It’s time for a retrenchment cover

All companies should be encouraged to have an insurance policy that improves the quality of conversation between the management and the employee during layoffs

The Covid-19 crisis has exposed not just India, but the entire world, in more than one way. And everyone has been found wanting. In case of India, the heart-wrenching pictures of migrants walking back to their hometowns without money or resources because the companies (mostly the micro, small and medium-scale enterprises or MSMES) refused/were unable to pay them, showed our complete lack of preparedness. Many died on the way. MSMES or firms employing them had their reasons. They were left high and dry due to lack of demand during the lockdown, and, of course, delayed payments from customers.

Even the white- collared haven’t been spared. Almost ever yone in India Inc has taken a salary cut. Worse still, job cuts have been rampant. After this jolt, and whenever it ends, ever yone will be wiser. The middle and upper middle class will have to change their saving habits, and leverage within limits. Banks should put tighter norms for giving a home or personal or auto loans. They should insist that the total loan-to -salary ratio should not exceed 40 per cent. If someone is staying on rent, and still buying a house in the same city, it should be reduced to 30 per cent. It’s important for both banks and borrowers to remember this in a crisis — collaterals like home and auto don’t mean much. Currently, it is the buyer ’s market both in the case of auto and housing.

So, a defaulter or lender cannot put any of these assets for sale and exact a proper price.

Of course, builders should also fall in line by slashing prices. Like HDFC Chairman Deepak Parekh and commerce minister Piyush Goyal have said, “Builders need to get rid of their inventory”. The cost of carry, by borrowing from private equity investors or other expensive routes, will only worsen matters. And Goyal’s comments clearly show that the government can only do so much — a completely reasonable position even in the best of times.

But while these things will take time to play out, the government should ask the Insurance Regulatory and Development Authority of India to prepare a standard “retrenchment insurance policy ” and ever y company — from MSMES to big corporates —should have one. It is necessary in a country like India because there is no social security for the retrenched. The US, which has been the worst i mpacted during t he Covid-crisis, has pumped in trillions of dollars to support the 40 - odd million rendered unemployed. In India, given our quality of data collection, we will never know the exact number.

Unfortunately, the best we have come up with till now is allowing individuals to withdraw from t heir employee provident fund, that is, they are being encouraged to dip into their retirement savings for survival.

And reports suggest that almost ~15,000 crore has already been withdrawn till date. Clearly, desperation is forcing people to eat into their retirement funds.

In such circumstances, a retrenchment policy would be a big help. It could be designed in various ways. The simplest: Much like a corporate health insurance policy, employees should be asked to contribute to a “retrenchment policy”. It could be a group insurance scheme, and provide employees with their take-home salary or basic plus 30-40 per cent more in case of retrenchment. The latter is very important because many companies give low basic salaries, and in some j ob profiles like marketing , high-performance incentives are key for motivation. There can be various grades — three months for junior level, six months for middle and one year for senior level.

The premiums of such policies should be cut from the employees’ salaries. And if any company wishes to throw in a percentage on its own, it is welcome. These policies can also have riders to take care of situations such as salary cuts and others. Importantly, it should be portable from one company to another like the Employee Provident Fund so that the employee does not lose out on the benefits if she quits.

This will help in two ways: One, the employee has the assurance that there is some security in case of a job loss. Also, companies won’t be made to feel guilty, if they decide to retrench in times like these. More imp or tantly, the conversation between the management and employee will improve to “It is better if we retrench rather t han you resign”, instead of the reverse that happens today, which leaves everyone bitter.