Voluntary Retirement Scheme (VRS)

What is VRS?

VRS expands to Voluntary Retirement Scheme. It is a scheme in which employers offer voluntary retirement from services to the employees, before their retirement date. This is a method to reduce the strength of employees.

One must take a note that before implementing a voluntary retirement scheme, the company must practice other alternatives so as to improve its performance of the firm. This means that VRS should be the last alternative.

Scheme Highlights

• Both provident funds and gratuity are offered to the employees.
• Up to a prescribed limit, the compensation paid is free from taxes.
• Employees can go for benefits like counseling and rehabilitation, to retire without any difficulty.
• Employees who fulfill the eligibility criteria for VRS can willingly end their tenure of service at the organization prior to their retirement date.
• Both the sectors – public and private can adopt this scheme.
• The scheme is for those organizations who wish to remove their excess staff, who withstood their productive term in the organization.
• This scheme is given the name Golden Handshake. In this scheme, the companies let go of some of their employees cordially.
• Terminal Benefits of VRS cover:
  • Balance of PF accumulation
  • Leave encashment
  • Gratuity
  • 1 or 3 months’ notice pay
  • Ex-gratia payment which is equal to 45-day emoluments for each completed year of service or monthly emolument at retirement or salary for the rest of the term of service. This will include basic pay and dearness allowance.
  • Travel for employees or family to the place where they want to settle.

Procedure for VRS

The company’s management must notify by way of a circular, its decision to implement VRS which may include:

1. Reason for rightsizing
2. Eligibility criteria, i.e. who can apply for VRS
3. Age limit and completed years of service
4. Benefits offered to employees
5. Right of the employer to accept or reject the application for voluntary retirement
6. Date up to which the scheme is open
7. Must indicate the incidence of income tax on the benefits received.
8. Must state that those employees who choose to retire voluntarily and accept benefits under the scheme won’t be eligible for employment in the organization in the future.

Applicability of VRS

Voluntary Retirement Scheme is applicable to those employees only:

• who have successfully completed their 10 years of service in an organization or
• who have attained the age of 40 years

Also, it is applicable to the workers, executives of the company, and authority of cooperative society

Obtaining prior approval of the central government is mandatory for public sector undertakings.

Moreover, it must result in an overall decrease in the total strength of employees and the vacant positions cannot be filled up.

Steps to be Taken to Introduce or Implement VRS

The company must take prior approval of the central government if it is a PSU.

• Identification of departments or employees to whom VRS can be offered.
• Formulation of the terms of the scheme and benefits which the company will offer to those who opt for VRS. These terms and benefits are required to be indicated in the circular. The company should also make a decision on the duration for which the scheme will be open.
• Arrangement of a counseling session for managers for their motivation.
• Arrangement of counseling sessions for employees. It must be noted that counseling employees is an important part of this scheme. In this session retiring employees learn – what they can do in the future and how they can manage the funds received through this scheme.
• When an application for VRS is received, the management must check and scrutinize all the applications to decide whose application should be accepted and whose application should be rejected.
• For all those employees whose applications are to be accepted, preparation of worksheet indicating the benefits each employee will get. The benefits will include dues like provident fund, gratuity, leave wages, etc.

Advantages of VRS

1. Because VRS is usually experienced in retrenchment under the labor laws, it is free from any legal obstacle.
2. Employees often get lucrative financial compensation when compared to the compensation allowed under labor law.
3. It does not force anyone to end up their service, rather due to its voluntary nature, employees by themselves choose to retire.
4. There exists flexibility and the scheme applies to a few divisions or departments where employees are in surplus.
5. It may result in savings in employee costs which in turn reduces the overall expenditure of the firm.

Disadvantages of VRS

VRS creates fear and a sense of uncertainty in employees to a certain extent.
There are some cases when severance costs could be heavy and maybe more than the possible gains.
The companies may also have to face protests from trade unions that may disrupt the normal operations.
Management may have to face embarrassment when some efficient and key employees and executives apply for VRS.

Wrap Up

The aim of this scheme is optimum utilization of the company’s human resources. It also ensures the provision of benefits to those who have worked hard for the organization for the long term and who want to retire before their retirement age.