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Introduction
The present labour laws in India preclude employers from terminating the services of the staff based on
their business needs. In accordance with section 25(O) of industrial Disputes Act, 1947, employers are
required to take prior permission of the appropriate government for closure/retrenchment where the
number of workers is over one hundred. Such permission is not often granted in India due to sociopolitical issues. Companies have often struggled to reduce unwanted manpower in an efficient and ethical
manner. Unions have opposed the efforts of the companies to reduce headcount for their own reasons. The
companies have resorted to various pressure tactics to compel the employees to look for employment
elsewhere.
However, all these measures result in loss of goodwill and good relations between the employer and the
employee. A win-win method of headcount reduction is a VRS scheme. The employer is able to reduce
the numbers by incurring an additional cost. The benefits are many. The employer is assured of no
industrial dispute post separation of the employees. Happy ex-employee and their families are able to
make ends meet and the retiring employee gets the benefit of tax as per income tax laws. However, I will
mention a word of caution here. The organizations need to take a long-term view of VRS to derive
strategic benefit from the initiative. Also the companies which helped the ex-employees to invest VRS
money in a gainful manner were more successful.
What is VRS?
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 a convenient method of retrenchment of
workmen.
It has to result in an overall reduction in the existing strength of employees? The vacancy created by
voluntary retirement is not to be filled up. The retiring employee shall also not be employed in another
company or concern belonging to the same management. It is the last salary drawn which forms the basis
for computing the payment to be made towards final settlement.
Legal provisions
Industrial Disputes Act 1947 does not have any section providing the method of granting VRS. However,
there is no prohibition on granting VRS to the employees under the Act. The income Tax laws provide
conditions /benefits as enumerated below:
As per Section 10(10C) of IT Act 1962 and Rule 2BA of IT Rules, any compensation received upon
voluntary retirement or separation is exempt from tax when the following conditions are fulfilled:
Exemption when allowed for an assessment year will not be allowed for any other assessment
year.
The recipient must have completed 10 years of service or 40 years of age (not applicable to
employees of a PSU) therefore an employee below 40 years age or with less than 10 years
service in the company will not able to satisfy this condition and therefore no exemption in
company.
The vacancy caused by voluntary retirement or separation is not filled up, and the retiring
employee must not be employed in another company or concern belonging to the same
management.
The amount receivable should not exceed 3 months salary for each completed year of service OR
monthly salary at the time of retirement multiplied by balance months of service left before the
date of his retirement.
The basic purpose of VRS to improve the efficiency of the organisation. Reduction of employees and
wage bill is one of the measures taken to attain efficiency. Companies often offer VRS because of the
following reasons mentioned below1. Business has become unviable due to decline in sales and changes in the external business
environment.
2. Increase in cost or change in technology.
3. Some others intend to reduce overhead costs and increase their profitability.
4. To infuse the fresh blood in the organisation with an intention of organisation restructuring
and to gain competitive advantage.
Financial Implications
Each organization has its own parameters about the cost to be incurred on VRS. Some view it as number
of times cost of the retiring employee. Some others compute the saving due to reduction in cost of
infrastructure being used by the employee. Generally speaking, it is cost which is planned to be recovered
during a period is taken as a benchmark. Many experts feel that 25-35 times monthly cost of the employee
is a reasonable figure. It will however, depend upon the type of industry, redundancy factor and
opportunity cost.
The first step towards financial analysis would be to make simulation tables for each employee with payouts based on different calculations. Care should be taken to remain aware of the limits laid down in IT
rule 2BA as well the budgets sanctioned by the top management. The employees who have availed of
such VRS compensation in the past are not eligible for the tax exemption.
SAIL (Steel Authority of India) for the first time posted a net loss of Rs 1,574 crore in 1998-99 .The
major reasons were lower steel demand, prices of steel and excess workforce. SAIL decided to prune its
workforce by 70,000 in next five years with separation of 10,000 employees in each year. Out of which
5975 left in year 1998, 213,670 people left in 1999, 6510 in year 2001. 3The next scheme was implemented
in year 2002, where it was targeted to reduce the head count to 1 lakh by year 2006-07.
VRS was made lucrative by allowing VRS seeking employees to take way its gratuity, provident fund and
other statutory dues at one go than the earlier practices of deferred payments through multiple
installments. The workers got additional financial benefits that accepted the scheme till the age of
superannuation.
The outcome of the scheme was that company got rid of excess manpower from 4170000 to 1 lakh, which
was essential for its existence. It helped to remove the employees with chronic ailments, habitual
absentees and poor performers, who add low to productivity. The company was able to restore its
financial foundation, by reinforcing marketing initiatives and regained its cost leadership. The company
was not only successful in overall restructuring of the entire organisation but was also able to increase its
productivity.
Similarly, 5Tata Steel Ltds introduced Sunhere Bhavishya ki Yojana scheme, equivalent to a VRS in
June, 2015 in the backdrop of poor market conditions, technological upgrades and cost cutting. It was part
of an attempt by a company to lower its employee cost from 12-15% of production cost to less than
10%.The scheme was accepted by its 780 employees.
It was attractive for the employees as they can retire while continuing to draw their basic salary and other
benefits, depending on their age. The others benefits included job-for-job scheme, where employees can
nominate their ward to take up employment at the time of their separation, escalation of pension every
year with provision of HRA,6medical facilities and switchover to job if person wants. The scheme also
helped company in replacing higher-salaried employees with less-paid ones.
1 http://www.financialexpress.com/article/industry/companies/sail-to-soon-launch-rs400-crore-vrs/182777
2
http://www.thehindubusinessline.com/2002/01/19/stories/2002011902040300.html
3 http://articles.economictimes.indiatimes.com/2002-12-06/news/27363834_1_vrsexpenses-staff-strength-long-term-wage-agreement
4 http://expressindia.indianexpress.com/fe/daily/19990611/fco11013p.html
5 http://www.livemint.com/Industry/NHrV3n3kg3wgiW16FjnX2N/780-accept-VRS-atTata-Steel-as-firm-tries-to-lower-employee.html
6 http://www.livemint.com/Companies/21EDjUtL1tc7M2zjK0eVaO/Tata-Steelsweetens-employee-separation-plan-number-of-reti.html