A Guide to Employee Entitlements and Tax Implications For Employers in Restructuring and Redundancy
A guide to employee entitlements and tax implications for employers in restructuring and redundancy situations In the last 12 months around 50,000 more people registered as unemployed many of them through redundancy.
Whilst there has been a perceptible slow down in the rise of unemployment, forced redundancies will remain a stable for companies seeking to reduce costs and restructure.
So what are the tax implications for employers seeking to implement a redundancy programme? Generally there are 2 types of redundancy payments that can be made tax-free: *Statutory Redundancy Payments (this is the payment an employee is entitled to under the Redundancy Payments Acts 1967 to 2007 ) and *Lump sum payment at the employer's discretion ( known as an ex gratia payment or enhanced payment) which may qualify for potential tax relief depending on circumstances.
Statutory Redundancy Payments - An employee is entitled to statutory redundancy payments under present employment legislation if the employee has worked for the employer for 2 years or more.
*The payment is in the form of a tax-free lump-sum payment.
*Tax free means no PAYE, PRSI, Health Levy or Income Levy.
*The payment is calculated on the wage or salary of the employee and the length of service.
*All eligible employees are entitled to 2 weeks' pay for every year of service (over the age of 16) + 1 further week's pay.
*There is a maximum limit of ?600 per week.
Basic example An employee works 5 full years he will be entitled to statutory redundancy for 11 weeks (5 years x 2 weeks + 1) and this is multiplied by his salary.
If he is in receipt of ?500 per week he will receive ?5,500 (11 weeks x ?500) If he is in receipt of more than ?600 per week he will receive ?6,600 (11 weeks x ?600) as there is a limit of ?600 per week.
This is a simplistic example - in practice the calculation will be done on a weekly basis so an employee might be paid for example 11.
6 weeks depending on the exact length of service.
It is important to be aware that there are certain periods that are not taken into account as service in making the calculation of the length of an employee's service (e.
g.
any period over 26 consecutive weeks where the employee was off work due to illness).
Refund of certain elements of Statutory Redundancy All employers are obliged to pay this statutory redundancy by way of lump sum to qualifying employees and must complete a Form RP50.
Both the employer and the employee must sign this form and if the employer gives proper notice of redundancy (at least two weeks) the employer will be entitled to a 60% rebate from the Social Insurance Fund.
The Redundancy Payments Section of the Department processes applications for these rebates.
The employer has 6 months to apply for the rebate but should obviously apply immediately.
Where a business is awaiting a statutory redundancy rebate and is experiencing difficulties in meeting its own tax obligations, Revenue will be accommodating in deferring collection or enforcement provided the business provides an authorisation for payment of the rebate direct to Revenue using the standard form which has been agreed between Revenue and the Department of Enterprise, Trade and Employment.
If an employer is unable to pay a redundancy lump sum, he should sign the RP50 and submit a letter from an accountant or solicitor stating he is unable to pay and accepting liability for the 40% owing to the Social Insurance Fund (Department of Enterprise, Trade and Employment) together with documentary evidence such as audited accounts.
The employer will then become a preferential creditor of the Department and will owe 40% of lump sum to the Social Insurance Fund.
Discretionary Lump sum payments (Ex gratia/Enhanced payments) made by an employer may qualify for potential tax relief depending on circumstances - Basic Exemption In addition to a statutory redundancy entitlement an employee is entitled to receive a tax free, ex gratia payment of ?10,160 plus ?765 for each full year of service with their employer.
Simple example An employee has worked for his employer for 10 years.
His employer has agreed to pay him an ex gratia payment of ?20,000.
He will be entitled to relief of ?17,810(?10,160 + ?765 x10).
The remaining ?2,190 is taxed.
Increased exemption An increased exemption of ?10,000 is available to employees who either are not a member of an occupational pension scheme or have given up the right (irrevocably) to receive a lump sum from the pension scheme, where no relief has been claimed in respect of a lump sum received in the previous ten years.
Where an employee is a member of an occupational pension scheme the tax increased exemption is reduced by either: •The tax free lump sum to which an employee is immediately entitled; or •The present day value of the pension lump sum at the date of leaving employment which may be receivable in the future If such a payment is greater than ?10,000 then no extra relief is available.
Standard Capital Superannuation (SCSB) This is a third option based on the average of the last 3 years salary x no.
of years service less value of any tax free lump sum.
Top Slicing Relief The three reliefs discussed above determine the tax exempt portion of a lump sum received.
Once the taxable portion of a lump sum has been determined, top slicing relief ensures that the rate of tax payable on the portion which is taxable is no greater than the average rate of tax paid for the 3 years prior to redundancy or retirement.
Taxable lump sum * (tax rate applied to lump sum - average tax rate paid for the previous 3 years) = amount of top slicing relief Insolvency or sale of business *Employees transfer with the sale of the business.
*In some insolvency cases an employer may not be able to pay employees (preferential creditors) and even if there are sufficient assets the employees may have to wait a considerable period of time for the liquidator to make a payment.
*In this case of insolvency employees are covered by the insolvency fund for wages, holiday pay, minimum notice and redundancy.
(Maximum ?600 per week for 8 weeks) *Full time & certain part time employees covered.
*Form EIP1 (employees application) & EIP3 (Liquidator) should be submitted to the department of Enterprise,Trade and Employment *The department will put the liquidator in funds so that he may pay the arrears for wages, holiday pay, minimum notice and redundancy.
What happens if an employer refuses to pay redundancy? An employee should first send his employer a Form 77, applying for a redundancy payment.
If the employer continues to refuse, but agrees to fill out and sign RP50 (redundancy Certificate), thereby acknowledging the employee's right to a payment, as opposed to actually making the payment, the employee can then apply to Redundancy Payments Section of the Department for payment from the Social Insurance Fund (SIF).
If the employer does not even agree to sign the Form RP50, then the employee can apply to the Employment Appeals Tribunal.
Reckonable and non-reckonable service All redundancies notified after 10 April 2005 takes account of absences from work only over the last 3 years of service.
Any absences outside of the three-year period ending on the date of termination of employment are disregarded.
When reckoning or calculating the actual length of an employees service for redundancy payment purposes, the following periods over the last 3 years of service only should be taken into account, (the absences listed here are called reckonable absences): • The period the employee actually in work • Any period of absence from work due to holidays • Any period of absence from work due to illness (see below for non-reckonable periods of illness) • Any period absent from work by agreement with (typically career break) • Any period of basic and additional maternity leave allowed under legislation • Any period of basic adoptive/parental/carer's leave • Any period of lock-out from employment • Any period where the continuity of employment is preserved under the Unfair Dismissals Acts.
However, in making the calculation of the length of service, the following periods over the last 3 years will not be taken into account as service, (these are called non-reckonable absences): • Any period over 52 consecutive weeks where the employee was off work due to an injury at work • Any period over 26 consecutive weeks where the employee was off work due to illness • Any period on strike • Any period of lay off from work.
If an employee is laid off or put on short time for more than 4 continuous weeks, or 6 non-continuous, broken periods of weeks, where all six weeks fall within a thirteen week period, then they are entitled to claim for redundancy payment? However if the employer counters by offering 13 weeks continual employment.
What are the Notice Periods? 2 weeks notice for an employee with two to five years' service.
4 weeks notice for an employee with five to ten years service, six weeks notice for employees with ten to fifteen years notice and 8 weeks notice for employees with more than 15 years notice.
However there may be greater notice periods in individual contracts and employers must check this.
Whilst there has been a perceptible slow down in the rise of unemployment, forced redundancies will remain a stable for companies seeking to reduce costs and restructure.
So what are the tax implications for employers seeking to implement a redundancy programme? Generally there are 2 types of redundancy payments that can be made tax-free: *Statutory Redundancy Payments (this is the payment an employee is entitled to under the Redundancy Payments Acts 1967 to 2007 ) and *Lump sum payment at the employer's discretion ( known as an ex gratia payment or enhanced payment) which may qualify for potential tax relief depending on circumstances.
Statutory Redundancy Payments - An employee is entitled to statutory redundancy payments under present employment legislation if the employee has worked for the employer for 2 years or more.
*The payment is in the form of a tax-free lump-sum payment.
*Tax free means no PAYE, PRSI, Health Levy or Income Levy.
*The payment is calculated on the wage or salary of the employee and the length of service.
*All eligible employees are entitled to 2 weeks' pay for every year of service (over the age of 16) + 1 further week's pay.
*There is a maximum limit of ?600 per week.
Basic example An employee works 5 full years he will be entitled to statutory redundancy for 11 weeks (5 years x 2 weeks + 1) and this is multiplied by his salary.
If he is in receipt of ?500 per week he will receive ?5,500 (11 weeks x ?500) If he is in receipt of more than ?600 per week he will receive ?6,600 (11 weeks x ?600) as there is a limit of ?600 per week.
This is a simplistic example - in practice the calculation will be done on a weekly basis so an employee might be paid for example 11.
6 weeks depending on the exact length of service.
It is important to be aware that there are certain periods that are not taken into account as service in making the calculation of the length of an employee's service (e.
g.
any period over 26 consecutive weeks where the employee was off work due to illness).
Refund of certain elements of Statutory Redundancy All employers are obliged to pay this statutory redundancy by way of lump sum to qualifying employees and must complete a Form RP50.
Both the employer and the employee must sign this form and if the employer gives proper notice of redundancy (at least two weeks) the employer will be entitled to a 60% rebate from the Social Insurance Fund.
The Redundancy Payments Section of the Department processes applications for these rebates.
The employer has 6 months to apply for the rebate but should obviously apply immediately.
Where a business is awaiting a statutory redundancy rebate and is experiencing difficulties in meeting its own tax obligations, Revenue will be accommodating in deferring collection or enforcement provided the business provides an authorisation for payment of the rebate direct to Revenue using the standard form which has been agreed between Revenue and the Department of Enterprise, Trade and Employment.
If an employer is unable to pay a redundancy lump sum, he should sign the RP50 and submit a letter from an accountant or solicitor stating he is unable to pay and accepting liability for the 40% owing to the Social Insurance Fund (Department of Enterprise, Trade and Employment) together with documentary evidence such as audited accounts.
The employer will then become a preferential creditor of the Department and will owe 40% of lump sum to the Social Insurance Fund.
Discretionary Lump sum payments (Ex gratia/Enhanced payments) made by an employer may qualify for potential tax relief depending on circumstances - Basic Exemption In addition to a statutory redundancy entitlement an employee is entitled to receive a tax free, ex gratia payment of ?10,160 plus ?765 for each full year of service with their employer.
Simple example An employee has worked for his employer for 10 years.
His employer has agreed to pay him an ex gratia payment of ?20,000.
He will be entitled to relief of ?17,810(?10,160 + ?765 x10).
The remaining ?2,190 is taxed.
Increased exemption An increased exemption of ?10,000 is available to employees who either are not a member of an occupational pension scheme or have given up the right (irrevocably) to receive a lump sum from the pension scheme, where no relief has been claimed in respect of a lump sum received in the previous ten years.
Where an employee is a member of an occupational pension scheme the tax increased exemption is reduced by either: •The tax free lump sum to which an employee is immediately entitled; or •The present day value of the pension lump sum at the date of leaving employment which may be receivable in the future If such a payment is greater than ?10,000 then no extra relief is available.
Standard Capital Superannuation (SCSB) This is a third option based on the average of the last 3 years salary x no.
of years service less value of any tax free lump sum.
Top Slicing Relief The three reliefs discussed above determine the tax exempt portion of a lump sum received.
Once the taxable portion of a lump sum has been determined, top slicing relief ensures that the rate of tax payable on the portion which is taxable is no greater than the average rate of tax paid for the 3 years prior to redundancy or retirement.
Taxable lump sum * (tax rate applied to lump sum - average tax rate paid for the previous 3 years) = amount of top slicing relief Insolvency or sale of business *Employees transfer with the sale of the business.
*In some insolvency cases an employer may not be able to pay employees (preferential creditors) and even if there are sufficient assets the employees may have to wait a considerable period of time for the liquidator to make a payment.
*In this case of insolvency employees are covered by the insolvency fund for wages, holiday pay, minimum notice and redundancy.
(Maximum ?600 per week for 8 weeks) *Full time & certain part time employees covered.
*Form EIP1 (employees application) & EIP3 (Liquidator) should be submitted to the department of Enterprise,Trade and Employment *The department will put the liquidator in funds so that he may pay the arrears for wages, holiday pay, minimum notice and redundancy.
What happens if an employer refuses to pay redundancy? An employee should first send his employer a Form 77, applying for a redundancy payment.
If the employer continues to refuse, but agrees to fill out and sign RP50 (redundancy Certificate), thereby acknowledging the employee's right to a payment, as opposed to actually making the payment, the employee can then apply to Redundancy Payments Section of the Department for payment from the Social Insurance Fund (SIF).
If the employer does not even agree to sign the Form RP50, then the employee can apply to the Employment Appeals Tribunal.
Reckonable and non-reckonable service All redundancies notified after 10 April 2005 takes account of absences from work only over the last 3 years of service.
Any absences outside of the three-year period ending on the date of termination of employment are disregarded.
When reckoning or calculating the actual length of an employees service for redundancy payment purposes, the following periods over the last 3 years of service only should be taken into account, (the absences listed here are called reckonable absences): • The period the employee actually in work • Any period of absence from work due to holidays • Any period of absence from work due to illness (see below for non-reckonable periods of illness) • Any period absent from work by agreement with (typically career break) • Any period of basic and additional maternity leave allowed under legislation • Any period of basic adoptive/parental/carer's leave • Any period of lock-out from employment • Any period where the continuity of employment is preserved under the Unfair Dismissals Acts.
However, in making the calculation of the length of service, the following periods over the last 3 years will not be taken into account as service, (these are called non-reckonable absences): • Any period over 52 consecutive weeks where the employee was off work due to an injury at work • Any period over 26 consecutive weeks where the employee was off work due to illness • Any period on strike • Any period of lay off from work.
If an employee is laid off or put on short time for more than 4 continuous weeks, or 6 non-continuous, broken periods of weeks, where all six weeks fall within a thirteen week period, then they are entitled to claim for redundancy payment? However if the employer counters by offering 13 weeks continual employment.
What are the Notice Periods? 2 weeks notice for an employee with two to five years' service.
4 weeks notice for an employee with five to ten years service, six weeks notice for employees with ten to fifteen years notice and 8 weeks notice for employees with more than 15 years notice.
However there may be greater notice periods in individual contracts and employers must check this.
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