Redundancy payments - not the final straw...

Emer Dufficy, Senior Manager

It is an unfortunate consequence of the current economic climate that many employers are faced with that most difficult of decisions which is to oversee a reduction in their workforce. For many, there is no choice but to implement a redundancy program in order to survive one of the most challenging periods for Irish business in the country's history. The management of most redundancy programs is usually left in the hands of the HR and Finance functions and for those accustomed to better times, it can seem as though the myriad of employment law and taxation issues associated with redundancy are endless.

However, there are some key points which are worth bearing in mind at the outset for both employers and employees which can help to ease the pain of redundancy:

Employers

There is often much confusion around the employee's termination date particularly where the employee has agreed to cease working at an earlier date than their contractual or statutory notice period. If the incorrect service period is used to calculate the statutory redundancy payment, employees may lose out on some portion of their statutory entitlement. Moreover, employers may lose out on the full amount of the government rebate due. Employers should check that they are using the correct date both for statutory redundancy purposes and for tax purposes, as these dates may or may not coincide depending on the employee's notice period and when they actually agree to cease working.
Pay in lieu of notice (PILON) is another area which can cause problems for employers both in terms of managing employee expectations and also ensuring full compliance with all employer related tax obligations. It is always advisable to check whether PILON is provided for in the employee's contract of employment so that it is correctly treated for tax purposes. Furthermore, employers should ensure that the PILON period has been taken into account when calculating the statutory end date as noted above.
The calculation of the standard capital superannuation (SCSB) tax exemption, especially for more senior personnel, often comes under some scrutiny. Employers should be aware that payroll data may not always contain the full picture of 36 months earnings to the termination date. Moreover, there may be some adjustment required where an employee has a gap in their service period.
Employers should always bear in mind that prior approval from the Revenue Commissioners must be obtained in order to apply the increased exemption for tax purposes. Given the current level of redundancy activity in the country, there are backlogs in many districts so employers should leave sufficient time for applications to be processed.
There has been much controversy regarding the possibility of retrospective application of the increased income levy rates announced in April's Supplementary Budget to the taxable portion of a non statutory redundancy payment. As the legislation currently stands, employers are only obliged to collect the increased income levy (2%, 4% and 6%) on a prospective basis from 1 May 2009. The legislation concerning the increased health contribution levy rates of 4% and 5%provides for the increased rates to apply from 1 May 2009. Fortunately, a non statutory redundancy is not subject to either employee or employer PRSI so the increased employee PRSI earnings threshold of €75,036 will not be of concern where payments are made post 1 May 2009.
There are alternatives to providing cash ex-gratia or non statutory payments especially where none of the three tax exemptions (basic, increased or SCSB) is sufficient to shelter the entire ex-gratia value. With the changes announced in the Supplementary Budget likely to have a major impact on the net value of non statutory redundancy packages offered post 1 May 2009, many employees will no doubt welcome an employer's flexible approach to their package as well as the opportunity to potentially reduce their liability to PAYE, the health levy and the income levy.

Employees

Ceasing employment in the middle of the tax year does not mean that unused personal tax credits and the standard rate cut off point (the amount taxed at 20%) will be lost. An employee can offset the unutilised benefit from their tax credits certificates in a number of ways.
Many employees will not be aware that additional tax relief could be available in respect of the PAYE deducted from their non statutory redundancy payment. This might be of particular benefit to anyone who has made significant pension contributions in the three tax years prior to termination.
Further tax savings may be achieved where an employee has undertaken a secondment overseas at some point in their career.
With the increased health levy and income levy rates taking effect from 1 May 2009, employees will certainly see the impact where some portion of their non statutory redundancy payment is taxable. Employees should ensure to retain their certificate of income levy deducted, along with their P45, to support a claim for a refund of both categories of levies after the end of the tax year.