Redundancy Payments – A Guide for the Employee
REDUNDANCY GUIDE: FREQUENTLY ASKED QUESTIONS
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
The basic exemption is €10,160 together with an additional €765 for each complete year of service.
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.
The third exemption is the Standard Capital Superannuation Benefit. This is arrived at using the following formula:
A x B – C
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
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
€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.
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
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
Tax @ 41% €9,411
USC @ 7% €1,607
Total Tax and Levies €11,018
Net Lump Sum €53,982
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.
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
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.
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
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
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
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.
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