IT Companies Rob Employees of Retirement benefits

Many people in India prefer Government jobs. The main reason is job security. People working in Government sector will not face job loss threats and their job is secured till their retirement. In few scenarios, if government sector employees are offered Voluntary Retirement Scheme, a clearly defined process is followed and hefty severance package is paid to the employees opting for VRS. This severance will normally be 2-3 years of overall salary in addition to retirement benefits.

retirement-fund

This severance will normally be 2-3 years of overall salary in addition to retirement benefits.

After IT got popular choice of employment among educated Indians, IT jobs became favoured over government jobs. The high salaries and onsite opportunities helped IT employees to lead better standard of living compared to government sector employees. But on the flip side, job security is very less in IT sectors and as the industry matured it turned out that there is a high chance for employees forcefully terminated after the age of 40. These employees who are forcefully terminated find it difficult to get new jobs and many are jobless for 2-3 years. This is based on discussion we had with many affected employees.

This sudden job loss makes employees taking extreme decisions including suicides.  There is a statistics that 8000 corporate employees committed suicide in Tamil Nadu in the last 5 years and prime reason for this is sudden job loss. If we look closer, we get 2 main reasons for employees to take this extreme decision:

  1. All companies are not considering employees above 40 to new positions so getting new job becomes very difficult. Corporates want young, fresh employees who will work for long hours and who don’t have family responsibilities. The same employees after giving their best years to the company, when they reach their 40s, the company throws them out, not considering the experience.
  2. Many companies are not paying any severance package to such forcefully separated employees. IT employees are forcefully made to resign by giving just 2 months notice period. So many don’t have money to cover even next few months responsibilities after termination.
  3. Add to the above injustice, the salary structure itself results in low retirement benefits such as PF, gratuity. IT employees get very less retirement amount compared to those in government jobs.
retirement-life

how retirement benefit of IT employees are less compared to other sector employees

This article explains the 3rd point in detail of how retirement benefit of IT employees are less compared to other sector employees and how it affects their lives after job loss or retirement.

In government sector, retirement benefits are calculated based on basic+dearness allowance component drawn by the employee. In government sector, usually basic+dearness allowance contribute about 60% of overall gross salary.

But in IT sector Basic is kept usually as 35% in the initial part of employee career and reduced to 25% at later stage of the career. For example, if employee joined as fresher and get a salary of 20,000, his/her basic will be Rs 7,000 that 35% of total salary. But as the employee gains experience and draws more salary, company pays increments in other component of salary instead of raising basic component. For example, if an employee draws 100,000 as salary, basic will be 25% of total salary, instead of 35% in the initial period or 60% for government employees.

The concept of dearness allowance to be added to the basic salary is not there in IT sector. Dearness allowance is given to take care of the rising price levels in the economy, so that the employees’ standard life is not affected by inflation. In other words, the salary is maintained at the same level in real terms. In IT sector, no such consideration is given. Rather, a different company (read – profitability at the cost of employees) focussed model is followed.

The tabular column below clearly shows the difference between other sector employees and IT employees (working for 20 years):

Sector

Monthly Gross

Basic

Dearness

PF per month (24%)

PF for 20 years

Gratuity

Government

100,000

30,000

30,000

14,400

=14,400*20*12

6,92,307

IT

100,000

25,000

0

6,000

= 6,000*20*12

2,88,461

Assumptions

  1. both Government sector employee and IT employee draw 1,00,000 (one lakh) gross salary.
  2. Provident formula is 24% of basic and dearness allowance. As per law 12% of PF is contributed by employee (deducted from Basic + DA) and 12% is paid by the employer (outside salary structure).
  3. Formula for Gratuity is Basic+Dearness * Years of service*15/26.
retirement-life-2

If we add both provident fund and gratuity, total retirement benefit for government employee is 92 lakhs where for IT employee it is 38 lakhs.

So Government employee will be getting provident fund of 14,400 per month and IT employee will be getting 6,000 per month. If we assume average interest rate given for provident fund is 8%, government employee getting gross of one lakh will get 84,81,894 (Roughly 85 lakhs) as provident fund for 20 year of service where as IT employee will receive 35,34,122 as provident fund.

So using the formula for gratuity, government employee will be getting 6,92,307 where as IT employee gets 2,88,461 only. If we add both provident fund and gratuity, total retirement benefit for government employee is 92 lakhs where for IT employee it is 38 lakhs.

In addition, IT companies take the full 24% of PF from employee compensation (as stated in the offer letter) unlike other sectors (12% employee and 12% employer)

Moreover, government employee will get pension whereas IT employee has no pension. (Here also, for the past 15 years, successive government have brought the pension of government employees also into high risk category. The pension contribution is taken from the employee and allowed to be managed by PF authority or private players. They are allowed a part of the fund in share markets. In case of losses, the employee will not get any pension)

retirement-coupleThe main reason for the sorry state of IT employees is the exploitation done by IT companies. They add various other salary components like special allowance, variable allowance, Additional allowance, Perks etc and intentionally keep basic component low. When annual increments are provided, hike is given more towards variable pay. At the same time,  the company will manipulate variable pay by adding policies and can reduce overall salary of employees.

If we compare basic and variable pay components in gross salary it will be 35% and 10% for juniors and 25% and 20% for senior employees. This clearly shows how salary structure is manipulated with the intention of increasing company profits and reducing retirement benefits of employees.

This is very clear exploitation and IT companies should revisit the salary structure. The increase in basic pay will automatically increase retirement benefits (PF and gratuity) of employees as formula of retirement component is based on basic.

Government also should intervene in this matter in regularizing the salary component in IT employee structure. This automatically will help in getting increased retirement benefit and help IT employees to face their life better even if they face sudden job loss. This will prevent employee from taking extreme decisions.

Considering the seriousness all parties including company, government and union should come together to restructure the salary component in IT sector.

When an employee or worker joins the company and gives his time, talent and life to the company’s cause (earn profits), it is the duty of the company to provide for the employee’s livelihood. That should include basic food, housing, children education and medical care. The employer should not look at only their gain and leave the employee in lurch after sucking their labour for years.

Shyam Sundar,
President, NDLF – IT Employee Wing

Permanent link to this article: http://new-democrats.com/it-companies-rob-employees-of-retirement-benefits/

2 comments

    • Vasuki on December 12, 2018 at 6:14 pm
    • Reply

    Why this happening, mainly because they say your salary is confidential should not be disclosed,once we got letter we keep it secret.IT people live in present situation not thinking about future.companys taking advantage of this doing all kind of gimmicks.

    • Mathivanan on December 18, 2018 at 7:09 am
    • Reply

    Many of us think that it is good to higher have take home than paying to the PF but that is wrong. One way we are falling to the trap of company to reduce the employer contribution and other way you won’t have anything left after you retire.

    Nobody knows that if you maintain the PF account for 10 years consecutively you are eligible for a pension (max 6000 per month as of now would increase in future) after retirement. I have seen most people withdraw their PF when they switch companies it is an act of ignorance….

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