Redundancy Payments – A Guide for the Employee

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REDUNDANCY GUIDE: FREQUENTLY ASKED QUESTIONS

[click below to jump-link to the relevant section]

– WHEN DOES REDUNDANCY ARISE?

– STATUTORY REDUNDANCY: HOW MUCH?

– WHICH EMPLOYEES ARE COVERED?

– HOW MUCH NOTICE IS REQUIRED?

– HOW ARE REDUNDANCY PAYMENTS CALCULATED?

– WHAT REBATES DO EMPLOYERS GET?

– WHAT IS THE EMPLOYMENT APPEALS TRIBUNAL?

– WHAT HAPPENS IF THERE IS A CHANGE OF COMPANY OWNER?

– MY EMPLOYER WON’T PAY: WHAT TO DO?

– WHAT ARE EX-GRATIA PAYMENTS?

– WHAT ARE REDUNDANCY PAYMENT EXEMPTIONS?

– WHAT IS SUPERANNUATION BENEFIT?

– HOW IS A REDUNDANCY LUMP SUM TAXED?

– WHAT IS TOP-SLICING RELIEF?

– HOW DOES FOREIGN SERVICE IMPACT REDUNDANCY?

 

 

 

When does Redundancy arise?

 

A redundancy situation arises where an employee’s job ceases to exist and the employee is not replaced because of rationalisation/reorganisation, not enough work available, the financial state of the firm/company closures etc.

 

How much is the Statutory Redundancy Payment?

 

Redundancy is now a reality for many people in Ireland particularly since the economic downturn which started in 2008. The Redundancy Payments Act, 1967-2007 legally obliges employers to pay redundant employees what is known as a ‘statutory redundancy’ entitlement’. The amount is related to the employee’s length of service and normal earnings (gross weekly wage, average regular overtime and payment in time), all added together, up to a maximum of €600 per week or €31,200 per annum.

 

Which employees are covered?

 

Employees are covered under the Redundancy Payments Acts if they meet the following requirements,

–          Age 16 or over

–          Have at least 2 years continuous service (104 weeks)

–          Are in employment which is insurable for all social Welfare Benefits. This condition does not apply if you are a part time employee.

–          Have been made redundant as a result of a genuine redundancy situation i.e. your job no longer exists and you are not replaced.

 

What Notice of Redundancy must an employer supply?

 

An employer who, because of redundancy, intends to dismiss an employee who has at least 104 weeks continuous service with the firm must give notice in writing to the employee of the proposed dismissal. The employer can do so by giving part A (notification of redundancy) of from RP50 to the employee.

 

How are Statutory Lump Sum Redundancy Payments Calculated?

 

The amount of statutory redundancy payments which an employee is entitled to receive from their employer is calculated as follows:

–          Two weeks pay for each year of employment continuous  and reckonable over the age of 16

–          In addition, a bonus week. All excess days are calculated as a portion of 365 days i.e. 4 years 190 days = 4.52 yrs

–          Reckonable service is service excluding ordinary sick leave over and above 26 weeks and an occupational injury over and above 52 weeks

Reckonable service also excludes absence from work because of lay-offs or strikes. However, short-time work in reckonable

All calculations are subject to the ceiling of €600 per week

Statutory payments are exempt for tax.

 

Worked Example: 

You started working for your current employer on the 1st January 2002. As a result of the slowdown in the economy your employer decided to reduce staff numbers and you are made redundant with effect from 31st December 2012. Your current salary is €45,000 per annum.

 

As you have 11 full years of services you will be entitled to:

11 x 2 weeks plus 1 week bonus = 23 weeks

 

Your weekly salary is €865.38 however the maximum you can receive by way of statutory redundancy is limited to €600 per week. Therefore your statutory redundancy payment is calculated as follows:

 

23 weeks x €600 = €13,800

 

 

This payment is tax free!!!!!!!

Bonus: your employer can receive a refund of 15% of the payment i.e. 15% x€13,800 = € 2,070 from the Department of Jobs, Enterprise and Innovation.

 

What rebates are available to employers?

 

Employers who pay the statutory redundancy entitlement and give proper notice of redundancy (at least two weeks) are entitled to a 15% rebate from social insurance fund, into which they make regular payments themselves through their P.R.S.I. contributions.

Due to the high levels of redundancies in recent years there can be a delay in an employer receiving a statutory redundancy rebate.

Note:If a business is waiting on a rebate and is experiencing difficulties in meeting its tax obligations, the amount of tax refund due to the employer can be paid directly from the Department of Jobs, enterprise and Innovation to the Revenue Commissioners.

 

Legislation Changes in Budget 2013

Note: This rebate is discontinued for redundancies made on or after the 1st January 2013.

 

The Role of the Employment Appeals Tribunal

 

Disputes concerning redundancy payments can be submitted to the Employment Appeals Tribunal, which can provide a speedy, fair, inexpensive and informal means for individual to the pursue their rights. The Tribunal seeks to provide remedies for alleged infringements of an employees statutory redundancy rights. The Tribunal also deals with disputes under other labour law areas including the minimum notice and Terms of Employment Acts, 1973 to 2001. These cover the rights of the workers to a minimum period of notice before dismissal, provided they are in continuous service with the same employer for at least 13 weeks and are normally expected to work at least 8 hours per week.

The Tribunal also deals with the unfair Dismissals Acts, 1977 to 1993 and the protection of Employees (Employer’s Insolvency) Acts, 1984 to 2003 dealing with such areas, amongst others, as arrears of pay due to an employee, holiday and sick pay etc. where the employer is insolvent.

 

What are the effects of change of ownership of a business on a redundancy lump sum payment?

 

Where there is a change in the ownership of a business and you continue, by arrangement, to work for the new owner with no break in your employment, you are not entitled to any redundancy payments at the time of the change of ownership. Your continuity of employment is also preserved for the purpose of the redundancy payments in the event of your dismissal or redundancy by the new employer at any future date. You are not entitled to a redundancy payment if an offer of employment by the new owner is unreasonably refused by you. If the new owner merely buys the premises in which you were employed, this will not constitute a change of ownership of the business and your former employer will be liable to pay any redundancy payment which may be due to you.

 

What happens if an employer fails to pay a redundancy lump sum?

 

In situations where the employer is unable to pay the employees their entitlements, the Department of Jobs, Enterprise and Innovation will pay the full amount directly to the employees from the social insurance fund. In no circumstances should the employer pay part of the statutory entitlement to the employee.

The employer will then be liable for the payment and will become a preferential creditor to the Department of Jobs, Enterprise and Innovation. The employee fills in Form RP50 including the original employer signature and sends it into the Department of jobs, Enterprise and Innovation. Before this claim can be processed an employer must provide a letter from their accountant/solicitor confirming their inability to pay. This confirmation must be based on their professional view of the company’s finances rather than a view based on information provided by the employer and they must be able to support this confirmation should an audit be carried out at any time.

For further information or relevant forms, contact the Department of Jobs, Enterprise and Innovation, Davitt House, Adelaide Road, Dublin 2 or FAS at any of their offices through the country or www.djei.ie

 

What are Ex-Gratia Payments?

 

Legally your employer is only obliged to pay you statutory redundancy in the event of a redundancy. However many employers also pay an additional, ex-gratia payment to employees. Ex-gratia payments or compensation payments over and above the statutory redundancy payments are taxable.

However there are a number of exemptions available which reduce the amount charged to tax and ‘Top Slicing Relief’ which reduces the rate of tax paid on ex-gratia lump sums.

 

Basic Exemption

 

The basic exemption is €10,160 together with an additional €765 for each complete year of service.

Increased Exemption

The basic exemption may be increased by €10,000 to a maximum of €20,160 plus €765 for each complete year of service provided:

–          You have not made any claims in respect of a lump sum in the previous 10 tax years

–          If you are in an occupational pension scheme, the increased exemption of €10,000 is reduced by the amount of:

1) Any tax free lump sum from the pension scheme, to which you may be immediately entitled or

2) The present day value at the date of leaving employment of any tax-free lump sum, which is received or may be receivable from the pension scheme in the future.

If the lump sum from the pension is more than €10,000 you are not due the increased exemption. If it is less than the €10,000 you are due the increased exemption of €10,000 minus the amount of the pension scheme entitlement.

Revenue approval must be sought for the increased exemption. The application for the increased exemption can be found on www.revenue.ie or is available from your local tax office.

 

What is Standard Capital Superannuation benefit (S.C.S.B)?

 

The third exemption is the Standard Capital Superannuation Benefit. This is arrived at using the following formula:

A x B   –   C

15

Where:

A = Average yearly remuneration from the employment for the last 36 months ending on the date of termination

B = Number of complete years of service

C = Any tax-free lump sum from an occupational scheme to which you may be entitled or the present day value at the date of leaving employment of any tax-free lump sum which is received or may be receivable from an occupational pension scheme.

For the purpose of calculating the increased exemption and the S.C.S.B. amount, the tax-free lump sum receivable from an occupational pension scheme is the present day value of any deferred tax-free lump sum receivable at retirement from the existing occupational pension scheme. A refund of pension contributions which were subject to tax at 20% is excluded.

If you sign a waiver letter i.e. a letter confirming you will not avail of any tax-free lump sum from your current occupational pension scheme now or at retirement, the value of any deferred tax-free lump sum receivable will be nil.

Ex-gratia payments made on or after the 01/01/2011 will be subject to a maximum exemption limit of €200,000 taking into consideration any prior tax-free payments (including SCSB deduction) which have been received.

 

Note: This does not include the €5,000 exemption for training/death/injury/disability

 

Worked Example

 

You commenced employment with company ABC Ltd on 01/12/1990

You opted for early retirement on 01/11/2012 and you received a lump sum of €60,000 (excluding statutory redundancy)

You received a tax-free lump sum of €25,000 from your pension scheme. The tax-free amount of this €60,000 is the highest of the following:

01/01/12 – 31/10/12                         €41,667                 (10 months)

01/01/11 – 31/12/11                         €50,000                 (12 months)

01/01/10 – 31/12/10                         €45,000                 (12 months)

01/11/09 – 31/12/09                         €7,000                   (2 months)

Total Salary for 36 months                 €143,667

Average Salary for 12 months           €47,889

Basic Exemption

€10,160 + (€765 x 21) = €26,225

Remember only complete years count for the purpose of the additional €765. So even though you had 21 years 11 months service, you only receive €765 x 21.

Increased exemption

As you received a tax-free lump sum from the pension scheme in excess of €10,000, the increased exemption would not apply to you.

Standard Capital Superannuation Benefit (SCSB)

Assuming your salary for the last 36 months was as follows:

Calculation of SCSB

A x B   – C        =     €47,889 x 21 less €25,000 = €42,045

15                                    15

Therefore the highest of the three exemptions is the SCSB amount of €42,045 and this is the amount you receive tax free.

In summary of your position, assuming you pay tax at 41% is as follows:

Gross Lump Sum                                  €65,000

Less SCSB Amount                               €42,045

Taxable                                                  €22,955

Tax @ 41%                                            €9,411

USC @ 7%                                              €1,607

Total Tax and Levies                            €11,018

Net Lump Sum                                      €53,982

 

Subsequent Claim

The basic exemption and the SCSB are generally available against any subsequent lump sum payment. However, they can only be given once against a lump sum from the same employer or an associated employer

The increased exemption of €10,000 may be claimed if an individual has not made any claims for the increased exemption in respect of a lump sum received in the previous 10 years.

 

How is the Lump sum taxed?

 

Your employer is obliged to deduct PAYE and USC on all of the lump sum less the basis exemption or SCSB as previously outlined.

 

Note: PRSI is NOT payable the taxable lump sum

 

Your employer can give the basic exemption or SCSB without prior approval from you Inspector of Taxes. However, if you are due an increased exemption, either you or your employer should apply to your local tax office well in advance of the payment date for approval to give increased exemption.

Assuming you received a lump sum in November 2012, the taxable lump sum was €22,800 and you paid tax @ 41% on this, amounting to €9,348. Your average rate of tax over the last three years would was 27%. Therefore the tax payable would be as follows:

Tax paid on Lump Sum                                                         €9,348

Taxable Lump Sum                                                               €22,800

Average rate of tax from 2009-2011                                       27%

Tax Due                                                                              €2,524

 

Budget 2013 and Top Slicing Relief:

 

Top Slicing relief will no longer be available to those receiving an ex-gratia payment, where the payment excluding statutory redundancy exceeds €200,000 or more. This applies to payments made after 1st January 2013.

 

What affect Foreign Service has on Redundancy:

 

If an employee exercised part of the duties of employment in a foreign country, an exemption was available in respect of the period of foreign employment

 

This relief ceased to apply to payments received after March 2013

(S14 Finance Act 2013)

 

Up to March 2013, your redundancy lump sum may be completely tax free provided:

 

– 75% or more of your entire period of employment, ending on the date of termination was Foreign Service, OR

 

– Your period of service exceeded 10 years but the whole of the last 10 years was Foreign Service, OR

 

– One half of your period of service including any ten of the last 20 years was Foreign Service, provided your period of service exceeded 20 years.

 

(Only one of the above conditions were required.)

 

Foreign Service is defined as a period of employments the emoluments of which were not chargeable to Irish Tax, or if chargeable to Irish Tax were chargeable on the remittance basis.

 

 

Where Foreign Service is not sufficient to exempt:

 

If you have Foreign Service but do not qualify for full exemption from income tax on your redundancy payment, as reduced by the basic/increased or SCSB exemption may be further reduced be the following formula:

 

P X FS 

TS

 

P = Gross Lump Sum Payment (as reduced by SCSB or basic/exemption)

 

FS = Number of years of Foreign Service

 

TS = Number of years of total service

 

 

Worked Example

Based on the example I used in my previous article and assuming that you had spent 6 yrs working in the U.S. Foreign Service relief would be as follows:

 

€22,955 x 6       =     €6,559: so your taxable lump sum is now reduced by Foreign Service relief of €6,559

21Thus the calculation would be as follows:

Gross Lump Sum                                                    €65,000

Less SCSB amount                                                  €42,045

Less Relief for Foreign Service                                €6,559

Taxable                                                                 €16,396

Tax @41%                                                                €6,722

USC @ 7%                                                                €1,148

Total Tax & Levies                                                   €7,870

 

 

Net Lump Sum                                                     €57,130 

 

Visit ocean.ie/pensions for more information.

 

If you need any assistance on taxation matters relating to pensions, you can contact my colleague Liam Burns ACCA at 01-8685944 or just use the quick enquiry form below and we will be back to you with one working day.