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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 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:

Compensation received is towards voluntary retirement or separation

Maximum exemption in income tax is restricted to Rs 5, 00,000.

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

income tax will be available to such an employee.


The scheme is applied to all employees, including workers & executives of a concern excluding

directors of a company or a co-operative society.


The scheme shall result in overall reduction of the existing 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 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.

Process of VRS Schemes


Communication: First and most important step is to communicate the need for VRS to the
employees/unions in routine meetings in which Managing Director explains the deteriorating condition of
the organization with the help of factual data on hand. Other senior managers also communicate with
employees on similar lines explaining the financial health of the organization and the need for manpower
reduction.
Similar communication is also shared with union leaders, government authorities, and
workers families making them feel that there was no option other than VRS. Sometimes an external
consultant is also hired to give authenticity to the opinion of the management. Employees who may be
willing to accept VRS also develop plans for their activities for their post-retirement life. Some
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 VRS and to get the cooperation of
the employees/unions.
Eligibility for VRS: There can be two main criteria, i.e., the tenure in the organization and age. The
minimum age criteria can vary from 30 years to 59 years. The tenure in the organizations can be as per the
needs and objectives. An employee below the age of 40 or tenure below 10 years can be subjected to the
VRS scheme and the only disadvantage will be non-availability of income tax exemption. The company
can find a way to compensate the employee for loss of tax benefit.
Discretion Clause: Discretion of the managers to accept or reject VRS applications and permit the
management to withdraw the scheme mid-way. Managements prefer to retain this discretion so that they
could retain people with appropriate skills. All the organizations want their crucial manpower to stay
back. Also the management will like to retain the option to withdraw the scheme before the end date in
case the exigency so demands. The withdrawal discretion is to be exercised carefully to avoid any
perception in the minds of the employees about fairness of the management. The pre-mature withdrawal
is considered as an important parameter in the design of VRS scheme.
Compensation: What should be the criteria to calculate the compensation? It is an important issue in the
design of VRS. To decide the compensation, managements primarily considers the paying capacity of the
organization, regional and industry practices, and attractiveness of the scheme for the target employees.
The success of the past schemes indicate that higher amount under VRS, more attractive is the scheme.
Most of the schemes have two aspects relating to compensation of retiring employees under VRS. One of
the common methods is to make the scheme attractive is to compensate employees for their remaining
period of service or the age/numbers of years spent in the company or both. Generally there is an upper
limit of the amount of compensation. Younger employees are much attracted to such schemes as they can
seek jobs in other organizations after accepting VRS. Therefore the treatment for educated and worker
class has to be different. Also the retiring employees need expert advice for the investment of the VRS
compensation as many of the workmen can fall prey to greedy and unscrupulous people.

Few Instances of VRS in Indian Industries


1

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

Labour Law Reforms in India


Successive 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 known that the weakest link in the mission
make in India is the labour reforms. There have been various judgements from different courts which
have interpreted various labour legislations in a progressive manner and thus making way for progressive
legal regime. There is however, no substitute for change in statue for making rapid industrial progress in
country. Needless to say, suitable checks and balances also needed to save the workers from exploitation.
Lack of flexibility in employment of labour has been responsible for slow employment growth of
employment opportunities.
Conclusions
All organizations have their distinct needs which should be incorporated in their VRS. For a VRS to be
successful, it has to be adequately thought of and planned. The organizations should be clear in their
objectives of offering VRS. They should make the scheme as helpful to the employees as possible and be
open for any communication and clarifications to make the employees accept VRS. The scheme should
be open for sufficient time so that the organizations as well as the employees get enough time to take this
crucial decision. The company should take measures that the crucial manpower required for running the
organization is not allowed to quit. The compensation criteria for VRS should be attractive but within
budget.

6 http://www.livemint.com/Companies/21EDjUtL1tc7M2zjK0eVaO/Tata-Steelsweetens-employee-separation-plan-number-of-reti.html