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Adjustment Process and Voluntary  Retirement Schemes

Definition: Voluntary retirement scheme is a method used by companies to reduce surplus staff. This mode has come about in India as labour laws do not permit direct retrenchment of unionized employees.

Description: VRS applies to an employee who has completed 10 years of service or is above 40 years of age. ?It should apply to all employees (by whatever name called), including workers and executives of a company or of an authority or of a co-operative society, excepting directors of a company or a co-operative society.

It has to result in an overall reduction in the existing strength of employees. ?The vacancy caused by voluntary retirement is not to be filled up. The retiring employee shall not be employed in another company or concern belonging to the same management. The amount receivable on account of voluntary retirement of the employee does not exceed the amount equivalent to three months’ salary for each completed year of service, or salary at the time of retirement multiplied by the balance months of service left before the date of retirement on superannuation of the employee. It is the last salary drawn which is to form the basis for computing the amount of payment. Most large public and private sector companies have implemented VRS in recent years.

The Government of India, with liberalization, adopted a new economic policy whereby significant changes in the industry and business sectors were brought about. One of the important aspects of the liberalized economic policy was the Exit Policy. The government allowed business and industrial establishments to reduce their excess staff and employees.

The reduction of excess staff is a result of restructuring of organizations due to modernizing, applying new technology and new methods of operation, so that the industrial organizations could operate economically and withstand the competition with companies and organizations which have accepted foreign collaborations, innovative methods and technology up gradation, rendering some employees surplus.

The Government of India, with liberalization, adopted a new economic policy whereby significant changes in the industry and business sectors were brought about. One of the important aspects of the liberalized economic policy was the Exit Policy. The government allowed business and industrial establishments to reduce their excess staff and employees.

The reduction of excess staff is a result of restructuring of organizations due to modernizing, applying new technology and new methods of operation, so that the industrial organizations could operate economically and withstand the competition with companies and organizations which have accepted foreign collaborations, innovative methods and technology up gradation, rendering some employees surplus. Excess manpower caused the following problems;

  • High labour cost which increases the production cost and thus ending in high product or service costs.
  • Reduction in the competitive ability of the enterprise.
  • Reduction of employee efficiency and labour productivity.
  • Threat to technology up gradation which is essential in the competitive market.
  • Resulting in poor industrial relations and unrest amongst labour.

Since the procedure under Industrial Disputes Act 1947, for retrenching involves a lot of legal hurdles and complex procedures, the Government authorized schemes of voluntary retirement of employees after offering them suitable voluntary retirement benefits, and giving some tax relief on such payments to employees who are eligible to retire voluntarily under the guidelines issued by the Government and Income Tax authorities.

Further, Trade Unions strongly oppose retrenchment and reduction of staff and workforce giving rise to industrial relations problems. Therefore, a way had to be found by allowing employers including those in the government undertakings, to offer voluntary retirement schemes to off-load the surplus manpower without giving rise to industrial relations problems.

The voluntary retirement scheme (VRS) is a process adopted by companies for trimming the workforce employed in an industrial unit. It is a common method used to cut down excess manpower and thus improve the performance of the organisation. Often, a VRS is also known as a ‘Golden Handshake’. The government has shown its support for VRS by exempting income tax on the money received by an employee as VRS compensation based on a ceiling limit of Rs 5 lakhs, as per Section 10(10B) of the Income Tax Act. The success of a VRS depends on its ability to attract as many employees belonging to the targeted category as possible to accept the scheme, at the least cost to the organization.

In the past, VRS has been introduced in companies owing to a number of reasons, chief among which were;

  • Recessionary economy Perhaps one of the most common reasons for introducing VRS by establishments is a slow economy with little or no growth, where reduction in manpower becomes an imperative
  • Decline in sales and increase in cost In the event a business becomes unworkable or unfeasible due to decline in sales and increase in costs, VRS are introduced to cut manpower costs
  • Improving efficiency in light of the present economic circumstance, it has been seen that organizations are unable to survive or face competition in the market without improving their efficiency. Reduction of employees and wage bill are one of the measures taken to attain these objectives.
  • Due to joint-ventures with foreign collaborations etc. Joint ventures and foreign collaborations, mergers and takeovers etc. often result in reshuffling of manpower, owing to which a certain department/category of employees may not be needed by the establishment anymore. Here’s where VRS schemes are introduced to part ways with such employees making sure they’re well compensated for.
  • Due to obsolescence’s of Product/Technology When a certain technology in a Company/the Industry becomes obsolete, there is no more need for the employees who operate the machines and devices with respect to that technology and therefore are offered VR.

Procedure involved with Voluntary Retirement Schemes –

The employer issues a circular communicating his decision to offer voluntary retirement scheme – mentioning therein;

(a) Detailed reasons for downsizing

(b) Eligibility i.e. who are eligible to apply for voluntary retirement

(c) The age limit and the minimum service period of employees who can apply (Employees who is 40 and above and those who have completed minimum 10 years of service in the establishment.)1

(d) The benefits that are offered. (It should be noted that employees who offer to retire voluntarily are entitled as per law to the benefits of Provident Fund,’ Gratuity and salary for balance of privilege leave up to the date of their retirement, besides the voluntary retirement benefits.)

(e) The right of an employer to accept or reject any application for voluntary retirement.

(f) The date up to which the scheme is open and applications are received for consideration by the employer.

(g) The circular may indicate income tax incidence on any voluntary retirement benefits which are in excess of Rs. 5 lakhs, which is maximum tax free benefit under such schemes.

(h) It should also indicate that those employees who opt for voluntary retirement and accept the benefits under such scheme shall not be eligible in future for employment in the establishment.

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