Fringe Benefits in HRM: Meaning, Objectives, Importance and Types

Everything you need to know about fringe benefits in HRM. Fringe benefits are supplementary compensation made in addition to wages, the object being to stimulate the interest of the workers and to make the job more attractive and conducive.

Fringe benefits include status (cars, entertainment facilities, holidays, foreign travel, telephone); security (insurance, medical facilities, children’s education), and work benefits (office accommodation, secretarial services, management training, company scholarships etc.). Key benefits are benefits such as share schemes, profit sharing, and retirement counselling house purchase.

According to ILO fringe benefits has been described as – “Wages are often augmented by special cash benefits, by the provisions of medical and other services or payments in kind that form part of the wage for expenditure on the goods and services.

In addition, workers commonly receive such benefits and holiday with pay, low cost meals, low rent housing etc. Such additions to the wage proper are sometimes referred to as fringe benefits. Benefits that have no relation to employment or wages should not be regarded as fringe benefits even though they may constitute a significant part of the worker’s total income.”

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In this article we will discuss about fringe benefits to employees.

Learn about:- 1. Introduction to Fringe Benefits 2. Meaning of Fringe Benefits 3. Definition 4. Objectives and Special Characteristics 5. Importance 6. Principle 7. Types 8. Statutory Benefits 9. Administration 10. Fringe Benefits in India.

Fringe Benefits to Employees: Meaning, Definition, Objectives, Importance, Principle, Types and Administration

Contents:

Introduction to Fringe Benefits
Meaning of Fringe Benefits
Definition of Fringe Benefits
Objectives and Special Characteristics of Fringe Benefits
Importance of Fringe Benefits
Principle for Fringe Benefits
Types of Fringe Benefits
Statutory Fringe Benefits
Administration of Employee Benefits and Services
Fringe Benefits in India

Fringe Benefits in HRM – Introduction

Fringe benefits are supplementary compensation made in addition to wages, the object being to stimulate the interest of the workers and to make the job more attractive and conducive. They are, as a matter of fact, indirect benefits. As to their nature, we can say, they are neither mere “fringes” nor peripheral “wage trimmings” but a substantial part of the wage and salary structure.

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To quote Belcher, these benefits are “any wage cost not directly connected with employee’s productive effort, performance, service or sacrifice”. Webster defines “fringe” as “an ornamental border, an edging, trimming or a margin”. However, these benefits are aimed at attracting and retaining efficient and contented workforce through boosting up of their real earnings.

There are wide variations in opinions as to the benefits covered by the term “fringe benefits”. We quote here Fisher and Chapman according to whom the classification of fringe benefits are – (a) premiums for time worked, (b) pay for time not worked (c) employee benefits, and (d) employee activities.

In India, the government has prescribed certain minimum amenities to be provided by employers to workers. Indirect benefits are fringe benefits but it is very difficult to distinguish between direct wages and indirect benefits. For instance, conducive working conditions benefit the employer directly, overtime wage paid for work done cannot be described as indirect benefit.

Cockman defines employee benefits as “those benefits supplied by an employer, to or for, the benefit of an employee which are not in the form of wages, salaries and time-related payments”. According to him, benefits are basically of two types – fringe and key.

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Fringe benefits afford better living standard to the employees and offer opportunities to the employer to have more productivity and production. So, they are relevant and useful for an organisation provided it can afford to extend fringe benefits. In term, of cost, these benefits constitute “the real total cost to the company of employing the employee” (Beath & Rands). It cannot be denied that fringe benefits are regarded as a “bonus” and, as such, they create a favourable attitude towards the particular job and company.

Benefits that have no relation to employment or wages should not be regarded as fringe benefits, even though they may constitute a significant part of the worker’s total income. This is fairly obvious in the case of public parks, sanitation services, and public and fire protection.

Examples of fringe benefit:

(a) Statutory benefits – The Employees Provident Fund Scheme, Gratuity or Pension Schemes and Employees State Insurance Scheme.

(b) Non-statutory benefits – Payments towards Employees Provident Fund Scheme, Gratuity and Pension Fund contribution, medical facilities, canteens, uniform and recreational facilities.

Fringe benefits also cover profit and other kinds of bonus such as attendance bonus, service bonus and gratuities, loans for house purchases, leave travel concession, children’s free education, fair price shops for essential commodities, loans for purchase of car.

Fringe benefits, in spite of some of these drawbacks, have come to stay. They have now become an important part of compensation plans.

So far as the corporate management is concerned, it is necessary to take several broad policy decisions regarding wages. One fundamental issue is the break-up of the compensation package. Several options are available – (a) high/low basic wage (b) high/low fringe benefit package, and (c) high/low retirement benefits.

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The management has to consider whether to pay just above or below or at par with “the going wage rate” in the area. The Bonus Act is a matter for consideration by the corporate management. “To a large extent, such issues are decided by the value system and managerial style of the corporate management and how they view wages as contributing to the organisation’s mission” (Monappa and Saiyadain).

Fringe Benefits in HRM – Meaning

The word “fringes” with reference to remuneration or compensation came into usage primarily during the Second World War period in the U.S.A. The War Labour Board, which was entrusted with the responsibility of controlling wage increases with a view to prevent inflationary pressure, permitted provision of non-cash benefits.

The board adopted this policy on the premise that these benefits were at the fringe of usual wages and salaries, and could not immediately affect the purchasing power of the employees and were not related to consumer demands. Initially, fringe benefits constituted only a minor portion of the total compensation.

However, the term “fringe benefits” in the sense of all non-monetary benefits and services came to be widely used in spite of its limited value in describing the actual practices. David W. Belcher says, “The large proportion of total compensation that such benefits represent appears inadequately accounted for by a name implying trimming or frills.”

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In spite of some obvious limitations in the use of the term, it came to be variously interpreted. The National Industrial Conference Board (U.S.A.) has defined “fringe benefits” as “payments to workers over and above the wages paid on the basis of time worked or production completed.”

Some subsequent interpretations emphasised such elements as follows – (i) employer’s labour costs beyond wages and salaries, (ii) compensation beyond wages and salaries requiring no additional productivity and (iii) compensation, benefits or services not related to employee performance. Despite these differences in approaches, the term has continued to be in wide usage even today.

However, more recent scholars and practitioners have preferred to use in its place such terms as “indirect compensation” (Belcher) “employee benefits” (Mortocchio), “employee benefits and services” (Dessler and Varkkey), denoting all non-monetary benefits, services and facilities made available to employees over and above monetary payments.

Thus, “fringe/employee benefits” may be defined as all non-monetary benefits, services or facilities and some fringe monetary benefits made available to employees in addition to their usual and established monetary compensation such as regular wages, salaries, cash allowances, incentive payments and bonuses. These benefits may take various forms and in varying dimensions, and made available to employees under varying conditions.

Fringe Benefits in HRM – Definition Given by Various Institution and Some Eminent Authors

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The term ‘fringe benefits’ refers to various extra benefits provided by employers to their employees, in addition to wages and salaries paid to them. They are also known as ‘sub-wages’ or ‘social charges’ or ‘perquisites other than wages’ etc. There is therefore no unanimous opinion about the meaning of the term ‘fringe benefits’. Some have expressed doubt whether the benefits given according to the provisions of law should be considered as fringe benefits.

The term ‘fringe benefits’ perhaps came into use in the 1950’s and can be credited to the regional chairman of the National War Labour Board in the United States.

In the words of Cockmar, “Fringe benefits are those benefits which are provided by an employer to or for the benefit of an employee and which are not in the form of wages, salaries and time- related payments.”

The ILO has described fringe benefits as follows:

“Wages are often augmented by special cash benefits, by the provisions of medical and other services or payments in kind that form part of the wage for expenditure on the goods and services. In addition, workers commonly receive such benefits and holiday with pay, low cost meals, low rent housing etc. Such additions to the wage proper are sometimes referred to as fringe benefits. Benefits that have no relation to employment or wages should not be regarded as fringe benefits even though they may constitute a significant part of the worker’s total income.”

D. W. Balcher defines fringe benefits as “any wage cost not directly connected with the employee’s productive effort, performance service or sacrifice”.

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According to the Employer’s Federation of India, Fringe benefits include payments for non-working time, profits and bonus, legally sanctioned payments on social security schemes, workmen’s compensation, welfareness, and the contributions made by employer under such voluntary schemes as cater for the post-retirement, medical, educational, cultural and recreational needs of workmen. The term also includes the monetary equivalent of free lighting, water, fuel etc. which are provided for workers, and subsidized housing and related services.

Thus, fringe benefits include both monetary and non-monetary benefits given to the employees during as well as post-employment period. These benefits are connected with the employment but not to the employees’ contributions to the organisation.

Fringe Benefits in HRM – Objectives and Special Characteristics

Many years ago, benefits and services were labeled “fringe” benefits because they were relatively insignificant or fringe components of compensation. However, the situation now is different, as these have, more or less, become important part of a comprehensive compensation package offered by employers to employees.

The main purpose of fringe benefits is to increase the financial position of the employees. They include items which are over and above the normal earnings.

Considering the above point of view in mind the important objectives of fringe benefits are:

1. To recruit and retain the talented personnel in the organisation.

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2. To maintain sound industrial relations and avoid unrest in the organisation.

3. To identify unsatisfied needs of the employees and convert those into satisfying needs by utilizing appropriate steps.

4. To protect social security of the employees during old age by providing provident fund, gratuity and pension.

As per Article 43 of the constitution of India, “All workers should be given a living wage conditions of work ensuring decent standard of life and fuller enjoyment to ensure social and cultural opportunities.” Therefore fringe benefits act as a social level to the employees because worker is not a commodity. He is an active participant in programme of economic development and social reconstruction.

5. To develop a sense of belongingness among employees of the organisation.

6. To comply various legislations related with fringe benefits which are formulated by central and state Government.

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7. To ensure cooperation, loyalty and faithfulness among employees of the organisation.

8. To develop Brand Image of the organisation in the eyes of public.

The special characters of fringe benefits are as follows:

i. Fringe benefits are supplementary forms of compensation.

ii. Such benefits are paid not as incentives but based on membership of the employees with the organization.

iii. Benefits are linked to performance; these are extended as a condition of employment.

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iv. Such benefits raise the standards of living of employees, therefore, contributes to enrichment of quality of work life (QWL).

v. Some of the benefits may be statutory while others may be voluntary.

vi. Payment of fringe benefits in India are primarily made for reasons like, employee demands, presence of trade union, employers’ preference to motivate employees, as social security measures and finally to create a motivating environment.

Fringe Benefits in HRM – Importance to Employees and Employer

Fringe/employee benefits are important not only for the employers and employees, but also for the community. A brief mention of these will be appropriate for discerning their importance. Some of the popular employee benefits comprise the following – medical and sickness benefits, workmen’s compensation, insurance, provident fund, pension, maternity benefit, housing accommodation with ancillary facilities, transport facility, leave travel facility and education facilities for the children of the employees.

These benefits may be provided under the company policy or under the agreement with the union or as a result of legislation.

1. Importance for Employees:

The benefits are important to the employees for the following main reasons:

(i) They enhance the real earnings of the employees and enable them to save money, which they would, otherwise, have spent in the absence of these benefits.

(ii) Money value of these benefits has, for long, not been taxable under income tax law, thus enhancing employees’ living standards. However, during more recent years, the value of these benefits is adjusted in the income tax payable by individual employees, but many of these still do not come into the ambit of income tax deductions.

(iii) Availability of the social security benefits in the event of such contingences as unemployment, sickness, disability, old age, maternity and so on mitigates the worries of the employees regarding apprehended insecurity.

(iv) Many benefits, particularly medical and refreshment facilities, are conducive to the protection of health of employees and enhancement of their efficiency.

(v) Housing accommodation with ancillary amenities and transport facilities result in saving of time and add to employees’ convenience.

(vi) Many benefits are made available to the employees’ family members, which promote congenial family life and strengthen employees’ motivation.

(vii) Many companies make available to their employees plots for construction of houses or flats on lease basis, and also bear a part of the burden of interests on house loans. Thus, a major item of worry of the employees is mitigated.

(viii) Some companies advance loans to their employees on liberal terms for the purchase of vehicles and household appliances. This facility also raises the living standards of employees.

2. Importance for Employers:

Fringe/employee benefits are advantageous to the employers for the following main reasons:

(i) Employers have, for long, been enjoying substantial rebate on these benefits under income tax law. This advantage has, however, increasingly diminished during more recent years. Nonetheless, employers still receive rebates for expenditure on many of these benefits.

(ii) In establishments facing chronic problems of unstable workforce and absenteeism, long-term social security benefits such as life insurance cover, provident fund and pension and housing accommodation have proved effective in reducing their incidence.

(iii) These benefits generally tend to strengthen employees’ motivation and efficiency resulting in higher production and reduction of labour cost.

(iv) Many companies have experienced establishment of sound employee and industrial relations as a result of provision of these benefits, especially when these benefits have emanated from agreement with the union.

(v) In some cases, the companies have been able to keep wage-rates at a low level on the ground of providing substantial benefits to their employees.

(vi) Provision of these benefits also enhances the prestige of the company in the community and enables competent workers to be attracted towards the company.

Fringe/employee benefits are also significant for the community and economy. It was during the Second World War period in the USA that the concept of “fringes” emerged in the context of compensation. The War Labour Board, which was entrusted with the responsibility of controlling wage increases, allowed fringe benefits holding that these would not stand in the way of measures intended to prevent inflation.

Even today, such a premise holds well in the situation of inflationary pressure under which “wages chasing prices and prices changing wages” is a usual phenomenon. Availability of fringe benefits diminishes pressures for wage increases which is helpful in fight against inflation.

Besides, many big companies have created infrastructure near workplaces in the form of housing colonies, roads, parks, lighting arrangements and community, educational and recreational centres. These benefit not only the residents of the locality, but also many others in the community. The facilities in the hospitals and dispensaries established and maintained by companies are generally made available to the public in the vicinity.

Marketing centres established by companies are similarly open to the public. Many other examples may be easily cited to show that the community derives advantages from the benefits intended to be provided for the employees.

Fringe Benefits in HRM – Principle of Benefits in Social and Organizational Context

Fringe benefits act as a maintenance factor in terms of motivation theories. It implies that provisions of benefits and services work as dissatisfies if not provided but do not stimulate employees for higher performance if provided. Therefore, the question arises- what is the rationale behind providing benefits and services?

The answer of this question involves the analysis in a much wider context than merely the organizational context; it has to be analyzed both in social as well as organizational contexts.

i. Social Context:

Every society takes care of its members by providing some kinds of benefits. The value and form of benefits depend on the economic conditions of the society. The basic logic behind such benefits is that members of the society will enjoy comparatively better lives as compared to what they can enjoy in the absence of these benefits. The objective is not necessarily to make them more efficient to work.

Therefore, every country adopts the concept of benefits in its framework which governs the country. For example, Constitution of India provides in its Article 43 that “all workers should be given living wage, conditions of work ensuring decent standard of life and fuller enjoyment to social and cultural opportunities.” Various benefits and services provided to the employees serve this purpose.

ii. Organizational Context:

Since every organization of a society is not similar to others, each organization adopts its own approach in providing the benefits to employees. The organizations which adopt philanthropic approach provide more generous benefits and services.

In general, from the organization’s point of view, the objectives of benefits and services are as follows:

1. To maintain parity with the general practices adopted by other organizations in the same geographical area or industry sector.

2. To provide community and commonly shared services which employees cannot provide individually.

3. To create better image of the organization so as to attract and retain competent employees.

4. To increase morale and work life of employees so that they can concentrate on their jobs.

5. To satisfy the trade unions by providing benefits and services to employees.

Fringe Benefits in HRM – Types: Employment Security; Health Protection; Old Age and Retirement; Personnel Identification; Participation and Stimulation & Miscellaneous

Organizations provide a variety of fringe benefits.

The fringe benefits are classified under five heads as given here:

1. Employment Security:

Benefits under this head include unemployment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the sons/daughters of the employees and the like.

2. Health Protection:

Benefits under this head include accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

3. Old Age and Retirement:

Benefits under this category include deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling, and medical benefits for retired employees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like.

4. Personnel Identification, Participation and Stimulation:

This category covers the benefits like anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counselling, safety measures, etc.

Other Miscellaneous Categories:

i. Payment for Time Not Worked:

Benefits under this category include sick leave with pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time, etc.

ii. Extra Pay for Time Worked:

This category covers the benefits such as premium pay, incentive bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, Deewali or Pooja bonus, food cost subsidy, housing subsidy, recreation.

iii. Retrenchment Compensation:

The Industrial Disputes Act, 1947 provides for the payment of compensation in case of lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to give one month’s notice or one month’s wages to all the workers who are retrenched after one year’s continuous service.

The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation as stated above even in case of closing down of undertakings.

iv. Lay-Off Compensation:

Layoff is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as the decision that certain positions are no longer necessary or business slowdown or interruption in work.

Originally the term ‘layoff’ referred exclusively to a temporary interruption in work, as when factory work cyclically falls off. In case of lay-off, employees are entitled to lay-off compensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. Lay-off compensation can normally be paid up to 45 days in a year.

Fringe Benefits in HRM – Statutory Benefits: Applicable to the Employees after Retirement and during Old Age

These benefits are related to the social security of employees because the economic and saving conditions of the employees are very poor due to the low wages and high living cost.

With a view to develop social security feeling after retirement and during old age the following statutory fringe benefits are applicable to the employees:

1. Gratuity:

As per the Payment of Gratuity Act, 1972, the gratuity is payable to all the employees who render a minimum continuous service of five year with the present employer or at the age of superannuation or death or disablement due to accident or disease. The maximum limit of gratuity payable to an employee shall not exceed Rs.3.5 Lakhs and the rate for the purpose of calculation is that the 15 days wages for every completed year of service.

2. Provident Funds:

The Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 provides provident fund and deposit linked insurance to the employees. Both employer and employees contribute to the fund. The rate of contribution is the 12% of the Basic Pay and Dearness Allowance in case of contribution to provident fund scheme and only 12% of the Basic Pay in case of provident fund scheme where the contribution from the employer side is not applicable.

Generally the organizations pay this fund amount with interest to the employee on superannuation or separation from the organisation by any means or to the dependents of the employee, in case of death.

3. Deposit Linked Insurance:

This scheme was introduced in 1976 in the Provident Fund Act. If a member of Employees Provident Fund dies during in service then his dependents will be paid an additional amount equal to the average balance during last three years in his account. The maximum amount payable is Rs.10000 under this scheme.

4. Pension:

The Government of India introduced a pension scheme in the year 1995 where the contributory provident fund scheme is applicable.

5. The Employee State Insurance Act, 1948:

The Workmen Compensation Act, 1923 and Maternity Benefit Act, 1961 are another statutory benefit schemes related to the health of employees comes under fringe benefits category.

The Human Resource Department is generally responsible for administration of the organisation. These are one of the means to ensure welfare of employees and to develop a sense of belongingness among employees towards organisation. Some of the organisations may provide even more than the aforementioned various fringe benefits programmes or may not provide all the benefits described due to the financial ability of the organizations.

Fringe Benefits in HRM – Administration (With Problems and Steps)

Fringe benefits and services are very useful for the employees. These provide help to the employees and fulfil their needs. It contributes to maintain the satisfied workforce. For this, it is required that the benefits and services must be managed properly. But in many organisations management does not pay proper attention towards administration of benefits and services.

Following are the problems faced in administration of benefits and services:

(a) Workers have different interest in benefits and services.

(b) Trade unions oppose such schemes.

(d) Managers are overloaded with work. Hence they are not able to pay proper attention towards administration of benefits and services.

(e) Lack of training in administration of benefits and services.

Administration of benefits and services must be proper; otherwise it will lead to confusion.

Following steps must be taken for effective management of benefits and services:

(a) Study of environmental factors.

(b) Study of competitor’s schemes and their administration.

(d) Fixing responsibility of administration of benefits and services.

(e) Communications of scheme to the employees and trade unions.

(f) Control of costs of benefits and services.

(g) Review of existing schemes.

Fringe Benefits in HRM – Types of Benefits Offered by Various Organisation in India: Hours of Work, Rest Period, Holidays, Shift Premium and a Few More

The provision of fringe benefits in Indian industries has not been very remarkable. There has been diversity in nature and quantum of these benefits in various industries. There are two types of fringe benefits being provided by Indian employers, some are legal, and some are voluntary.

The contribution to the provident fund of the employees, pension schemes, gratuity, contribution to employees, states insurance fund, lay off compensation, leave travel concession; maternity benefits are some examples of legal fringe benefits, which cost on an average equal to 21.3% of the annual wages.

On the other hand, in many industrial houses, various schemes are being operated for the benefit of their employees voluntarily. Their values range from 10% to 21% of the annual wages in different industries. Public sector enterprises have taken a lead in providing such benefits to their employees.

In spite of such high percentage, the provision of fringe benefits in India cannot be said to be adequate and satisfactory. The cost of fringe benefits is by no means significant as compared to other countries.

The fringe benefits offered by various organisation in India may be following types:

1. Hours of Work – As per Section 15 of the Factories Act, 1948, that no adult worker shall be allowed to work in a Factory for more than 48 hours in a week and more than 9 hours in a day.

2. Rest Period – Tea break or coffee break are allowed during the day to allow the worker to rest.

3. Holidays – As per the Factories Act, 1948, an adult worker shall have weekly paid holiday in general on Sunday or any other day in a week.

4. Shift Premium – Shift premium to the workers who are required to work during second and third shifts in a day.

5. Paid Vacation – Workers are eligible for paid vacation from 15 days to 30 days in a calendar year.

6. Holidays Pay – Independence Day, Republic Day, Gandhi Jayanti, Deepawali, Dusshera, Holi, Id and Christmas are gazetted paid holidays. Generally organizations after double the normal rate of the salary if the workers worked during these holidays.

7. Sick Leave – The employees are entitled to get full day when he is out of work due to sick for a 10 days in a calendar year.

8. Maternity Benefit – The Women are entitled to maternity leave for 12 weeks (six weeks before the delivery and six weeks after the delivery) in addition to cash benefit of 75 paise per day or twice of sickness benefit, whichever is higher.

9. Disable Benefit – The employees are entitled to get the benefit under Workmen’s Compensation Act 1923, if he is disabled temporarily or permanently (partial or total) during employment injury or occupational diseases.

10. Absence Leave – The pay is provided to an employee if he is absent from the work place due to the participating in training and development programmes.

11. Canteens – Fully or partially subsidized food and refreshments is provided to the employees during working hours.

12. Transport Facilities – Many organizations are providing conveyance facilities to employees from their residence to work place and back.

13. Housing Facilities – The big houses are providing company owners housing or subsidized housing facilities to their employees.

14. Purchasing Facilities – Many of the large organizations has set up the consumer stores in the employee’s colonies and supply all essential goods and services at fair prices.

15. Educational Service – Educational services include tuition fees refunds, scholarships, setting up of schools and colleges, libraries and many more. These facilities not only provide to the employees of the organisation but also to their family members.

16. Medical Facilities – These include clinics, hospitals and counselling services. It reduces tiredness, absenteeism and employee turnover.

17. Financial and Legal Aid – Many organizations are provided loan funds, income-tax service, assistance in legal matters and group insurance plans to their employees.

18. Recreational Facilities – Organisations provide social clubs, arrange parties and picnics, reading rooms, libraries and entertainment programmes for their employees.

19. Travel Concessions – Many organizations are providing leave and travel concessions one time in a financial year to their employees.

20. Miscellaneous – Many organisations are providing other benefits to their employees such as Dipawali gifts, birthday gifts, pooja gifts and productivity or performance rewards, etc.