reason behind this bifurcation is that it was not until 1972 that the legal provisions pertaining to the payment of bonus find their way onto Federal Statue Book. Prior to that date, the payment of bonus was depended on a number of factors i.e. term of employment, strength of custom, usage or practice or by means of settlement between the employer and the workmen or in case of a dispute on the award of a labour court[12].

Kinds of Bonus

A cursory review of the literature on the subject reveals that following types of the bonus have been in vogue in Pakistan: firstly, customary bonus, secondly, efficiency bonus and thirdly, profit bonus. It is interesting to note that there seems to be great disparity in terms of parameters for the payment of these bonuses and such incongruity has paved the way to an unending debate in relevant circles.

A) Customary Bonus

In Pakistani labour jurisprudence, the customary bonus occupies a very unique place as before the incorporation of the provisions pertaining to the payment of statutory bonus, it was the only one which was catering for the requirements of the bread earners in Pakistan. It is a settled position that the custom which can be recognized as a rule of law modifying the ordinary law must be ancient and invariably pleaded before the trial court apart from the fact that a clear and unambiguous evidence must be given in support of its existence and must be proved by reliable evidence of repeated act openly done which had been assented and submitted to in such a manner as to lead to the conclusion that the usage had by agreement or otherwise become the local law of the place in respect of persons or things which it concerned[13]. However, in order to bring the claim within the ambit of customary bonus it was incumbent upon the claimant to prove that the same was paid at a uniform rate; it was paid during the years of loss as well and it had been paid for sufficiently long time and for an unbroken series of years[14]. So much so, the fact that the bonus was payable on profit basis in terms of settlement will not make it a customary bonus[15].

B) Negotiable Bonus

Negotiable bonus or sometimes called settlement bonus is another type of bonus which has evoked a continuous stream of controversy between the two segments of the economy. As in most of the cases, the bonuses are paid under settlements even when there is no profit[16], therefore, unlike statutory bonus, the law admits the autonomous character of the parties as to the determination of pre-requisites of this kind of bonus. For instance, there is no minimum or maximum limit of such bonuses compared with statutory bonus; there is nothing in law with regard to the length of service on which the bonuses agreed upon are to be paid[17]. In other words, all these matters are left to the parties to settle through the process of collective bargaining. The principal reason behind this autonomy being that the object and policy of the law has always been not to fix any condition or criteria for grant of benefit which is subject to the process if collective bargaining rather it is left to the parties to decide the issues in the manner they deem fit. Such criteria and condition are fixed only in the case of statutory benefits[18]. Another hallmark of the settlement bonus is that it holds grounds notwithstanding the fact that the workers have to receive any profit bonus under any provision of law in future[19].

C) Efficiency/ Production Bonus

A production bonus is a wage incentive plan devised in the hope or expectation that profit will thereby accrue to the employer but this is not necessarily based on profits[20]. Further more, production bonus is an extra emolument for extra effort put in by the workmen over the standard that may be fixed. It was owing to this reason that all these plans like Halsey Premium Plan, Bedaux Point Premium Plan, Haynes Maint System and Emerson Efficiency are known as Incentive Wage Plans and generally speaking have little to do with profits. So, the extra payment depends not on extra profit but on extra production[21].

Efficiency bonus is not a bonus on profit. It is an incentive to the workers to work hard and efficiently. So it is part of the wages. Its benefit is that management may put efficient workers in the next group or grade or may not but efficiency bonus is earned by them by their labour. It is calculated for the payment of overtime and there is no reason why it should not be calculated towards wages while calculating wage of a worker. Therefore, it was held that efficiency bonus is part of wages and it should be calculated as extra wages of an extra and efficient work[22].

D) Statutory Bonus

In a sense, statutory bonus has been given preference over any other kind of bonus. The reason seems to be the beneficial aspect of the Standing Order No. 10 (C)[23] of the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. It is appropriate to reproduce it in extensor:

10(C) Payment of Bonus.—(1)

Every employer making profit in any year shall pay for that year within three months of the closing o that year to the workmen who have been in his employment in that year for a continuous period of not less than ninety days a bonus in addition to the wages payable to such workmen.

(2) The amount of bonus payable shall –

(a) if the amount of the profit is not less than the aggregate of one month’s wages of the workmen employed, be not more than the amount of such aggregate, subject to the maximum of thirty percent of such profit;

Illustration 1—If the profit is Rs.1,20,000/- and the aggregate of one month’s wages of the workmen is Rs.30,000/-, the amount of bonus payable shall be not less than the aggregate of one month’s wages, that is to say, Rs.30,000/-

Illustration 2--- If the profit is Rs. 30,000/-, and the aggregate of one month’s wages of the workmen is Rs. 30,000/-, the amount of bonus payable shall be not less than thirty per cent that is to say, Rs.9, 000/-

(b) If the amount of the profit is less than the aggregate referred t in paragraph (a), be not less than fifteen per cent of such profit.

(3) The amount payable to a workman entitled thereto under clause (1) shall bear to his monthly wages the same proportion as the total bonus payable by the employer bears t the aggregate of the wages referred t in paragraph (a) of clause (2) and shall be paid either in cash or in N.I.T Units of equivalent value at the option of such workman.

(4) Nothing in this section shall be deemed to affect the right of any workman to receive any bonus other than that payable under clause (10 to which he may be entitled in accordance with the terms of his employment or any usage of any settlement or an award of a Labour Court established under the Industrial Relations Ordinance, 1969 (XXIII of 1969).

Explanation--- For the purpose of this section—

(a) “N.I.T Units’ means the Units referred to in the National Investment (Unit) Trust Ordinance, 1965 (VII of 1965);

(b) “Profit” means the ‘net profits’ as defined in Section 87-C of the Companies Act, 1913 (VII of 1913) ; and.

(c) “wages” does not, for the purpose of calculating the bonus payable to a person under clause (1), include the bonus referred to in clause (vi) of section 2 of the Payment of Wages Act, 1936 (IV of 1936)

Criterion for Statutory Profit Bonus

According to Standing Order No.10-C (1) of the Ordinance, every workman who has put in, in that accounting year, a continuous service of not less than ninety days would be entitled to receive bonus and for the purposes of this Ordinance, the term workman means any person employed in any industrial or commercial establishment to do any skilled or unskilled, manual or clerical work for hire or reward[24]. Whether a particular person is worker or not, his nature of work would be the decisive factor; his pay or designation would be immaterial[25]. The other eligibility for bonus for a workman is “employment in that year for a continuing period of not less than ninety days”[26]. The law doesn’t enjoin upon the worker to be actually on duty rather his relationship as an employee should have continued for at least ninety days[27].

The provisions adumbrated in Standing Order No. 10 (C) of the Ordinance provide the parameters for the payment of statutory bonus. The employer has to pay it within three months from the date of earning profit. Albeit the concept of statutory bonus is associated with the earning of profit but the workers are not in a position to know whether in a particular year the employer got earned profit or not, if so, to what extent? So, the time starts from the date on which the employer declares whether it earned profit or not[28]. On the contrary, in the light of the report of the auditor[29] in case of loss to the company, there is neither a right in the workers to receive profit bonus nor is the liability for the company to pay the bonus[30]. The judicial approaches as have been demonstrated in these cases depict that the onus of establishing the fact of earning profit has been cast on the workers. In case they fail in doing so, there is likelihood of their deprivation of bonus. No doubt, the provision has been made ambiguous by not putting corresponding duty on the employer to provide accurate and timely provision of the accounts. So much so, an order directing an anticipatory calculation of the bonus has been held to be reasonable[31].

Another set back with the extant law is that the industrial dispute with regard to the benefits allowed under Standing Orders Ordinance cannot be raised in view of the definition of the term provided by section 2 (XIII) as amended by Ordinance No.XIX of 1974. According to this definition any right guaranteed or secured to the workman by or under any law, other than Industrial Relations Ordinance was excluded from the definition. As the right to statutory bonus has been guaranteed by Standing Order Ordinance, therefore, any controversy relating to enforcement thereof doesn’t amount to an industrial dispute. So, even if there was an agreement between the parties which prohibited the payment of bonus that would be violative of the rights of the workers and would be null and void[32]. But, the restriction that the fact of non-payment of bonus doesn’t amount to industrial dispute is valid only to the extent of profit bonus payable under clause (1) of the Standing Order No-C of the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. As far as the issue of payment of bonus under Clause (4) of the said Ordinance, is concerned the same may be espoused as an industrial dispute in case of any controversy. It is submitted that the lost faith of the legislation can be redeemed by enlarging the infinitesimal character of the term industrial dispute.

Calculation of Bonus

Another rather regrettable aspect of the law relating to the payment of bonus in Pakistan is the calculation of bonus. No doubt, the provisions pertaining to bonus have find place onto statute down to quite lately and it was supposed to be exhaustive by encompassing its all aspects. In this respect, the non provision of exact formulas for its calculation has paved to uncertainties. For instance, it has been said that the bonus is to be paid in proportion to the monthly wages[33]. In this regard, plethora of case law has ripened on the issue of the term wages. It is pertinent to mention here that the term wages has not been defined in the law relating to the payment of bonus rather it has been laid down that the term wages does not for the purpose of calculating the bonus payable to a person under clause (1) of the Standing Order No. 10-C includes the bonus referred to in clause (vi) of section 2 of the Payment of Wages Act, 1936[34]. So, there arose a question in a number of cases, whether, in calculating the amount of bonus, all the allowances should be taken into account. The courts, on this issue, have categorically turned down the pleas advanced by the workers by excluding the allowances admissible to the workers. The scope of the bonus has been bogged down by narrowing the definition of the term wages.

The term wages is very wide in its scope and includes all remunerations capable of being expressed in terms of money, if the terms of contract of employment, express or implied were fulfilled[35]. Therefore, the words wages has to be interpreted according to its ordinary meaning. In this ordinary sense wages would include all payments made to workman by his employer in regular and permanent bases periodically in lieu of the services. As a corollary, therefore, payments made to a workman, which are contingent in nature, would not form part of the wages. So, in order to render a particular payment as part of the wages of a workman it is necessary to ascertain the nature of such payment[36]. The term wages means pay which was intended to remain permanent. Various allowances except cost of living allowance allowed by law, held, cannot be considered to have degree of permanence making part of wages. Allowances, other than statutory cost of living allowance, held cannot be considered to be the part of wages for the purposes of computation of gratuity and bonus under Standing Order No. 10-C[37]. Non inclusion of such allowances in the ambit of wages, prima facie, curtails and abridges the rights of workmen as to the quantum of statutory bonus to which they are entitled under the Standing Order No. 10-C but unlike the definition of the term wages in The Payment Of Wages Act, 1936[38], it could not attract the judicial favour for its enlargement. The upshot of the above discussion is that the wages for the purposes of computing the bonus payable under Standing Order No.10-C don’t include house rent allowance and if there is a settlement which prohibits the parties to include certain allowances in wages for the purposes of computing the amount of bonus that will neither curtail the statutory right of the workers to receive bonus under Standing Order No.10-C nor is such provision in violation of any provision of the Industrial Relations Ordinance, 1969[39].

Conclusion

The notion of welfare legislation can only come out of present malaise if the extant legislation is modified according to new situation. Albeit, the addition of Standing Order may be reckoned as a beneficial step on the part of the government yet the provisions of the said Standing Order do not seem to have been tailored in an exhaustive fashion. For instance, it neither defines the terms wages for the purposes of calculation of the amount of bonus nor does it enjoins that the definition of the said word as contained in the payment of the Wages Act, 1936 would be applicable to the Standing Orders. Similarly, in case of customary bonus, the requirement, inter alia, that it should have been paid for “sufficiently long” time is source of constant discontentment amongst the proletariat circles as in this respect, no hard and fast rule has been laid down. Another telling shortcoming in the extant law is non-inclusion of bonus disputes in the inventory of matters constituting industrial dispute. So, the ramification of the law on the subject will be instrumental in bolstering the rhetoric of bonus as a right in Pakistan.

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*Iftikhar Ahmad Tarar is Assistant Professor in the University Law College University of the Punjab, Lahore, Pakistan. iftikhartarar@hotmail.com

[1] Michael J. Van den Bogaert, S.J ‘The Bonus Question in India: From Ex Gratia Payment to Industrial Claim’ (1968) 1 Economic Development and Cultural Change 17, 50

[2] Ministry of Labour and Employment, Report of the Bonus Commission (1964), p.3 as quoted by Michael J. Van den Bogaert, S.J in ‘The Bonus Question in India: From Ex Gratia Payment to Industrial Claim’ (1968) 1Economic Development and Cultural Change 17, 50

[3] n.1 above, 50

[4] ibid

[5] ibid

[6] ibid

[7] Rashtriya Mill Mazdoor Sangh Textile Workers’ Union v Bombay Mill Owners Association [1946-47] Industrial Court Reporter 390-91, quoted in Michael J. Van den Bogaert, S.J. n.1 above

[8] n.1 above,50

[9] ibid

[10] Nikki R. Keddie, ‘Labour Problems of Pakistan’ (1957) 4 The Journal of Asian Studies16, 575

[11] Obaidur Rehman, The Law of Industrial Relations in Pakistan (Karachi: Pakistan Law House, 4th ed, 2004) “87”.

[12] M.Shafi. Profit Bonus: Law and Practice (Karachi: Bureau of Labour Publications, 2nd ed, 1980) “12”.

[13] Diamond Silk Mills Workers Union v Diamond Silk Mills (Management) [1975] PLJ Tr. C (Labour) 149.

[14] Employees’ Union V Messrs International Advertising Ltd. Karachi, [1978] PLC 453.

[15]American International Underwriters (Pak) LTD Karachi v The Presiding Officer, Fifth Labour Court Karachi and Others [1978] PLC 87.

[16] Employees Union Pak-American Fertilizers Ltd V Management, P.A. Fertilizers Ltd. Mianwali, [1978] PLJ Tr.C (Labour) 235.

[17] ibid

[18] ibid

[19] London Assurance V Employees Union [1974] PLJ Tr. C. (Labour) 122.

[20] Employees’ union V Messrs Fauji Sugar Mills Ltd [1982] PLC 947

[21] ibid

[22] Workers’ Union v. Carrier Telephone Industries Islamabad, [1978] PLC 177

[23] Employees Union (C.B.A) v Messrs New Jubliee Insurance Company Ltd. [1984] PLC 232

[24] Industrial and Commercial Employment (Standing Orders) Ordinance 1968, s 2(1)

[25] M. Shafi, Profit Bonus: Law and Practice (Karachi: Bureau of Labour Publications, 2nd ed, 1980) “5”.

[26] ibid

[27] ibid

[28] Muhammad Suleman Malik v Factory Manager, Lever Brothers (Pak) Ltd [1989] PLC 909.

[29] Multan Cotton Industries, Multan v Mehant Kash Union [1978] PLC 97.

[30] Workers’ Union v Messrs Enwar Jamal Ltd, Karachi, [1981] PLC 380.

[31] Golden Industries Ltd; Karachi v Workers’ Union [1978] PLC 406.

[32] International General Insurance Company of Pakistan Ltd v I.G.I Staff Union [1974] PLJ Tr. C. (Labour) 389.

[33] Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, s.o. 10-c

[34] ibid

[35] General Manager Pakistan Railways and Others V Anwar Ahmad Khan and Others, [1995] PLC 627.

[36] Zain Packing Industries Limited Karachi V Abdul Rashid and 2 others [1994] SCMR 627.

[37] Employees’ Union v Messrs R.C.D Ball Bearings Ltd [1983] PLC 317.

[38] According to Section 2 clause (vi) The Payment of Wages Act, 1936, wages means all remuneration, capable of being expressed in terms of money, which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable, whether conditionally upon the regular attendance, good work or conduct or other behavior of the person employed otherwise, to a person employed in respect of his employment or of work done in such employment, and includes any bonus or other additional remuneration of the nature aforesaid which would be so payable and any sum payable to such person by reason of the termination of his employment, but does not include- (a) the valued of any house accommodation, supply of light, water, medical attendance or other amenity, or of any service excluded by general or special order of the Provincial Government; (b) any contribution paid by the employer to any pension fund or provident fund; (c) any traveling allowance or the value of traveling concession; (d ) any such sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or (e0 any gratuity payable on discharge.

[39] Employee’ Union V Messrs New Jubilee Insurance Co. Ltd [1982] PLC 817.