Fringe Benefits

Fringe benefits are indirect form of compensation

given to employees in addition to the various forms
of cash pay- base pay, dearness allowance and
incentive pay. They provide a quantifiable value for
individual employees. They are the indirect form of
compensation as they are not related to the
performance but are granted to the employees for
just being a member of the organization. They are
not in the form of wages, salaries and time related
payments. For example key executives in large
companies might also enjoy fringe benefits like use of
time-share condominiums, paid continuing education,
use of a company jet, use of a company credit card,
discounted or free health club memberships, and a
significant amount of paid vacation.
According to the International Encyclopedia of social
sciences “A fringe benefits has to meet two tests, it
must provide a specific benefit to an employee and it
must represent a cost to the employer”
 Objectives of Fringe Benefits
The employer’s views are that fringe benefits form an
important part of employee incentives to obtain their loyalty
and retaining them.
The important objectives of fringe benefits are: ➢ To
create and improve sound industrial relations
➢ To boost up employee morale.
➢ To motivate the employees by identifying and satisfying
their unsatisfied needs.
➢ To provide qualitative work environment and work life.
➢ To provide security to the employees against social risks
like old age benefits and maternity benefits.
➢ To protect the health of the employees and to
provide safety to the employees against accidents.
➢ To promote employee’s welfare by providing
welfare measures like recreation facilities.
➢ To create a sense of belongingness among
employees and to retain them.
➢ To meet requirements of various legislations
relating to fringe benefits
 Features of Fringe Benefits
➢ They are the payments and benefits to an
employee by his employer in addition to
his normal earnings
➢ Fringe benefits are not linked to
performance or efficiency of any employee
➢ Fringe benefits may be statutory or
voluntary in nature
➢ Difference in fringe benefits may exist due to
classification of employees based on
organizational status
➢ Fringe benefits are paid to all the employees based on
their membership in the
organization
➢ Fringe benefits are indirect compensation because
these are usually extended as a
condition of employment and are not directly related to
performance.
➢ Fringe benefits involve labour cost for the
employer and are not meant directly to
improve efficiency
➢ Fringe benefits may be statutory or
voluntary. Provident fund is a statutory benefit
whereas housing is a voluntary benefit
➢ Fringe benefits raise the standard of living of
the employees
 Factors Determining /Reasons for Offering
Fringe Benefits
When a company wants to hire or keep an
employee, they look at all the standard and non-
standard compensation they can offer. The set of
perks the business comes up with is known as a
fringe benefits package. Companies also know
that employees will want benefits to increase
over time, so they need to create a package that
has room to grow. The following are the main
reason company offers fringe benefits:
Social Security
The employers must pay in whole or in part for certain
legally mandated benefits and insurance coverage also
known as social security. According to ILO, social security
refers to the protection which society provides for its
members through a series of public measures against
the economic and social distress that otherwise would
be caused by the stoppage or substantial reduction of
earnings resulting from sickness, maternity, employment
injury, unemployment invalidity, old age and health.
Paternalistic or Humanistic Consideration
Historically, fringe benefits were introduced with
humanistic considerations to support wage
compensation with certain infrastructure or
facilities to provide for health, education and
housing as also social, cultural, religious and
recreational activities.
Tax Considerations
There are individual and organizations to develop
ingenious methods of avoiding the obligations
through restructuring the pay packet. The various
fringe benefits like house rent, education expenses,
travel charges and many more are shown as re-
imbursement of expenditures. However, in recent
years the tax authorities are taking exception to such
camouflaging and disallowing non-wage benefits
beyond certain limits.
Utilization of Leisure Time
There is awareness about the effects of off-duty
life style on working life and vice-versa. The
importance of leave and holidays for rest and
recuperation is increasingly being understood.
Keeping these in mind, organizations are
providing various facilities for leave travel
including expenses of travel maintenance of
guest houses etc.
Competitive considerations
A variety of incentives and benefits are being
offered like company housing liberal loan
facilities, construction of schools or
reimbursement of education expenditure ,
membership in clubs/professional associations,
sponsorship for training and conference abroad
etc to attract and retain people based on the
competitors companies in the field.
To Meet Price Rises
Rising prices and cost of living has brought about incessant
demand for provision of extra benefit to the employees.
Employers too have found that fringe benefits present
attractive areas of negotiation when large wage and salary
increases are not feasible.
To Attract and Retain Best Talents
As organizations have developed more elaborate fringe
benefits programs for their employees, greater pressure has
been placed upon competing organizations to match these
benefits in order to attract and keep employees.
To Protect Employees from Adverse Impact
Rapid industrialization, increasingly heavy urbanization
and the growth of a capitalistic economy have made it
difficult for most employees to protect themselves against
the adverse impact of these developments. Since it was
workers who are responsible for production, it was held
that employers should accept responsibility for meeting
some of the needs of their employees. As a result, some
benefits-and-services programs were adopted
by employers.
Due to Government Legislation
The growing volume of labor legislation, particularly
social security legislation, made it imperative for
employers to share equally with their employees
the cost of old age, survivor and disability benefits.
Collective Bargain by Trade Unions
The growth and strength of trade unions has
substantially influenced the growth of company
benefits and services.
Labour Scarcity and Competition
Labor scarcity and competition for qualified
personnel has led to the initiation, evolution
and implementation of a number of
compensation plans.
 Types of Fringe Benefits
The following are the general types of fringe benefits
offered to the employees
For 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.
For Health Protection
Benefits under this head include accident insurance,
disability insurance, health insurance, hospitalization, life
insurance, medical care, sick benefits, sick leave, etc.
For Old Age and Retirement
Benefits under this category include: deferred income
plans, pension, gratuity, provident fund, old age assistance,
old age counseling, medical benefits for retired employees,
traveling concession to retired employees, jobs to
sons/daughters of the deceased employee and the like.
For Personnel Identification, Participation and Stimulation
This category covers the following benefits: anniversary
awards, attendance bonus, canteen, cooperative credit
societies, educational facilities, beauty parlor services,
housing, income tax aid, counseling, quality bonus,
recreational programs, stress counseling, safety measures etc.
Employee Security
Physical and job security to the employee should also be
provided with a view to promoting security to the employee
and his family members. The benefit of confirmation of the
employee on the job creates a sense of job security.
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. Workers are eligible
for compensation as stated above even in case of
closing down of undertakings.
Lay-off Compensation
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.
Health Facility
Employee’s health should be taken care of in order to protect the
employee against accidents, unhealthy working conditions and to
protect worker’s capacity. In India, the
Factories Act, 1948, stipulated certain requirements regarding
working conditions with a view to provide safe working environment.
Safety Facility
Provisions relating to safety measures include fencing of
machinery, work on or near machinery in motion,
employment of young person’s on dangerous machines,
striking gear and devices for cutting off power, self-acting
machines, easing of new machinery, probation of
employment of women and children near cotton openers,
hoists and lifts, lifting machines, chains ropes and lifting
tackles, revolving machinery, pressure plant, floors,
excessive weights, protection of eyes, precautions against
dangerous fumes, explosive or inflammable dust, gas etc.
Accident or Health Plans
The value of accident or health plan coverage provided
by the employer is usually not included in the income.
However, benefits may be taxable to employee. If
employer does not pay the entire cost of your health
insurance, employee may be able to enter into a
“salary reduction agreement” with employer. Under
these agreements, employer reduces salary or wages
by the amount of cost of the health insurance and
pays the full amount.
Adoption Assistance
Employee may be able to exclude from your income amounts
paid or expenses incurred by your employer for qualified
adoption expenses if employee attempt to adopt an eligible
child.
Holiday Gifts
If employer gives employee a ham, turkey, or other item of
nominal value at Christmas or other holidays, it is not
included in employee income. However, cash, gift cards, or
similar items are included in the income regardless of the
amount.
Qualified Employee Discounts
These are not taxable if the discount for services does not
exceed 20%. Discounts for merchandise are limited to the
employer’s gross profit percentage. No discounts are allowed
for real estate, stock, or other investment property. This is
available to employees, spouses, dependents and retirees.
Working Condition Benefits
These include items such as professional dues paid by the
employer or subscriptions to professional publications and
are not included in income.
Qualified Transportation Fringe Benefits
Employer may provide to the employee transit passes and
tokens for parking. These amounts are excluded from
employee income. Also, transportation in a commuter highway
vehicle, provided by employer, between employee home and
place of work is not taxable
income.
Recreation and Athletic Facilities
The use of employer-owned athletic or recreation facilities is
not taxable income. This benefit is available for employees,
spouses, dependents and retirees.
Educational Assistance
Employer provides educational assistance to
employee to go for higher studies, training,
children’s education etc.,
Employer-Provided Vehicles
Employer provides a vehicle employees personal
use is a taxable non cash fringe benefit. Employer
must determine the actual value of the benefit and
include that amount on employees account.
Retirement Planning Services
Employer has a qualified retirement plan,
qualified retirement planning services provided
by the employer to employee and his spouse are
not included in employee income.
Meals and Lodging
Meals provided by an employer may be excluded from an
employee’s income if the meals are furnished on the employer’s
premises and are for the convenience of the employer. Lodging
provided by an employer may be excluded from an employee’s
income if it is furnished on the employer’s premises, is for the
convenience of the employer, and is required that the employee
accept the lodging as a condition of employment.
Dependent Care Benefits
These benefits are employee-financed programs that provide care
for an employee’s children or other dependents. The care must
be care that would qualify for the dependent
care credit if the employee had paid the amounts.
Employee Death Benefits
These are payments made to the family or
friends of a relative who dies. They may or may
not be taxable, depending on the facts and
circumstances. If the payments were for past
services such as bonuses, accrued wages, or
unused vacation pay they are taxable income to
the family.
 Current Fringe Benefit Practices
Currently three main approaches are in vogue in
the area of fringe benefits:
➢ Innovation: organizations are offering many
new types of fringe benefits to their employees
➢ Flexibility in fringe benefits: employees are
allowed to choose from an array of benefits within
certain cost limits and
➢ Harmonization is tried to be attempted to give
a feeling of equity and fair play to employees
 Principles of Fringe Benefits
The following principles must govern the administration of
fringe benefits
➢ Benefits and services must be provided to the employees
on the basis of a genuine interest in the protection and
promotion of their well-being. The management should
not feel that the fringes are thrust upon them. Nor should the
management feel that they are providing the benefits as a
matter of charity.
➢ The benefits must satisfy a real need. Employees resist or
are indifferent to any benefit which is not like by them
➢ The benefits must be cost-effective
➢ The benefits should be as broad based as
possible
➢ Administration of the benefits should be
preceded by sound planning
➢ The wishes of employees expressed by their
union representatives and the bargaining
power of the union must be considered
➢ Employees should be educated to make use of
the benefits.