Key Elements of a Labor Program
SEVERANCE
Statutory Payments
Contractual Benefits
Ex Gratia Severance Payments
Adverse Selection and Targeting
Implementation Issues
Material and Sources
Implementation Issues
Three main implementation issues arise in severance programs: (1) the definition of severance procedures, (2) payment options and procedures, and (3) monitoring and evaluation arrangements. This section covers the first two items; the third item is discussed in module 7.
Severance Procedures
Well-documented redundancy and severance procedures can improve the quality and transparency of severance and can avoid the potential for dispute and opposition during implementation, which in turn may create delays. The advantages of having clearly established procedures are that (a) there is a common understanding on the terms, conditions, and definitions applicable to severance; (b) the prospect of redundancy has been raised and discussed (in some PPI utilities, the culture may still be one of "jobs for life"); and (c) there are clear guidelines for conducting severance activities (such as calculation of amounts owed to each worker or disbursement procedures).
Severance procedures should be set out in a policy statement or in regulations at the government or enterprise level, and usually are agreed to by government and worker representatives before restructuring starts. The CD-ROM accompanying this Toolkit provides an outline of a general redundancy policy and an example of a redundancy policy from a privatized freight railway.
Outline of a redundancy policy.
Redundancy policy for a privatized railway.
In addition to establishing procedures, governments can develop a manual for the entire severance process. The typical content of such a manual is set out in box 5.9.
Severance procedures generally cover the following areas:
- Eligibility criteria: Sometimes legislation or labor contracts will only provide for fulltime or permanent employees as eligible for severance. The implementing agency will need to ensure that the treatment of other categories of workers is properly defined, including:
- Temporary, daily paid, seasonal, intermittent, or part-time workers: Unions will often want to make casual workers permanent as part of the preprivatization restructuring and thus make them eligible for severance, as was the case in India's telephone and power sectors (see box 4.8 and box 5.10). If, however, it is clear from staff audits that there are large amounts of surplus workers in these categories, it may be preferable to make special severance provisions to compensate workers for their losses, provide a social safety net, and secure support (see box 5.10, for example). In practice, given the often very low wages of this group, the incremental cost to government of including temporary workers within a severance program may be small relative to the benefits of doing so. Such calculations will have to be done on a case-by-case basis.
- Probationary staff, apprentices, and contracted workers are often excluded from severance plans. The rights of these groups depend much on national or state legislation, which can affect the design of the severance package.
- Officers and managers: Senior staff (defined by grade or by salary) may be excluded from a severance package, given their higher salary and benefits levels. For example, in the concessioning of Chile rail, senior staff earning over US$1,800 a month were not eligible for early retirement benefits (see box 5.8).
- Definition of salary:
- Many if not most plans define basic salary as the base for calculating severance payments.
- A combined salary and benefits definition is another approach. In the case of Mexico rail (box 5.1), the "daily integrated salary" made up of 14 different elements was used both for severance pay and for early retirement packages.
- In Chile retirement benefits are calculated on the basis of a "worker's reference salary," which is calculated as the annualized salary over the last five years of employment.
- Definition of years of service: In practice this needs to take account of issues such as:
- Will prior service in another organization be taken into account?
- How are part-years calculated?
- Will service as a temporary worker count?
- Will service as an unregularized temporary worker count?
- What about apprenticeship or probationary periods and interruptions to service (such as times of military service)?
- Constraints on reemployment.
- Treatment of other benefits (loans, medical insurance, and so forth).
- Treatment of housing occupied by the workers.
- Taxation: Treatment of severance pay varies among countries, with many countries treating severance pay as tax free, and some (such as Malawi) treating it as a taxable benefit.
Box 5.9: Content of a Severance Manual
What should be included in a severance manual? Circumstances will differ but the procedures could include the following material:
- Full definitions of all key terms.
- A description of the timetable for labor adjustment. This will include descriptions of any enterprise restructuring activities (for example, closure of operating units, depots, or workshops), levels and scope of downsizing, phasing, and timetable.
- A standard format or spreadsheet for calculating the amounts due for every worker. This will be based on an agreed formula.
- Detailed definitions of the calculation of severance benefits–statutory and contractual. This will supplement the paper format or spreadsheet because calculating the value of the contractual (enterprise) benefits and allowances, in particular, can be challenging. There may be different schedules and eligibility rules for different groups of workers. And if those benefits are not well defined, if enterprise human resources management has been weak, or if data are missing, then in practice the interpretation of the rules may have been and continue to be subject to considerable discretion. One unit manager may apply rules differently than another, and similar workers can receive different severance amounts.
- A standard submission format to the decision body for release of funds. Normally, approval for the release and transfer of funds for severance will require review by the ministry of finance or by a committee involving representation from the ministry of finance. The standard format aims to ensure that all costs are captured, including statutory payments, enterprise dues, ex gratia severance payments, arrears of salary, arrears of pension contributions, other allowances, and other costs arising from the restructuring. If a noncore activity is being sold, closed, or liquidated, there will be other costs to the ministry of finance, such as those associated with salaries of core staff (security and accounting staff often need to be retained), as well as valuation, privatization, or liquidation costs.
- A standard letter of agreement between the PPI enterprise manager and the government. This will outline the role of the PPI enterprise manager, as well as public finance arrangements.
- A standard letter that all workers sign when accepting voluntary departure. This will include their acceptance of any restrictions on rehiring, and verify their recognition of any tax or social insurance consequences.
- Terms of reference for the engagement of accountants and auditors to help implement a program.
- A standard format for the disbursement of payments to workers. This format should provide for the signatures of the workers to acknowledge receipt, as well as countersignatures by witnesses (such as independent accountants or auditors).
- Standard formats for tax purposes as appropriate for the national tax regime.
Box 5.10: Regularizing Casual and Stipendiary Workers in the Orissa Power Sector
Public sector enterprises can engage large numbers of workers on ad hoc or occasional terms. In the Orissa State Electricity Board, for example, 5,336 semiskilled workers, engaged for extended periods as daily paid "nominal muster roll" workers, were regularized as part of the preprivatization restructuring of OSEB. Their remuneration then rose from Rs. 30 per day to about Rs, 3,500 per month. Similarly some 250 so-called stipendiary engineers had been employed by OSEB through emergency recruitment procedures, but they lacked any service benefits other than a fixed stipend. Following corporatization of OSEB, most of these engineers were regularized and made permanent employees of the successor company– the Grid Corporation of Orissa.
Although these groups were relatively weak stakeholders, their regularization helped create a strong positive impression regarding the reform process, and helped to back up the stance taken by the government of Orissa that power sector reforms would not lead to compulsory retrenchment. These workers could have been retrenched but, according to one former chairman/ managing director, "possibly with such a beginning we would not have been able to carry on with the reforms" (p. 24).
Source: Ray 2001.
Payment Options and Procedures
There are choices for when and how severance payments are made.
The implementing agency must decide how to pay severance to workers. Early retirement benefits are normally paid from the pension plan. For severance, the main options are to:
- Provide severance in a single payment. Many governments favor this approach because (a) employees tend to prefer lumpsum payments, (b) it is administratively simpler, (c) it provides a clean break, and (d) it avoids an impression of continuing government obligations toward the displaced worker. There are risks that a proportion of workers can very quickly dispose of lumpsum payments on consumption. Clearly, some cultural specifics in certain countries may predispose those workers more toward consumption than in other countries–for example, because of the social status of costly weddings or funerals.
- Provide severance as a salary continuation. In Chile's rail sector most workers received 50 percent of their salary for a period equal to half the number of years of service plus one (see box 5.10). In a 1,000-response survey of severance practices in the United States, where severance is typically one or two weeks per year of service, 47 percent of organizations implemented severance payment through continuation of the salary (Lee Hecht Harrison 2001); a similar percentage (46 percent) used lump-sum approaches and some offered workers a choice between the two methods.
- Provide severance over a defined period. For example, when the Uganda Railways Corporation retrenched 1,300 staff in 1997, severance benefits were paid over a threeyear period (Murungi 2002). Provide all severance as an annuity. This is unlikely to be acceptable to workers if they have some pension arrangements or if they had the choice between early retirement and a lump-sum payment.
- Allow workers to freely choose among a lump-sum amount, staged payments, and an annuity.
Workers' preferences for these different options will vary among countries. Preferences can be determined through well-designed and statistically valid surveys representing all of the work force (all ages, all cadres, and both genders), perhaps as part of the prelayoff worker surveys (described later in this module in the section on redeployment programs). Factors that influence workers' preferences are likely to include:
- Inflation: Workers may want to quickly convert a lump sum into a tangible asset, such as housing, and may reject phased payments if there is a history of high inflation in the economy.
- Degree of uncertainty about the future, both personal and economywide.
- Potential for small business: If workers (or, perhaps, their spouses) can see income-earning opportunities, they may favor the opportunity to invest lump-sum amounts of their severance compensation in establishing a new microenterprise or small business.
Accurate and prompt payments of severance are critical. Workers who are paid incorrectly or late are treated unfairly and can create public dissatisfaction with the process. Moreover, in the absence of clear payment procedures there is a risk that severance monies will be captured by fraudulent people or that there is wide disparity in implementation among different units of the enterprise.
Therefore, the job of the manager in the implementing agency is to ensure that the right worker receives the right amount, at the right time, with no surprises. This generally involves the following steps:
- Carrying out pre-audits of the proposed funds disbursement system, preferably with the help of the government accounting or auditing staff: This can help ensure that processes are consistent with national public finance accountability regulations and with the requirements of any donors involved, defended from potential fraud, and able to provide an adequate subsequent audit trail.
- Hiring accountants to provide implementation capacity: Accurate calculation and verification of worker payments can be a timeconsuming task in large-scale programs. If records are not computerized it might take 30 minutes to check each application. If 2,000 workers are to be retrenched, it would be equivalent to 125 person-days, without allowing for travel times and delays resulting from missing information, unclear rules, and other anomalies. Where internal resources are limited this task can be contracted out to national firms of accountants or to other professional firms of auditors or consultants. Some guidelines for this process include the following: have a panel of accountants to draw from, emphasize the need for independence of the accountants, do not let enterprises select their own accountants, and make the accountants also responsible for the accuracy of the payment process.
- Developing computerized information technology systems that enable rapid analysis of worker dues: In the privatization of Brazil's RFFSA, each RFFSA office was equipped with software that gave information on all the incentives offered to each worker and a simulation of the benefits each would obtain (Estache, Schmitt de Azevedo, and Sydenstricker 2000).
- Monitoring payments: The scope of work of any subcontracted accountants and auditors can include supervision of the actual handover of payments to workers (see module 7).
