Applicability & Liability to Pay Bonus

After 18th amendment in the Constitution of Pakistan, Labour Laws become provincial subject
and now every province has to develop their own set Labour Laws. Presently there are following
provisions of law in different provinces which are related to Payment of Bonus (as known as
Profitability Bonus or 10C Bonus, etc.):

 Standing Order 14 of Khyber Pakhtunkhwa Industrial and Commercial

Employment (Standing Orders) Act, 2013.
 Standing Order 13 of The Sindh Terms of Employment (Standing
Orders) Act, 2015.
 Standing Order 10-C of Industrial & Commercial Employment
(Standing Orders) Ordinance, 1968 - Punjab, Baluchistan, Islamabad,
FATA, etc. has adopted the same Standing Order, with nominal
changes.  
This provision of law is applicable to every employer (industrial or commercial
establishment):    

 working in Pakistan;
 employed 20 or more workmen, directly or through any person or
contractor, during anytime of that particular fiscal year;
 making profit;
 is liable to pay bonus to workmen who worked in that particular fiscal
year, within three months of closing of that year.

Eligibility Criteria: Every workman (either permanent, probationers, badlis, temporary,

apprentices, contract worker) who have a continuous service of 90-days, will be eligible for
payment of bonus. 

Quantum of Bonus:

 If profit is less than aggregate of one month wages of workmen, 15% of

the profit would be distributed among the eligible workmen;
 If profit is equal to or greater than aggregate of one month wages of
workmen, the amount of bonus shall not less than the amount of such
aggregate to maximum 30% of the profit, be distributed among eligible
workmen. 

Calculations 
How to calculate monthly aggregate wages. For example: total eligible workers
employed by the establishment are 50, and out of these 10-workers are drawing Rs. 15,000/- and
10-workers are drawing Rs.20,000/- and 30-workers are drawing Rs.30,000/-, average wages per
month. The aggregate wages will be (Rs. 10 x 15,000 + 10 x 20,000 + 30 x 30,000
= 1,250,000/- per month. 

How to calculate Bonus amount for each workman

 If employer’s profit (e.g. Rs.1,000,000) is lower than the monthly

aggregate wages of workmen; 15% of profit i.e. Rs.150,000/- (which
is 12% of monthly aggregate wages) will be distributed among workers
as a bonus. So, the bonus amount will be equal to 12% of monthly
average wage of every eligible workman. 
 If employer’s profit (e.g. 1,250,000/-) is equal to the monthly
aggregate wages of workmen; 30% of profit i.e. Rs.375,000/- (which
is 30% of monthly aggregate wages) will be distributed among workers
as a bonus. So, the bonus amount will be equal to 30% of monthly
wage of every eligible workman.
 If employer’s profit (e.g. 9,000,000/-) is greater than the monthly
aggregate wages of workmen; 30% of profit i.e.
Rs.2,700,000/- (which is more than 100% of monthly aggregate wages)
in this case one monthly average wage will be paid to every eligible
workman.

 Relevant Definitions 

 Workman: means any person employed in any establishment

(industrial or commercial, etc.) to do any skilled or unskilled, manual
or clerical work for hire or reward. (Ref: Clause 2(i) of W.P Industrial
& Commercial Employment (Standing Orders) Ordinance, 1968.
 Profit means “Net Profit”, as defined in Section 87C of the Companies
Act.
 Wages – all the payments or allowance, which are regular & permanent
in nature, will be treated as monthly wages. (Ref. Payment of Wages
Act, 1936) 

Frequently Ask Questions 

Who is a "workman" under the law? Any person employed in any establishment
(industrial or commercial, etc.) to do any skilled or unskilled, manual or clerical work for hire or
reward. Not having any kind of authority to recommend or approve the leave application or
overtime or shifts or duties or hiring or fire, etc.

Are only on-job workers entitled to get bonus or resigned workers are
also entitled?Every worker who did a continuous service of 90-days, in that particular fiscal
year in which company earned profit, either he is on service or separated from service due to any
reason, is entitled to get the bonus amount. 

Is a seasonal worker entitled to get bonus? Yes, every worker who did a

continuous service of 90-days is entitled for this bonus, regardless of their type or classification
of workman. 

What is the meaning of customary bonus? This is totally depend upon the wish and
will of the employer, it’s not binding by any law. For example there are a lot of organizations
who distribute a bonus amount to at every eid regardless of their profitability or loss. Such kind
of bonus are considered as customary bonus which are based on traditions instead of profitability
or loss.

Is employer bound to pay bonus every year? Provision of payment of bonus

become applicable in case of profit only, if there is no profit then there is no bonus at all.

Is management staff also entitled to get his bonus amount? This bonus is only
for worker cadre employees. Actually, nature of job, level of authority or supervision define that
either the employee is a worker or employer/management cadre employee, not his job title or
salary is determining factor.
Gratuity is a one of the retirement benefits for long service. Before May 1972, the payment
of gratuity by employer was on voluntary basis, after that it was incorporated in Standing Orders
and becomes a statutory obligation of employers. Since then payment of gratuity is a legal
benefit of eligible worker.

There are three different retirement benefits defined in Standing Order 12(6) i.e. “Gratuity” or
“Provident Fund” or “Approved Pension Fund”. The commercial establishment employed 20 or
more workmen OR any industrial establishment employed 49 or more workmen, directly or
indirectly, during any days of preceding 12-months, are legally liable to offer at least any one of
these retirement benefit.

S.O 12(6) of W.P. Industrial & Commercial (Standing Orders) Ordinance, 1968 defines, “where
a workman resigns from service or services are terminated by the employer, for any reason other
than misconduct, shall be entitled for gratuity equivalent to thirty (30) days wages, calculated on
the basis of the (wages admissible to him in the last month of service if he is a fixed-rated
workman or the highest pay drawn by him during the last twelve months if he is a piece-rated
workman), for every completed year of service or any part thereof in excess of six months:
provided that, where the employer has established a provident fund to which the workman is a
contributor and the contribution of the employer to which is not less than the contribution made
by the workman, no such gratuity shall be payable for the period during which such provident
fund has been in existence. Provided further that if through collective bargaining the employer
offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance,
2001, and where the contribution of the employer is not less than fifty per cent of the limit
prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the
remaining fifty per cent or less, no gratuity shall be payable for the period during which such
contributions has been made.]”

Which Establishment is Liable to Pay Gratuity?

As per Section 1 of the Ordinance, the provision of gratuity becomes applicable to: every
commercial establishment employing or employed twenty or more workmen and every industrial
establishment employing or employed fifty or more workmen, on any day during the preceding
twelve month.

When Gratuity becomes payable?

Gratuity becomes payable at time of separation from services which could be: (i) by resignation
by the workman, (ii) termination of services by employer due any reason other than misconduct
(in case of proved misconduct employer is not bound to pay gratuity), (iii) in case of death and
(iv) retirement or superannuation of a worker.

Who is entitled for Gratuity?

There are following conditions to check the entitlement of gratuity:
(i) provision of statutory gratuity is applicable on the establishment i.e. industrial or commercial,
in respect to number of workmen employed, as explained above.

(ii) employee is a "workman" as defined in Section 2(i) of this Ordinance as someone who is
employed to do any skilled or unskilled, manual or clerical work. According to various Courts
judgments, it is the nature of duties he is performing rather than his designation or wages
which determine whether he is a "workman" or not.

(iii) length of service should be excess to six months or more.

Rate of Gratuity
Earlier the rate of gratuity was 15-days of wages for each completed year of service and later on
it was revised as 20-days wages. Right now the present rate of gratuity is 30-days wages for
every completed year of service or for any period in excess of six month in the same
establishment.

How to calculate the amount of Gratuity payable?

Following is procedure to calculate the payable gratuity of an eligible worker:

1. Calculate per day wage rate based on 26-days in a month, by dividing

monthly wages by 26-days;
2. Rate per day is multiplied by rate of gratuity which is 30 days wages
(i.e. per day wage x 30); and
3. Finally calculate payable amount of gratuity for the entire service
period, the formula is per day wage x 30 (rate of gratuity) x No. of
service years
Six-month rule is followed to decide whether to pay gratuity for the last year of service
depending upon whether the service is more or less than six months. For service of more than six
months, gratuity is payable otherwise not.

The 26-days month is defined in the Explanation of Section 3 of the Minimum Wages for
Unskilled Workers Ordinance, 1969 i.e. "month" means a normal working period of twenty-six
days calculated at the rate of forty-eight hours of work per week. Similarly the minimum wages
for skilled and semi-skilled workers is also based on 26 days in a month. The yearly provincial
gazettes specify the same for these categories of workers.

Meaning of Wages for Calculation of Gratuity

All payments or allowances which are regular, permanent and non-contingent in nature, no
matter by what name they are called, are included in wages for the purpose of gratuity. Any
payments which are irregular (unpredictable and/or depend on the goodwill of employer)
or contingent in nature (payable upon existence or disappearance of certain conditions (e.g.,
profit) which could not be predicted in advance) then those payments are not part of wages for
the purpose of calculating gratuity.

In the case of fixed-rated worker, gratuity is to be calculated on the basis of wages admissible to
worker in the last month of service.

In the case of piece-rated worker, gratuity is to be calculated on the basis of highest pay drawn
during the last twelve months, for every completed year of service or any part thereof in excess
of six months.

Payment of Gratuity in case of Death of Worker

In case of death of a workman, gratuity is payable to the legal dependents of a workman. As
mentioned above, death may not necessarily occur on duty but the worker should be in
continuous service at that time. The amount of gratuity, in this case, is transferred to "Workmen
Compensation Commissioner" who will then allocate this amount to the dependents of a worker.
The dependents of a deceased worker include "his widowed mother, his own widow, minor son
and unmarried daughter". The Commissioner shall proceed with the allocation of the deposit
amount to the dependents of the deceased in accordance with the provisions of Section 8 of the
Workmen’s Compensation Act, 1923. If the employer fails to deposit the gratuity amount then
the dependents of the deceased may submit an application to Commissioner for the recovery.

Important points to be remembered regarding payment of gratuity:

 Gratuity has no connection with loss or profit or the financial position

of an employer; it has to be paid to eligible worker.
 Completed year of service means a period of 12-months service
counted from the date of first appointment in the same establishment. It
does mean calendar year, financial year or any other period.
 The period of service which is 6-months or less, will not be considered
for payment of gratuity.
 Retirement on attaining the age of superannuation is treated as
termination of service by employer and voluntary retirement is
considered resignation by worker.
 Legally employer is bound to offer only one retirement benefit out of
three. However, employer at its sole discretion may also offer provident
fund or worker unions have to right to negotiate and get more benefits
simultaneously.