Voluntary retirement scheme

Concept/meaning of Voluntary Retirement Scheme/Golden Handshake

Modern management in the public as well as private sectors adopted the various labour adjustment strategies which takes the form of Voluntary Retirement Scheme [VRS] or the Golden Handshake or the Diamond Handshake.

Voluntary retirement schemes are programs offered by employers to provide retirement benefits to long term employees before the employees projected retirement date.

In the present global scenario, right sizing of the manpower employed in an organization has become an important management strategy in order to meet the increased competition.

The voluntary retirement scheme [VRS] is the most humane technique to provide overall reduction in the existing strength of the employees. It is a technique used by companies for trimming the workforce employed in the industrial unit.

It is now commonly used to dispense off the excess manpower and thus improve the performance of the organization.

It is a generous, tax-free severance payment to persuade the employees to voluntarily retire from the company.

It is also known as the “Golden Handshake” as it is the golden route to retrenchment.

In India the Industrial Disputes Act, 1947, puts restrictions on the employers in the matter of reducing staff by retrenchment, by closure of establishment. The retrenchment process involves a lot of legalities and complex procedures as labour laws do not permit direct retrenchment of unionized employees. Also, any plans of retrenchment and reduction of staff and workforce are subjected to strong opposition by trade unions. Hence VRS was introduced as an alternative legal solution to solve this problem.

VRS allows the employers including those in government undertakings, to offer voluntary retirement schemes to off-load surplus manpower and no pressure is put on any employee to exit.

The voluntary retirement schemes were also not subjected to vehement opposition by the unions as it was voluntary and involved no compulsion.

It was introduced in both public and private sectors. Public sector undertakings, however, have to obtain prior approval of the government before offering and implementing the VRS.

VRS offers

Most VRS programs offer lucrative terms to employees who choose early retirement, such as full benefits package and a lump sum payment.

Some companies offer very attractive packages of benefit to the employees who opt for VRS scheme may also include counseling to employees about their future; managing of funds received under the scheme, offering rehabilitation facilities to them.

The recent finalisation of the Golden Handshake Scheme for the public sector undertakings will involve a cost of Rs 700 crores. The scheme envisages rationalistion of about 4.5 lakh employees – about a fifth of 23 lakh employees in the 246 central public sector undertakings declared surplus.

The workers and executives who have completed 40 years of their age or completed 10 years of service are included in this scheme.

Under the scheme, terminal benefits which includes 45 days of employments for each completed year of service or the monthly emoluments at the time of retirement multiplied by the remaining month, if service before the normal date of retirement, whichever is less.

The “National Renewal Fund” was established by the government with an initial corpus of Rs 2500 crores to provide a “social safety net” to workers which were affected by the consequences of technical upgradation and modernization of industrial units. The fund is applicable both for public and private sectors. It is of a non-statutory nature and receives contributions from the Central Government, State Government, Financial Institutions, Insurance Companies, Industrial Undertakings etc.

The Voluntary Retirement Scheme [VRS] as well as “the National Renewal Fund” are devised in order to make the process of retrenchment easier for industries and less painful for workers. Even if “The National Renewal Fund” is created to provide a safety net to workers, he fund is so small that the contemplated rate of 1.5 lakh per retrenched worker, will cover the compensation claims of only 3% to 4% of the total number of employees in the 58 sick units.

The Voluntary Retirement Scheme [VRS] contributes effectively the process of pushing the entire job market towards the unorganized sector.

The workers who have accepted the Voluntary Retirement Scheme [VRS] voluntarily or under compulsion as the case may be lose the job security, better safety, health conditions and a good pay packet and are forced to take up a new job on a contract basis. Due to this reason, union leaders are highly critical about the VRS.

Eligibility to opt for VRS or Targeted employees

Though the eligibility criteria for VRS varies from company to company, but usually

Employees of middle age, those closer to actual retirement and who have completed 10 years of service or is above 40 years of age are eligible for voluntary retirement.

The scheme applies to all employees including the workers and executives, except the directors of the company.

The employee who opts for voluntary retirement is entitled to get 45 days emoluments for each completed year of service or monthly emoluments at the time of retirement multiplied by the remaining months of service before the normal date of retirement, whichever is less.

Along with these benefits the employee gets provident fund and gratuity dues.

Compensation received at the time of voluntary retirement is exempt from tax under section 10 (10C) of the Income Tax Act of 1961upto a prescribed amount upon fulfilling certain stipulated conditions.

However, the retiring employee should not be employed in another company or concern belonging to the same management.

The companies can frame different schemes of voluntary retirement for different classes of their employees. However these schemes have to conform to the guidelines prescribed in rule 2BA of the Income Tax Rules. The guidelines for the purpose of section (10C) of the Income Tax Act have been laid down in the rule 2BA of the Income Tax Rules.

The guidelines provide that the scheme of voluntary retirement framed by a company should be in accordance with the following requirements ie

1] It applies to the employee of the company who has completed ten years of service or completed 40 years of age.

2] It applies to the employees (by whatever name called) including workers and executives of the companies excepting Directors of the company.

3] The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company.

4] Neither the vacancy caused by the voluntary retirement is not to be filled up, nor is the retiring employee to be employed in another company or concern belonging to the same management.

5] The amount receivable on account of voluntary retirement of the employees does not exceed the amount equivalent to one and a half months salary for each completed year of service or monthly emoluments at the time of retirement multiplied by the balance months of service left before his date of retirement on superannuation. In any case, the amount should not exceed Rs 5 lakhs in case of each employee.

It is the last salary drawn which is to form the basis for computing the amount of payment.

6] the employee has not availed in the past the benefit of any other voluntary retirement scheme.

The adoption or the implementation of the VRS by the management led to the following consequences viz

a] Expansion of unorganized sector.

b] Increase of income inequality.

c] More social tensions and unrest.

According to union leaders, most of the companies implement VRS forcefully instead of voluntarily. Employees are forced to leave. It is not the golden shake hand as the name suggests but literally a “kick in the back”.

The following given are the few categories of workers, those which can be easily persuaded to leave by the management.

a] Workers with a bad record or debt.

b] Workers who had taken loans and those who have stood sureties to the worker who had taken a loan.

Many workers opt for VRS due to the following causes

a] A worker may decide to start his own business.

b] When the children are grown up well, the worker migt feel like leaving the job.

c] Physically/mentally unable to work.

d] Death.

Management introduces VRS due to the following reasons or the causes of introducing VRS or Purpose of VRS

Businesses and organizations often offer voluntary retirement schemes as

1] To reduce excessive work force. To downsize the number of employees on payroll to adapt to changing business environment.

2] To reduce the administrative costs and maintain it as low as possible.

To reduce or avoid an increase in long term costs.

3] To make the best possible use of limited resources.

4] To reduce the expenditures and raise the profitability level of the concern/organization.

5] VRS plans to reduce layoffs and to get rid of inefficient work force and retain only the good ones.

6] Due to recession in the business.

7] Due to intense competition, the establishment becomes unviable unless downsizing is resorted to.

8] Due to joint venture with foreign collaborations.

9] Due to takeovers and mergers.

10] Due to obsolesce of product technology.

A company may make the following announcements while implementing a voluntary retirement scheme.

1] The reason behind downsizing the organization.

2] The eligibility criteria for voluntary retirement scheme.

3] The age limit and the minimum service period of employees who can apply for the scheme

4] The benefits that are offered to the employees who offer to retire voluntarily.

5] The rights of the employers who can accept or reject any application for voluntary retirement.

6] The date upto which the scheme is open.

7] the income tax benefits and the income tax incidence related to the scheme.

8] It should also indicate the employees who opt for voluntary retirement and accept the benefits under such scheme shall not be eligible in future for employment in the organisaton.

Before introducing VRS employers should consider

1] Voluntary retirement schemes have been legally found to be giving no problem to employers, employees and their unions.

2] The retrenchment plans of any organization must be compatible to its strategic plans.

3] Its procedure and reasons for introduction must be discussed with all management staff and including top management.

4] One needs to identify department or employees to whom VRS is applicable and thereby formulate its terms and conditions and also state the benefits that would be available to those who took VRS. Such information should be made available to every employee of the organization,

5] Employees should be informed about the period during which the scheme will be open.

6] Also existing employees might face insecurity because of fear of losing their jobs too. Thus it is the responsibility of the employer to motivate them and remove their apprehensions and fears.

Before opting for VRS employees should consider or considerations

1] The financial implications of accepting a VRS.

2] They remain liable for taxes on lump sum payments and early retirement can also strain any existing retirement plans.

3] Their finances with care to determine if the existing retirement finances can support early retirement.

VRS may not be right for every individual because the retiree will have to live on a fixed income.

Circumstances to be considered are  – needs of the household’s dependents [college expenses etc], mortgage payments and other expenses.

If the VRS is not accepted, on the other hand, the employee might be laid off and receive few or no benefits.

Only the employees who are on the verge of retirement and employees with considerable experience, a marketable skill and the capacity to secure another job opt for VRS. Other employees are left in the society to face the bad face of VRS.

Advantages of VRS

1] Voluntary retirement schemes [VRS] offer employees an incentive to commit to employment with their employer for a significant number of years.

2] Voluntary retirement programs can also provide employees with an option to retire before the minimum age of a government pension scheme.

3] It is offered to certain employees as an incentive to retire. It usually contains generous benefits.

4] It is typically targeted at employees in the middle age and/or those who have been with the company for a considerable amount of time.

Disadvantages of VRS

One of the possible drawbacks of the VRS is that the efficient employees would leave the company while the inefficient may stay back.

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