Voluntary Retirement Scheme - The Golden Handshake

Voluntary Retirement Scheme - The Golden Handshake

Voluntary Retirement Scheme (VRS) an scheme offered to an employee to voluntarily retire from services before the retirement date. The scheme allows companies to reduce the strength of employees. It can be implemented by both the public and private sectors. VRS is also known as 'Golden Handshake', as it is the golden route to retrenchment, both the employer and the employee happily bid a final goodbye to each other.

Under the aforesaid scheme an employee/worker opting for the Voluntary retirement/Golden Handshake scheme would be entitled to compensation. the very purpose of having a VRS, i.e., to bring in financial efficiency

The word ‘voluntary’, means without compulsion— willingly. Voluntary is an act on the part of the employee to give up employment willingly and without compulsion from the employer. It is a unilateral act on the part of an employee to cease the contract of employment with the employer. 

The word “voluntary retirement” received legislative recognition in 1953, when section 2(00) was engrafted in the Industrial Disputes Act. The said Section 2(00) asserts that retrenchment does not include voluntary retirement of the workmen.

A Golden Handshake Scheme is associated with voluntary retirement. It is a clause in an executive employment contract that provides the executive with a significant severance package in the case the executive loses his/her job through firing, job restructuring or even scheduled retirement. This can be in the form of cash, equity, and other benefits.

Do VRS apply to employees who have completed 10 years of service or are above the age of 40 years ?

As per the available statute of limitations, there is no ground for qualification of VRS applicants. The provision to provide VRS to those employees who had completed 10 years of service or above the age of 40 years is just to take advantage of Section 10(10C) Exemption of amount received on voluntary retirement & Rule 2BA Guidelines for the purposes of section 10(10C) of Income Tax Act & Rules relating to Conditions for claiming exemption. 

Thus there is no thumb rule or defined minimum tenure of service or age of employee to take VRS, it’s company internal policy. It applies to workers, executives of companies and/or to an authority of a co-operative society (except company/co-operative society directors). 

As per the rules, voluntary retirement schemes should result in an overall reduction in the existing strength of employees and the vacancy cannot be filled up.Companies can frame different schemes, however, they must conform to the guidelines under section 2BA of the Income-Tax Rules, to take better advantage. One of the pertinent rules clearly states that retiring employees must not be employed in another firm belonging to the same management.

How did voluntary retirement schemes come about in India?

Indian labour laws do not allow direct retrenchment of employees under a union. According to the Industrial Disputes Act, 1947, employers cannot reduce excess staff by retrenchment. In fact, any plans of retrenchment and reduction of staff and workforce are subjected to strong opposition by trade unions. So, VRS was introduced as an alternative legal solution to solve this problem. The voluntary retirement scheme was not vehemently opposed by the Unions, because it is 'voluntary' in nature and not compulsory.

When can a firm opt for a voluntary retirement scheme (VRS)?

• Private and public sector firms can opt for VRS under the following circumstances:
• Due to recession in the business. 
• Due to reduced labour costs to cut total cost of production. 
• Due to intense competition, the establishment becomes unviable unless downsizing is resorted to. 
• Due to joint-ventures with foreign collaborations. 
• Due to takeovers and mergers. 
• Due to obsolescence of Product/Technology.
• Due to the need for getting rid of surplus workforce without resorting to termination of jobs. 

What are the benefits for the employee who opts for VRS?

• 45 days salary for each completed year of service or monthly emoluments at the time of retirement multiplied by the remaining months of service before the normal date of service, whichever is less. 
• Employee gets provident fund (PF) and gratuity dues. 
• Compensation received at the time of VRS is tax-free up to the prescribed amount on fulfilling certain conditions. 
• Companies also offer benefit packages to the employees who opt for VRS. 
• For example, the scheme may also include counselling sessions for the employee's future; advice on managing funds received under VRS; firms may offer rehabilitation facilities to staff, etc.