Sections 37 and 38 of the Code on Wages, 2019: Adjustment and Deduction from Bonus
Sections 37 and 38 of the Code on Wages, 2019 deal with two distinct situations affecting the amount of bonus ultimately payable to an employee. Section 37 permits adjustment of certain customary or advance bonus payments against the statutory bonus payable for the same accounting year. Section 38 permits deduction from bonus where an employee is found guilty of misconduct causing financial loss to the employer.
Section 37: Adjustment of Customary or Interim Bonus
Section 37 is titled "Adjustment of customary or interim bonus against bonus payable under this Code." It addresses cases where an employer has already paid a customary bonus or part of the statutory bonus before the bonus under the Code becomes payable.
37. Where in any accounting year,-
(a) an employer has paid any puja bonus or other customary bonus to employee; or
(b) an employer has paid a part of the bonus payable under this Code to an employee before the date on which such bonus becomes payable,
then, the employer shall be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employee under this Code in respect of that accounting year and the employee shall be entitled to receive only the balance.
Meaning and effect of Section 37
Section 37 prevents duplication of bonus payments for the same accounting year. Where an amount qualifying under the section has already been paid, the employer may adjust that amount against the bonus subsequently payable under the Code.
The provision covers two principal situations:
- Customary bonus: an amount already paid as puja bonus or another customary bonus.
- Interim or advance statutory bonus: part of the bonus payable under the Code paid before the date on which the full bonus becomes payable.
What is an accounting year?
Section 2(a) of the Code defines "accounting year" as the year commencing on the first day of April. Section 37 expressly links the adjustment to the bonus payable in respect of the relevant accounting year.
Example of adjustment under Section 37
If an employee is entitled to a bonus of Rs. 20,000 for an accounting year and the employer has already paid Rs. 5,000 as a customary puja bonus falling within Section 37, the amount already paid may be adjusted and the employee would receive the balance of Rs. 15,000, subject to the requirements of the Code.
Section 38: Deduction of Certain Amounts from Bonus Payable
Section 38 deals with financial loss caused to an employer by an employee's misconduct and specifies when that loss may be deducted from the employee's bonus.
38. Where in any accounting year, an employee is found guilty of misconduct causing financial loss to the employer, then, it shall be lawful for the employer to deduct the amount of loss from the amount of bonus payable by him to the employee under this Code in respect of that accounting year only and the employee shall be entitled to receive the balance, if any.
Conditions for deduction under Section 38
The statutory language makes the deduction dependent upon specified conditions. The employee must be found guilty of misconduct; that misconduct must have caused financial loss to the employer; and the deduction is linked to the bonus payable for the accounting year concerned.
- There must be misconduct attributable to the employee.
- The employee must be found guilty of that misconduct.
- The misconduct must cause financial loss to the employer.
- The deduction is limited to the amount of the financial loss.
- The deduction is from bonus payable for that accounting year only.
- The employee remains entitled to the balance of bonus, if any.
Difference Between Sections 37 and 38
| Point | Section 37 | Section 38 |
|---|---|---|
| Subject | Adjustment of bonus already paid | Deduction for financial loss caused by misconduct |
| Trigger | Customary bonus or part of statutory bonus has already been paid | Employee is found guilty of misconduct causing financial loss |
| Purpose | Avoids duplication of bonus payment | Allows specified financial loss to be deducted from bonus |
| Amount | Amount of qualifying bonus already paid | Amount of financial loss |
| Employee's entitlement | Balance of bonus after adjustment | Balance of bonus, if any, after deduction |
Practical Significance
Sections 37 and 38 serve different purposes and should not be treated as interchangeable. Section 37 concerns an amount that has already been paid as bonus and permits its adjustment against the statutory liability for the same accounting year. Section 38 concerns financial loss resulting from misconduct and permits a deduction subject to the conditions stated in that section.
For calculation of bonus, these provisions should be read together with the other bonus provisions in Chapter IV of the Code, including the provisions dealing with eligibility, minimum and maximum bonus, allocable surplus, available surplus, set-on and set-off, and the time limit for payment.
Official Legal Resources
For authoritative statutory text and subsequent notifications, readers should verify the current law through the official Government sources, particularly India Code and the Ministry of Labour and Employment.