VRS as a HR Tool

7/25/2019 VRS as a HR Tool

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VRS as a HR Tool

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 ct! "#$%! employers arere&uired to ta'e prior permission of the appropriate government for closureretrenchment where the

number of wor'ers is over one hundred. uch permission is not often granted in India due to socio*

political issues. +ompanies have often struggled to reduce unwanted manpower in an efficient and ethical

manner. ,nions 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 loo' for employment

elsewhere.

-owever! all these measures result in loss of goodwill and good relations between the employer and the

employee. win*win method of headcount reduction is a / 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. -appy e0*employee and their families are able toma'e ends meet and the retiring employee gets the benefit of ta0 as per income ta0 laws. -owever! I will

mention a word of caution here. The organi1ations need to ta'e a long*term view of / to derive

strategic benefit from the initiative. lso the companies which helped the e0*employees to invest /

money in a gainful manner were more successful.

What is VRS?

Definition: Voluntary retirement schemeis 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

wor'men.

It has to result in an overall reduction in the e0isting strength of employees The vacancy created byvoluntary 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 ct "#$% does not have any section providing the method of granting /. -owever!

there is no prohibition on granting / to the employees under the ct. The income Ta0 laws provide

conditions benefits as enumerated below3

s per ection "4("4+) of IT ct "#2 and /ule 26 of IT /ules! any compensation received uponvoluntary retirement or separation is e0empt from ta0 when the following conditions are fulfilled3

+ompensation received is towards voluntary retirement or separation

7a0imum e0emption in income ta0 is restricted to /s 5! 44!444.

80emption when allowed for an assessment year will not be allowed for any other assessment

year.


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The recipient must have completed "4 years of service or $4 years of age (not applicable to

employees of a 9,) : therefore an employee below $4 years age or with less than "4 years

service in the company will not able to satisfy this condition and therefore no e0emption in

income ta0 will be available to such an employee.

The scheme is applied to all employees! including wor'ers ; e0ecutives of a concern e0cludingdirectors of a company or a co*operative society.

The scheme shall result in overall reduction of the e0isting strength of the employees of the

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 e0ceed < month=s salary for each completed year of service O/

monthly salary at the time of retirement multiplied by balance months of service left before the

date of his retirement.

The basic purpose of / to improve the efficiency of the organisation. /eduction of employees and

wage bill is one of the measures ta'en to attain efficiency. +ompanies often offer / because of the

following reasons mentioned below*

1. 6usiness has become unviable due to decline in sales and changes in the e0ternal business

environment.

. Increase in cost or change in technology.

!. ome others intend to reduce overhead costs and increase their profitability.

". To infuse the fresh blood in the organisation with an intention of organisation restructuring

and to gain competitive advantage.

#inancial I$plications

8ach organi1ation has its own parameters about the cost to be incurred on /. ome view it as number

of times cost of the retiring employee. ome others compute the saving due to reduction in cost of

infrastructure being used by the employee. >enerally spea'ing! it is cost which is planned to be recovered

during a period is ta'en as a benchmar'. 7any e0perts feel that 25*


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%rocess of VRS Sche$es

+ommunication3 ?irst and most important step is to communicate the need for / to the

employeesunions in routine meetings in which 7anaging Director e0plains the deteriorating condition of

the organi1ation with the help of factual data on hand. Other senior managers also communicate with

employees on similar lines e0plaining the financial health of the organi1ation and the need for manpower

reduction. imilar communication is also shared with union leaders! government authorities! and

wor'ers families ma'ing them feel that there was no option other than /. ometimes an e0ternal

consultant is also hired to give authenticity to the opinion of the management. 8mployees who may be

willing to accept / also develop plans for their activities for their post*retirement life. ome

companies also provide for limited period health insurance and housing facility for voluntarily retired

employees. This will help ease the obstacles in implementation of the / and to get the cooperation of

the employeesunions.

8ligibility for /3 There can be two main criteria! i.e.! the tenure in the organi1ation and age. The

minimum age criteria can vary from


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#e& Instances of VRS in Indian Industries

1IC(teel uthority of India) for the first time posted a net loss of /s "!5%$ crore in "##*## .The

ma@or reasons were lower steel demand! prices of steel and e0cess wor'force. IC decided to prune its

wor'force by %4!444 in ne0t five years with separation of "4!444 employees in each year. Out of which

5#%5 left in year "##! 2"

superannuation.

The outcome of the scheme was that company got rid of e0cess manpower from $"%4444 to " la'h! which

was essential for its e0istence. 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 mar'eting 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.

imilarly! 5Tata teel Ctd=s introduced Eunhere 6havishya 'i Bo@anaF scheme! e&uivalent to a / in

Gune! 24"5 in the bac'drop of poor mar'et conditions! technological upgrades and cost cutting. It was part

of an attempt by a company to lower its employee cost from "2*"5H of production cost to less than

"4H.The scheme was accepted by its %4 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 @ob*for*@ob scheme! where employees can

nominate their ward to ta'e up employment at the time of their separation! escalation of pension every

year with provision of -/!medical facilities and switchover to @ob if person wants. The scheme also

helped company in replacing higher*salaried employees with less*paid ones.

1 http://www.fnancialexpress.com/article/industry/companies/sail-to-soon-launch-rs-

400-crore-vrs/182

2

http://www.thehindu!usinessline.com/2002/01/1"/stories/2002011"02040#00.html

# http://articles.economictimes.indiatimes.com/2002-12-0$/news/2#$#8#4%1%vrs-

expenses-sta&-stren'th-lon'-term-wa'e-a'reement

4 http://expressindia.indianexpress.com/e/daily/1"""0$11/co1101#p.html

) http://www.livemint.com/*ndustry/+,r#n#'#w'i1$n2+/80-accept-3-at-

5ata-teel-as-frm-tries-to-lower-employee.html


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La'our La& Refor$s in India

uccessive governments have made attempts at bringing reforms in labour laws but due to pressure from

various unions! the success has not been achieved. It is well 'nown that the wea'est lin' in the mission

Ema'e in IndiaF is the labour reforms. There have been various @udgements from different courts which

have interpreted various labour legislations in a progressive manner and thus ma'ing way for progressive

legal regime. There is however! no substitute for change in statue for ma'ing rapid industrial progress in

country. eedless to say! suitable chec's and balances also needed to save the wor'ers from e0ploitation.

Cac' of fle0ibility in employment of labour has been responsible for slow employment growth of

employment opportunities.

(onclusions

ll organi1ations have their distinct needs which should be incorporated in their /. ?or a / to be

successful! it has to be ade&uately thought of and planned. The organi1ations should be clear in their

ob@ectives of offering /. They should ma'e the scheme as helpful to the employees as possible and be

open for any communication and clarifications to ma'e the employees accept /. The scheme should

be open for sufficient time so that the organi1ations as well as the employees get enough time to ta'e this

crucial decision. The company should ta'e measures that the crucial manpower re&uired for running the

organi1ation is not allowed to &uit. The compensation criteria for / should be attractive but within

budget.

$ http://www.livemint.com/6ompanies/2179t1tc;2/5ata-teel-

sweetens-employee-separation-plan-num!er-o-reti.html

VRS as a HR Tool

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