Plugging the loopholes

Downsizing manpower strength has become an important global economic issue nowadays. VRS, now a commonly used term, especially in India, stands for a voluntary retirement scheme, whereby employees are amicably offered the option to voluntarily retire from services before the retirement date. Thus, VRS is also known as the 'Golden Handshake.' The word retirement can be replaced by the word resignation or separation, depending upon the needs of the entity.

Under Indian laws, retrenchments, closures, and mass terminations are often difficult. Therefore, corporates, as well as government departments and PSUs, often announce lucrative voluntary separation schemes. Both private and public sector firms can opt for VRS, inter alia, due to recession, intense competition, joint-ventures, takeovers, mergers, amalgamations, reduction, redundancy, obsolete practices, procedures, or various other reasons.

In the business world, it is essentially a package deal of give and take. It is paid in lieu of the employee leaving the services of the company or the industrial establishment and forgoing all his claims or rights in the same. Therefore, the term "golden handshake" has been coined for the arrangement. The primary purpose of paying this amount is to bring about a complete cessation of the jural relationship between the employer and the employee. A considerable amount is paid to an employee as ex-gratia, besides the terminal benefits if he opts for voluntary retirement under the scheme, and the option is accepted by the management. A legal and valid contract comes into place. There are cases when, after accepting VRS, employees sometimes try to revoke the same upon learning about the enhancement of pay scales by the management or due to a change of mind or any other reason, etc. Various courts have held that once the VRS amount is accepted by the employee, he cannot later assail it.

In the case of AK Bindal, the Apex Court stated that after accepting a golden handshake, if an employee is still permitted to raise a grievance regarding the enhancement of pay scale from a retrospective date, the whole purpose of introducing the Scheme would be totally frustrated. All rights are lost after accepting VRS. The Supreme Court has clearly held, in various dictums, that after the amount is paid, and the employee ceases to be under the employment of the company or the undertaking, he leaves with all his rights. There is no question of him again agitating for any kind of his past rights with his erstwhile employer, including making any claim regarding the enhancement of pay scale for an earlier period. Even contentions of accepting VRS under any kind of compulsion are generally not accepted in such cases.

In certain cases, tax exemption is also allowed as per Section 10(10C) of the Income Tax Act when the scheme is of public sector companies, other companies, cooperative societies, authorities, universities, government bodies, institutes, etc., as mentioned in the provision. The schemes of these entities are to be framed in accordance with prescribed guidelines to take advantage of the provisions. As per statutory stipulations pertaining to Income Tax, Rule 2BA of Income Tax Rules, to take advantage of the exemption scheme, it has to apply to employees who have completed 10 years of service or reached 40 years of age. It applies to all employees, including workers and executives of a company. The scheme of voluntary retirement or separation is drawn to result in an overall reduction in the existing strength of the employees. The vacancy caused by voluntary retirement or separation is not to be filled up. The retiring employee of a company shall not be employed in another company or concern belonging to the same management. The amount receivable on account of voluntary retirement or separation of the employee does not exceed the amount equivalent to three months’ salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. There are certain exclusions available with respect to age and eligibility in cases of public sector companies. If such conditions are fulfilled, exemptions from tax provisions are available for the stipulated amount.

If entities eligible for exemption cannot follow stipulations given under the IT Act, there is no bar in floating out schemes; it is just that tax immunities would not be available.

VRS is regarded as the most viable way out for entities to reduce staff. It is also the most pragmatic option in cases where mass terminations are needed or where unions are militant or in any other circumstance. Most importantly, it saves from litigation costs that are otherwise spent in cases of phasing out. In a nutshell, it is the most equitable middle path for scaling down operations and can save from huge costs as well as mess, apart from spoiling the goodwill of the organisation.

The writer is a practising Advocate in Supreme Court and High Court of Delhi. Views expressed are personal