Fringe Benefits: Meaning, Objectives, Types, Trends

fringe benefits

Fringe benefits are extra benefits provided to employees in addition to their normal compensation. They have become an important part of a comprehensive compensation package offered by employers. They are paid to all employees, are supplementary forms of compensation, and help raise living conditions. They are indirect compensation and may be extended as a condition of employment.

The term fringe benefits refers to the extra benefits provided to employees and the normal compensation paid in wages or salary. Many years ago, benefits and services were labeled ‘fringe’ benefits because they were relatively insignificant or fringe compensation components.

However, the situation now is different, as these have, more or less, become important parts of a comprehensive compensation package offered by employers to employees.

5 Features of Fringe Benefits

The main features of fringe benefits, as they stand today, may be stated as follows:

  1. They are paid to all employees (unlike incentives, which are paid to specific employees whose work is above standard) based on their membership in the organization.
  2. They are supplementary forms of compensation.
  3. They help raise the living conditions of employees.
  4. They are indirect compensation because they are usually extended as a condition of employment and are not directly related to performance.
  5. They may be statutory or voluntary. Provident funds are statutory benefits, whereas transport is a voluntary benefit.

5 Need for Fringe Benefits

Most of the organizations pay fringe benefits to their employees, year after year, due to the following reasons:

Trade-union demands

Trade unions compete with each other to get more and a new variety of fringe benefits for their members. If one union succeeds in getting one benefit, the other union persuades management to provide a new one.

Thus, the competition among trade unions within an organization results in more and varied benefits.

Employee demands

Employees demand more and varied types of fringe benefits rather than pay hikes because of a reduction in the tax burden on the part of employees and in view of the galloping price index and cost of living.

To improve human relations

Human relations are maintained when the employees are satisfied economically, socially, and psychologically.

Fringe benefits satisfy the workers’ economic, social, and psychological needs.

Consumer stores, credit facilities, canteens, recreational facilities, etc., satisfy the workers’ social needs, whereas retirement benefits satisfy some of the psychological problems about post-retirement life.

However, most of the benefits minimize the employee’s economic problems.

Employer’s preference

Employers also prefer fringe benefits to pay hikes, as fringe benefits motivate employees to give their best to the organization. It improves morale and works as an effective advertisement.

As social security

Social security is security that society furnishes through appropriate organization against certain risks to which its members are exposed. These risks are contingencies of life, like accidents and occupational diseases.

Employers have to provide various benefits like safety measures, compensation in case of involvement of workers in accidents, medical facilities, etc., to provide security to their employees against various contingencies.

7 Objectives of Fringe Benefits

The important objectives of fringe benefits are:

  1. To motivate the employees by identifying and satisfying their unsatisfied needs.
  2. To create and improve sound industrial relations.
  3. To protect the employees’ health and provide safety to the employees against accidents.
  4. To provide security to the employees against social risks like old age benefits and maternity benefits.
  5. To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden handcuffs.
  6. To promote employees’ welfare
  7. To meet the requirements of various legislations relating to fringe benefits.

7 Types of Fringe Benefits

The fringe benefits offered by various organizations may be broadly classified into five categories. These are discussed below:

Payment for time not worked

This category includes;

  1. Hours of work
  2. Paid holidays
  3. Shift premium
  4. Holiday pay
  5. Paid vacation

Hours of work

The Factories Act specifies that no adult worker shall be required to work in a factory for more than 48 hours in any week. The Act also restricts the working hours to 9 on any day. In some organizations, the number of working hours is less than the legal requirements.

According to the Factories Act, an adult worker shall have weekly paid holidays, preferably Friday. When a worker is deprived of weekly holidays, he is eligible for compensatory holidays of the same number in the same month. Some organizations allow the workers to have two days’ holidays in a week.

Shift premium

Companies operating second and third shifts pay a premium to the workers who are required to work during the odd hours shift.

Holiday pay

Generally, organizations offer double the normal rate of salary to those workers who work during holidays.

Workers in manufacturing, mining, and plantations who worked for 240 days during a calendar year are eligible for paid vacation at the rate of one day for every 20 days worked in case of adult workers and at the rate of one day for every 15 days worked in case of child workers.

Employee security

Physical and job security for the employee should also be provided with a view to ensuring security for the employee and his family members. When the employee’s services are confirmed, his job becomes secure. Further minimum and continuous wage or salary give a sense of security to life.

  1. Retrenchment compensation
  2. Layoff compensation

Retrenchment compensation

The Industrial Disputes Act provides for the payment of compensation in case of layoff and retrenchment.

Layoff compensation

In case of a layoff, employees are entitled to layoff compensation at the rate equal to 50% of the total of the basic wage and dearness allowance for the period of their layoff except for weekly holidays.

Safety and health

Employee’s safety and health should be taken care of to protect the worker’s productive capacity. The Factories Act stipulates certain requirements regarding working conditions to provide a safe working environment.

These provisions relate to;

  1. cleanliness,
  2. disposal of waste and effluents,
  3. ventilation and temperature,
  4. dust and fume,
  5. artificial humidification,
  6. overcrowding,
  7. lighting,
  8. drinking water,
  9. latrines,
  10. urinals, and
  11. spittoons.

Provisions relating to safety measures include

  • fencing of machinery,
  • work on or near machinery in motion,
  • employment of young persons on dangerous machines,
  • striking gear and devices for cutting off power,
  • self-acting machines,
  • casing of new machinery,
  • prohibition 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 weight,
  • protection of eyes,
  • precautions against dangerous fumes, explosive or inflammable dust, gas, etc.

Precautions, in case of fire, power to require specifications of defective parts or test of stability, safety of buildings and machinery, etc.

Workmen’s compensation

In addition to safety and health measures, provisions for the payment of compensation are also made under the Workmen’s Compensation Act.

The Act is intended to meet the contingency of invalidity and death of a worker due to an employment injury or an occupational disease specified under the Act at the sole responsibility of the employer.

Health benefits

Today, various medical services like hospital, clinical, and dispensary facilities are provided by organizations not only to employees but also to their family members.

Such benefits usually include:

  • Sickness benefits
  • Maternity benefit
  • Disablement benefit
  • Dependants’ benefits
  • Medical benefits

Sickness benefits

Insured employees are entitled to get cash benefits under this system.

Maternity benefit

Ensured female employees are entitled to maternity leave.

Disablement benefit

Insured employees who are temporarily or permanently disabled (partial or total) due to employment injury and/or occupational diseases are entitled to get the cash benefit under this head.

Dependants’ benefits

If an insured person dies as a result of an employment injury sustained as an employee, his dependents who are entitled to compensation under the Act shall be entitled to periodical payments referred to as dependents’ benefits.

Medical benefits

This benefit shall be provided to an insured employee or to a member of his family where the benefit is extended to his family. This benefit is provided in the following forms:

  • out-patient treatment or attendance in a hospital, dispensary, clinic, or other institutions; or
  • by visits to the home of the insured person or,
  • treatment as an in-patient in a hospital or other institution.

An insured person shall be entitled to medical benefits during any week for which contributions are payable or in which he is eligible to claim sickness or maternity benefits or eligible for disablement benefits.

However, many large organizations provide health services over and above the legal requirements to their employees free of cost by setting up hospitals, clinics, dispensaries, and homeopathic dispensaries. The company’s elaborate health service programs include:

  1. Providing health maintenance service, emergency care, on-the-job treatment, care for minor complaints, health counseling, medical supervision in rehabilitation, accident and sickness prevention, health education programs, treatment in employee colonies, etc.
  2. Medical benefits are extended to employee family members and to retired employees and their family members.
  3. Small organizations that cannot set up hospitals or large organizations (where hospitals cannot be set up for various reasons) provide medical services through local hospitals and doctors. Sometimes, they provide the facility of reimbursement of medical expenses borne by the employees.

Welfare and recreational facilities

Welfare and recreational benefits include;

  1. Canteens
  2. Consumer stores
  3. Credit Societies
  4. Housing
  5. Legal aid
  6. Employee counseling
  7. Welfare organizations and welfare officers
  8. Educational facilities
  9. Transportation
  10. Parties and picnics
  11. Miscellaneous

Canteens

Perhaps no employee benefit has received as much attention in recent years as that of canteens. Some organizations have a statutory obligation to provide such facilities as the Factories Act imposes a statutory obligation on employers to provide canteens in factories employing more than 250 workers.

Others have provided such facilities voluntarily. Foodstuffs are supplied at subsidized prices in these canteens. Some companies provide lunchrooms when canteen facilities are not available.

Consumer stores

Most of the large organizations located far from towns and provide housing facilities near the organization set up consumer stores in the employees’ colonies and supply all the necessary goods at fair prices.

Credit Societies

The objective of setting up these societies is to encourage thrift and provide loan facilities at reasonable terms and conditions primarily to employees. Some organizations encourage employees to form cooperative credit societies to foster self-help rather than depend upon money lenders, whereas some organizations provide loans to employees directly.

Housing

Of all the requirements of the workers, decent and cheap housing accommodation is of great significance.

The problem of housing is one of the main causes of fatigue and worry among employees, which comes in the way of effectively discharging their duties. Most organizations are located very far from towns where housing facilities are unavailable.

Hence, most organizations build quarters nearer to the factory and provide cheap and decent housing facilities to their employees, whilst a few organizations provide and/or arrange for housing loans to employees and encourage them to construct houses.

Organizations also provide assistance or aid regarding legal matters to employees as and when necessary through company lawyers or other lawyers.

Employee counseling

Organizations provide counseling services to employees regarding their personal problems through professional counselors. Employee counseling reduces absenteeism, turnover, tardiness, etc.

Welfare organizations and welfare officers

Some large organizations set up welfare organizations with a view to provide all types of welfare facilities at one center and appoint welfare officers to provide welfare benefits continuously and effectively to all employees fairly.

Educational facilities

Organizations provide educational facilities not only to the employees but also to their family members. Educational facilities include reimbursement of fees, setting up of schools, colleges, and hostels, and providing grants-in-aid to the other schools where many students are from the children of employees. Further, the organizations provide rooms and libraries for the benefit of employees.

Transportation

Companies provide conveyance facilities from their residence to their place of work as most of the industries are located outside the town, and all employees may not get a quarter facility.

Parties and picnics

Companies provide these facilities with a view to inculcating a sense of association, belongingness, openness, and freedom among employees. These activities help employees to understand others better.

Miscellaneous

Organizations provide other benefits like organizing games, sports with picnics, setting up of clubs, community service activities, Christmas gifts, birthday gifts, marriage gifts, leave travel concession, annual awards, productivity/performance awards, etc.

Old age and retirement benefits

Industrial life generally breaks joint family systems. The saving capacity of the employees is very low due to lower wages, high living costs, and increasing aspirations of the employees and their family members.

As such, employers provide some benefits to the employees after retirement and during old age to create a feeling of security about old age.

These benefits are called old age and retirement benefits. These benefits include

  1. Provident fund.
  2. Pension.
  3. Group insurance.
  4. Gratuity.
  5. Medical benefit.

Provident fund

This benefit is meant for the economic welfare of the employees. Legal provisions exist for the Provident Fund institution for employees in factories and establishments.

The Provident Fund Scheme provides monetary assistance to employees and/or their dependents during post-retirement life.

Thus, this facility provides security against social risks, enabling industrial workers to have a better-retired life. The Act covers employees in all factories under the Factories Act. Generally, both the employee and employer contribute to the fund.

The employees attaining 15 years of membership are eligible for 100% of the contributions with interest. Generally, the organizations pay the Provident Fund amount with interest to the employee on retirement or to the employee’s dependents in case of death.

Pension Programs

The single largest source of income for retired workers in the past was Social Security Benefits. Most workers in the public sector today, however, rely on some form of pension plan to cover their financial needs in retirement.

Many workers in the private sector also have special private pension plans operated by their employers.

A pension represents a fixed payment, other than wages, made regularly to former employees or their surviving dependents.

To qualify, employees are required to fulfill certain conditions of employment for a specific length of time. The most popular method for determining the amount of an employee’s pension is to base payment on a percentage of the employee’s earnings, usually computed on an average over several years, multiplied by the number of years the organization has employed him or her.

The next most popular method is one in which payment is based on some percentage of the employee’s income, usually for a particular period of time.

Pensions are expensive benefits for organizations to provide but are necessary to attract and keep valuable employees.

However, little evidence indicates that employees are motivated by pension plans. The reason is that pension plans are only remotely tied

to an individual’s performance, and the payoff, especially for the worker under forty-five years of age, is far into the future.

Pensions must, therefore, be viewed as membership-based rewards that are provided to develop loyalty, especially where vesting is withheld for the full ten years. Group insurance, gratuity, and medical benefits are to be ensured appropriately.

Benefits have become something other than what was once thought of as “fringe.” Employees expect certain extras to be the norm rather than the exception.

Cognizant of these requirements and competition from other businesses, management has had to develop cost-effective methods to offer and service these benefits.

The most widely used prescription has been the cafeteria style of benefits. The cafeteria approach allows employees to pick and choose those benefits that are desirable.

The use of the cafeteria-style approach to benefits will undoubtedly continue, with the most popular offering being some core benefits required for all employees and the remainder of the monies to be spent on benefits left to each employee’s decision.

Many research studies have supported the advantages of the cafeteria approach to benefits, as we can show that people do have different needs according to their age, financial and family position, attitudes, and lifestyle.

Younger employees tend to favor the benefits of frequent or immediate use, such as vacation days, holidays, and flexible working hours. Older employees are usually security-conscious, preferring life insurance and retirement-related benefits.

As for the other trends, we can expect the burden of paying for these benefits to shift to one more equitably shared between the employee and the employer. Health care is a primary example. While it may cost more to subscribe to health coverage, it is still minimal compared to the costs of a disastrous illness.

Finally, we must realize that employees may be paying more for or getting less of employers’ benefits. Economic hardships are a reality, and cost-cutting measures are mandated. Employees must be willing to accept less if they are to progress in the future.

The paternalistic perception of an organization must be changed, and employees must be willing to share more responsibility for their well-being.