The retirement age in India is 60 yrs. However, companies, both public and private, can ask their employees to voluntarily retire before their actual retirement date. This way of cutting down labour in an organisation is called VRS (Voluntary Retirement Scheme).
This article covers:
Backdrop of voluntary retirement scheme in India
The Industrial Disputes Act, 1947 prohibits companies from reducing their excess staff via direct retrenchment. In other words, employees covered under a labour union cannot be retrenched directly in India. That’s why VRS was introduced as a legal solution to address the issue.
What is VRS?
Voluntary Retirement Scheme is a way to cut down surplus staff in an organisation. Here, employees are offered an option to retire before their actual retirement date and are paid compensation for severance of their services. VRS is voluntary and so no eligible employee can be forced to opt for it. They can do it at their will and wish. Similarly, an employer has the right to accept or reject any application.
Which companies are eligible to offer a Voluntary Retirement Scheme?
VRS can be implemented by both, public- and private-sector companies.
Voluntary retirement rules
Companies and employees should mind the following voluntary retirement rules before offering and opting for the scheme:
- VRS is voluntary. Meaning, there has to be a mutual agreement between the employer and the employee stating that the latter would voluntarily terminate their services on receiving a compensation from the former
- Since the primary objective of Voluntary Retirement Scheme is to reduce the strength of employees in an organisation, the vacancy created thereby is not to be fulfilled. In other words, employees retrenched by way of VRS shouldn’t be employed in any other company belonging to the same management
- VRS is applicable to employees aged over 40 yrs or those who have served the company for 10 yrs. The scheme applies to all employees including workers and executives but not the directors of a company/co-operative society
- Public sector companies are required to take prior approval of the government before they offer Voluntary Retirement Scheme to their employees
- Companies can have different rules of VRS but they should conform to the guidelines mentioned under section 2BA of the Income Tax Rules
When can a company offer voluntary retirement scheme?
A company can offer VRS to their employees in case:
- They want to lay off excess staff
- They are fighting intense competition
- They enter into a joint venture with a foreign organisation
- There’s a recession in the economy
- They are part of a merger or a takeover
- Their technology or product has become obsolete
An employee willing to take up VRS is entitled to receive the following compensation:
- The compensation offered to employees for accepting voluntary retirement scheme shouldn’t exceed the lower of:
- A lump sum which is the lower of:
- o 3 months’ salary for each completed year of service
- o Salary at the time of retirement multiplied by the remaining months of service before the retirement date on superannuation of the employee
Note that VRS compensation is calculated based on the employees’ last drawn salary
- Provident fund (PF) and gratuity dues
- The non-monetary compensation offered to employees opting for VRS can include counselling for the future, rehabilitation facilities, medical facilities offered to retired employees, and advice on managing the compensation received under VRS
Since VRS is the most humane way of offering employees termination from their employment, it is called the Golden Handshake.”
Instances of VRS offered in the past
So far, well-established companies such as TISCO, SAIL, Bajaj Auto, Philips India, Hindustan Unilever Ltd., and Castrol have offered VRS to its employees.
What are the benefits of VRS?
- Employing just the right number of labourers has a significant bearing on a company’s profit and success. It results in cost and resource optimisation and achieves operational effectiveness and efficiency
- VRS also helps companies to fight competitors. Thanks to globalization, companies are fighting intense competition in critical fields including innovation, technical know-how, and skills. Ergo, companies look to recruit labour and management that can adapt to the latest developments and let go of the old workforce
- VRS is the most humane way to reduce staff. The employee opting for VRS is entitled to receive monetary compensation. Some companies may also offer non-monetary compensation to employees
- Although a company has to bear a heavy VRS payout initially, they save significant wage bills over time
Why do employees opt for VRS?
- Employees looking for a strategic shift in their careers may accept VRS to venture into new fields
- Sometimes employees are dissatisfied with their growth in an organization, which is why they may ask for VRS
- VRS compensation may allow some employees to meet their financial responsibilities and liabilities
- A possibility of future lay-offs in a company may trigger an employee to seek early retirement
What are the demerits of VRS?
- Efficient employees may ask for VRS, impacting the skill-base of the organisation
- VRS may add to the workload of existing employees, thus pressuring them
Although VRS is voluntary, it should only be offered after all other options are evaluated. As an employee, it is prudent to do a cost-benefit analysis of the compensation before opting for the scheme. In addition, the employee should also assess other career opportunities before handing in their paper. Watch this space to learn more about how to make the most of your VRS compensation.