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.
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 is also known as ‘Golden Handshake’ as it is the golden route to retrenchment. Downsizing of the work force generally implemented through VRS in India, and the Industrial Disputes Act, 1947 puts restrictions on employers in the matter of reducing excess staff by retrenchment, by closures of establishment and the retrenchment process involved lot of legalities and complex procedures. 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. It allowed employers including those in the government undertakings, to offer voluntary retirement schemes to off-load the surplus manpower and no pressure is put on any employee to exit.
The voluntary retirement schemes were also not subjected to not vehement opposition by the Unions, because the very nature of its being voluntary and not using any compulsion. It was introduced in both the public and private sectors. Public sector undertakings, however, have to obtain prior approval of the government before offering and implementing the VRS.
VRS is different from downsizing because here employee are asked to retire voluntarily and are not laid off by force. Secondly, in VRS employees are given attractive severance package whereas in downsizing they are not given any monetary or non-monetary benefits.
VRS refers to a scheme of an option given by the organization to its employees to retire before superannuation (i.e., before the actual date of retirement) in exchange for additional severance payment and benefits.
VRS is based on mutual agreement between the employer and employees, under which an employee agrees to voluntarily separate from the organization on payment of agreed compensation by the employer. VRS is also known as ‘early retirement buyout’ (because the organization buys the retirement of an employee before superannuation by paying for it) and ‘golden handshake’ (because both the employer and the employee happily bid a final goodbye to each other).
Voluntary Retirement Scheme (VRS) Nature
VRS applies to an employee who has completed 10 years of service or is above 40 years of age. It applies to all employees, 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.
Voluntary Retirement Scheme (VRS) Reasons for Offering VRS by Employers and by Employee
Though the eligibility criteria for VRS varies from company to company, but usually, employees who have attained 40 years of age or completed 10 years of service are eligible for voluntary retirement. The scheme applies to all employees including workers and executives, except the directors of a company.
The employee who opts for voluntary retirement is entitled to get forty five 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 service, whichever is less. Along with these benefits, the employees also get their 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, 1961.
- Reasons for Offering VRS by Employers
(a) Recession in the economy forces the organization to opt for VRS in order to survive.
(b) Globalization has brought intense competition in terms of innovation, knowledge of manpower, knowledge of technological and management systems. Every organization wants to recruit fresh management and techno-workers who can adapt to the latest developments easily. Thus, the old workforce is asked to retire.
(c) Intense competition has led to mergers and takeovers in the economy. Every organization wants to merge or amalgamate to others to become more powerful and sustainable. These ventures keep lean structure and want to be more cost competitive. They show doors to many old workers.
(d) At times, a constant decline in the productivity compels the organization to get rid of the inefficient staff which is causing it.
- Reasons for Offering VRS by Employee
(a) Employees may want a strategic shift in their careers at any time in life. When they want to go in for new career, they may ask for VRS.
(b) Some employees can sense the threat of retrenchment coming in their organization very soon. In order to look for better opportunities, they may opt for VRS.
(c) At times, employees are not satisfied with their growth and advancement in the organization. This triggers off their need to ask for VRS.
(d) On account of bad health, some employees find it difficult to keep up with their responsibilities. They find it very fair to resign and live a comfortable retired life.
(e) Very ambitious employees opt for VRS to start with their own enterprises e.g. Computer Engineers generally take up their own ventures after VRS.
(f) Monetary benefits of VRS allow you to meet your family responsibilities easily, e.g. construction of house, settling dependents etc. Many employees take VRS and meet their liabilities and join other organizations in the evening of their careers.
Employees’ Reasons for Accepting VRS
(i) Employee’s personal financial position: Since a hefty compensation is paid upfront by the employer, the employee feels tempted to seek early retirement. The compensation amount so received can be utilized by the employee for meeting family members’ needs, say, to set up business, and so forth.
(ii) Employee’s physical health: Failing health condition may compel an employee to opt for VRS and utilize the compensation amount on health improvement and leading a healthy life thereafter.
(iii) Extent of job satisfaction: No or low level of work satisfaction is a potent driving factor for employees to quit their jobs and take advantage of VRS.
(iv) Possibility of future lay-offs: Employees anticipating complete or partial downturn in company’s business may think it wise to seek early retirement with immediate financial gain under VRS.
(v) Inability to meet work responsibilities: If an employee finds himself inadequate to perform the duties and meet the demands of his current job, he may decide to leave the organization and take advantage of VRS.
(vi) Better alternative job opportunities: An employee having a better alternative employment opportunity may find the time opportune to quit the present job and enter into the alternative field of work.