The world today is very different from what it used to be before. Retirement that was often associated with aging and bad health is now being chased after by people in their 40s. More and more people are now thinking of taking up the voluntary retirement scheme as companies offer it to employees to reduce overall strength, save costs, and improve productivity.

Here are some things to note about the voluntary retirement scheme.

What is voluntary retirement?

Generally, the retirement age is considered to be 60 years. When a person crosses this milestone, they can retire from work obligations and spend the golden years of retirement pursuing their hobbies and interests. However, in the case of voluntary retirement, a person retires in their 40s or 50s.

What is the voluntary retirement scheme?

The voluntary retirement scheme is used by organisations as a way to cut down the number of employees. It is also referred to as the golden handshake and is a cordial way for companies to let go of some of their employees. Many big enterprises from the private and public sector resort to the scheme. However, in order to make sure that no company misuses it, the Industrial Disputes Act of 1947 mandates certain stipulations that all organisations must follow under the voluntary retirement scheme.

It is essential to note that even though the method is used as a way to decrease the workforce, the scheme differs from a regular termination. The final decision to opt for voluntary retirement lies with the employee. An employee who has worked with a company for a minimum of 10 years and is over the age of 40 can also apply for VRS.

Understanding the Voluntary Retirement Scheme (VRS)

The Voluntary Retirement Scheme (VRS) is a program that many companies offer - which allows employees to retire before the official retirement age. While most employees in India retire in their late 50s or early 60s, VRS enables individuals to retire as early as in their 40s.

Companies offer VRS for two primary reasons: to optimise workforce and to boost overall productivity. Employees must meet specific criteria to qualify for a VRS. They need to be over 40 years old and have been with the company for more than 10 years. When an employee chooses to retire under VRS, their role cannot be replaced. Additionally, the retiring employee cannot work within the same management group.

• The retirement compensation received by employees under VRS is calculated as either: (whichever is higher)
• Three months of their salary for each completed year of service

OR

• Their last drawn salary multiplied by the number of months left until their official retirement age

Employees interested in opting for VRS must submit an application to their employer. The company will then review the application, verify eligibility according to voluntary retirement rules and process it.

Key Objectives of the Voluntary Retirement Scheme

Optimised Workforce

As business structure changes over time, their employee requirements do change. One way a company can cope with this, is to occasionally lay off excess employees or bring in new talent. However, this can impact a company’s attrition rate. On the other hand, voluntary retirement provides an effective alternative, allowing employees the option to retire earlier than the standard age. This helps companies reduce labour costs, enhance operational efficiencies and create opportunities for younger employees, contributing to a strong and positive image.

Lower operational costs

VRS helps companies reduce their operational costs. By encouraging voluntary retirement, organisations can effectively reduce workforce and related expenses. Unlike involuntary layoffs, VRS provides companies with a strategic way to manage costs by streamlining their workforce. It allows companies to optimise resources without impacting employee morale.

Employee Incentives

Companies can enhance the appeal of the VRS by offering competitive financial incentives. Employees who choose to participate in the program receive compensation, retirement benefits and various other incentives that make the option financially rewarding for them.

Positive Company Image

Layoffs can significantly damage a company's reputation, both internally and externally. However, VRS allows organisations to present themselves as employee-friendly.

Early Retirement

VRS offers employees the opportunity to retire before reaching the mandatory retirement age. Early retirement can be appealing for those looking to engage in new hobbies, travel, relax or explore different career paths.

How did VRS start in India?

In India, directly laying off employees is prohibited by law. The Industrial Disputes Act, 1947 explicitly states that employers cannot reduce their workforce through layoffs.

VRS was introduced as a solution to help companies meet evolving business needs while remaining compliant with these laws. There are several voluntary retirement benefits for both the employer and the employee. For employers, it helps maintain a balanced workforce and ensure compliance with trade laws. Additionally, VRS provides employees the choice to retire voluntarily, and pursue their retirement goals or live the life they truly desire after retiring.

What are the features of voluntary retirement scheme?

Here are some highlights of the scheme:

• The scheme offers the employee their provident fund (PF) as well as gratuity.
• The compensation paid to the employee is tax-free up to a prescribed amount.
• The employee can opt for benefits such as counselling, rehabilitation, etc. to facilitate a smooth transition into retirement.
• The scheme is predominantly used by public and private sector companies.

What are the criteria for voluntary retirement scheme?

To be eligible for this scheme, the following criteria must be met:

• The employee should be at least 40 years old.
• The employee should be working with the company for at least 10 years.
• The scheme can be applicable to all employees of a company. The only exceptions are directors of a company or a co-operative society.

How is the compensation for voluntary retirement scheme calculated?

The compensation for voluntary retirement is calculated on the last drawn salary of an employee. The payment offered by the company is equivalent to the employee’s three months’ salary for each completed year of service or the employee’s salary at the time of retirement is multiplied by the remaining months of service left before the original date of retirement. In the case of public sector banks, the compensation is calculated based on 45 days of salary for every year of service or the salary for the remaining period, whichever is lower.

What are the rules for voluntary retirement scheme?

When it comes to voluntary retirement, there are some rules that need to be followed, such as:

• Voluntary retirement is used as a way to reduce the total workforce of a company. Therefore, the company cannot hire new people in the place of the old employees who retire.
• The employees who opt for voluntary retirement cannot take up a job with the same company, its management, or a sister concern. However, they can work elsewhere if they prefer.

What are the benefits of voluntary retirement scheme?

Voluntary retirement scheme offers a host of benefits for the company as well as the employee. For instance:

• It is a simple, effective, and empathetic way to let go of employees and reduce the workforce strength of an organisation.
• Since the human resource team of the company has to convince the trade unions about the need for implementing voluntary retirement, the process is transparent with no discrepancies. The scheme is also voluntary, so there are no objections from the trade unions either.
• Voluntary retirement can reduce the company’s overall costs. When payroll costs are lowered, the money can be directed to several other operations to boost productivity.
• The company provides rehabilitation like training to impart new employability skills to their employees. This helps them get another job in the future.
• As the rules and regulations of the scheme have been clearly indicated under the Industrial Disputes Act of 1947, there are no inconsistencies in the process and both the employee and the employer benefit from it.

To sum it up

The voluntary retirement scheme is one of the most humane ways of reducing the total number of employees in an enterprise. It is beneficial for the company and helps the employee embark on a new phase of their lives with financial ease. However, it is important to know how the compensation is calculated to ensure that one knows what they are getting into.