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An Overview of Redundancy

Covering

The Redundancy Payments Acts 1967-2007

&

The Minimum Notice section of The Minimum Notice & Terms of Employment Acts 1973 to 2001


Prepared by : Byrne Casey & Associates

Chartered Accountants

Registered Auditors

Tullamore, Co. Offaly

Ph: 057 93 66700

Web: www.bca.ie

December, 2008


The details and information contained herein are for information purposes only and are intended for guideline use only.

You should always consult your advisor in relation to obtaining specific details.


  1. The Main Provisions of the Act. (Page 1)

  1. Who is covered by the Act? (Page 1)

  1. When does a redundancy situation arise? (Page 2)

  1. How do you calculate the statutory redundancy amount? (Page 2)

  1. What is continuous and reckonable service? (Page 3)

  1. What happens if an employer fails to pay statutory redundancy? (Page 3)

  1. What obligations are on an employer during a redundancy? (Page 4)

  1. What happens if an employer wants to make a payment in excess of statutory redundancy – an ex-gratia payment? (Pages 4 - 6)

  1. Can an employee claim statutory redundancy without being dismissed? (Page 7)

  1. Consider any possible alternatives to redundancy (Page 7)

  1. Permissible grounds for redundancy. (Page 8)

  1. Fair Selection of Employees for redundancy. (Page 8)

  1. Minimum Notice. (Page 9)

  1. A Redundancy Flow Chart. (Page 10)

  1. Sample RP50 Form

  1. Sample RP9 – Lay Off and Short Time Procedures

  1. Sample RP6 – Leaving before redundancy notice expires

  1. Sample notice of reduced hours

  1. Sample notice of redundancy

  1. Overview / Summary

If Staff are to be made redundant, follow the law and guidelines.

Start with the proper notice of what may be happening ie. let them know that there are possible redundancies coming – issue protective notice or notice of short-time, etc.

Select staff for redundancy fairly (after checking for voluntary redundancies).

Issue plenty of notice of redundancy (where possible more than required).

Find out who is and who is not entitled to a Statutory redundancy payment and calculate this payment amount.

Remember if you intend to pay an ex-gratia payment – it should be paid to all qualifying staff. “Fairness”

Be sure to calculate and pay all untaken annual leave.

Be sure to calculate and pay any back week / week in lieu.

Calculate and pay the correct amount of termination notice.

Record all payments on final payslip.

Give P45 on leaving day.

Where the employee is being paid a Statutory Redundancy amount, fill in and get signed an RP50 Form.

Issue all employees with a “Certificate of Service” on leaving day.

Issue all employees with a “General reference” on leaving day.

Overview / Summary


The Main Provisions of the Act


The Redundancy Payments Acts 1967-2007 provide a minimum entitlement to a redundancy payment for employees who have a set period of service with an employer.

It should be noted that not all employees are entitled to the statutory redundancy payment, even when there is a redundancy situation. When an employee does qualify for redundancy there are specific redundancy procedures which employers and employees must follow in order to comply with the legislation.

Ultimately it is up to you and your employer to agree a redundancy payment above the statutory minimum, this is termed an ex-gratia payment and under such an agreement, employees who have not reached the statutory minimum period of service may also receive a payment.

For example, statutory redundancy only applies to employees with two (or more) years' service. However, an employer might agree to pay a lump sum to employees with less than two years' service. This payment arises through agreement and not through a statutory entitlement. The legislation is concerned with ensuring minimum rights, while allowing the parties to agree more substantial rights; this is often the case in employment law.

A statutory redundancy payment is a lump-sum payment based on the pay of the employee. The statutory redundancy payment is tax-free.

An employer is entitled to a 60% rebate of the amount of statutory redundancy paid.

Who is covered by the Act?


A statutory redundancy payment is a lump-sum payment paid to employees (over the age of 16 years) who have two years or more of reckonable service with an employer. It is paid regardless of age. You must be in employment that is insurable under the Social Welfare Acts.

All redundancies notified after 10 April 2005 take account of absences from work only over the last three years of service. Any absences outside of the three-year period ending on the date of termination of employment are disregarded.

When does a redundancy situation arise?


A redundancy situation arises where an employee's job ceases to exist, and the employee is not going to be replaced for reasons such as; rationalisation, reorganisation, not enough work available, the financial state of the firm, business closures etc.

How do you calculate the statutory redundancy amount?


From 1 January 2005 the maximum employee earnings taken into account in the calculation of statutory redundancy lump sum payments are €600.00 per week.

An employee (over the age of 16) is entitled to two weeks pay for each year of continuous and reckonable employment.

In addition, they are entitled to 1 bonus week.

All excess days over whole years must be calculated as a portion of 365 days. i.e. 8 years 183 days = 8.50 years (i.e. 8 years + 180/365)

Example 1: for an employee with 8 years + 183 days reckonable service and an average weekly wage of € 550.00 gross:-

8.5 years * 2 weeks per year = 17 weeks

Plus 1 bonus week = 18 weeks

18 * € 550.00 = € 9,900.00

Example 2: for an employee with 8 years + 183 days reckonable service and an average weekly wage of € 855.00 gross:-

8.5 years * 2 weeks per year = 17 weeks

Plus 1 bonus week = 18 weeks

18 * € 600.00 = € 10,800.00 (Note: ceiling of € 600.00 used)

What is continuous and reckonable service?


When calculating continuous and reckonable service for an employee the following periods (called reckonable absences) over the last three years of service only should be taken into account;

  • The total period they were actually in work

  • The total period of absence from work due to holidays 

  • The total period of absence from work due to illness (up to 26 weeks or up to 52 weeks for an occupational illness) 

  •  The total period where they were absent from work by agreement with your employer (typically career break) 

  • The total period of basic and additional maternity leave allowed under the legislation 

  • The total period of basic adoptive/parental/carer's leave

  • The total period of lock-out from their employment 

  • The total period where the Unfair Dismissals Acts has preserved the continuity of your employment

If you can say yes to any of the following, you must ignore the following periods as non-reckonable absences when calculating continuous and reckonable service for an employee.

  • In the last 3 years has the employee a period of over 52 consecutive weeks where they were off work due to an injury at work ie. an occupational illness?

  • In the last 3 years has the employee a period of over 26 consecutive weeks where they were off work due to illness?

  • In the last 3 years has the employee a period on strike?

  • I

    What happens if an employer fails to pay statutory redundancy?

    n the last 3 years has the employee a period of lay off from work?

Employers are obliged to make redundancy payments in accordance with Redundancy Payments Acts.

However, in situations where the employer is unable to pay the employees their entitlements, the Department of Enterprise, Trade and Employment pays the full amount direct to the employees from the Social Insurance Fund (S.I.F.). The employee fills in Form RP50 and sends it into the Department and the Department usually treats these applications as a priority. Later on seeking reimbursement from the employer via its Redundancy Recoveries Section.

What obligations are on an employer during a redundancy?

Employers must pay the statutory redundancy entitlement and give proper notice of redundancy (at least two weeks), but the notice must comply with the Minimum Notice and Terms of Employment Acts 1973-2001 or the contract of employment – whichever is the longest.

An employer must fill in a form RP50 and it must be signed by both the employee and the employer.

An employee who is due to be made redundant is entitled to a reasonable amount of paid time off to look for a new job or to make their arrangements for training.

What happens if an employer wants to make a payment in excess of statutory redundancy – called an ex-gratia payment?


It is a common practice in particular with voluntary redundancies, to offer a termination payment in excess of statutory redundancy. For example an employer may offer

€ 500.00 per year of service to employees on top of their statutory redundancy entitlements.

If an extra amount is being offered to employees, attention should be paid as to the possible taxation of the non-statutory part of the “package”. The statutory amount is free of tax and subject to certain conditions the extra amount or “ex-gratia” payment may be free of tax also.

The 1st € 10,160 of a termination payment (also called an ex-gratia payment) plus

€ 765.00 for each complete year of service with the company can be paid tax free.

Where an employee is not entitled to any lump sum payment on retirement from a company pension scheme an additional exemption in the amount of € 10,000 may be applied for in advance from revenue. Revenue approval must be obtained in advance.

So for example if an employee had 10 years service they could receive and amount equal to:-

€ 10,160

[Basic Exemption]

Plus

(€ 765.00 * 10) or € 7,650

[€ 765 for each of 10 years service]

Plus

€ 10,000

[increased exemption] (1 See Note)

or a total of € 27,810

(1) Note: If an employee is a member of an occupational pension scheme,

the increased exemption is reduced by the current value of any tax

free lump sum received from the employer’s pension scheme, or the

current value of any future tax free lump sum receivable.

However the full increased exemption will apply if the right to a lump

sum is irrevocably revoked.

An employer can also calculate an alternative exemption figure known as the Standard Capital Superannuation Benefit (SCSB).

This is calculated as follows:-

A x B/15 – C

Where:

A = the average annual emoluments (gross earnings including any and all BIK’s) over the last 36 months of service to the date of termination.

B = the number of years of complete service

C = the value of any tax free lump sum received from the employer’s pension scheme, or the current value of any future tax free lump sum receivable.

This will be Nil if an employee is not entitled to any lump sum or if they are entitled but have irrevocably surrendered their entitlement to a lump sum.

For example – John has worked for 10 years with his employer and in the last 3 years earned € 40,000, € 45,000, € 55,000. He has no entitlements re pension due to him.

A = (40,000 + 45,000 + 55,000) / 3 = € 46,666.66

B / 15 = 10 / 15 = .6666

C = Nil

Therefore John is entitled to € 46,666.66 * .6666

or € 31,111.10

Top Slicing Relief

A certain amount of a redundancy payment may be taxable, this portion can be taxed as part of the current year's income or at your average rate of tax in the previous 3 years. This method is known as Top Slicing Relief which is claimed at the end of the tax year, by submitting their P45 and the last 3 year P60’s to their tax office.

It is most useful to people who paid tax mainly at the low rate during those 3 years, but are now paying tax at the top rate at the time of redundancy.

Example: If you were made redundant and the taxable amount of your lump sum was €20,000, it may be taxed at your marginal rate of 41% depending on your income for the year. If your average rate of tax for the previous 3 tax years was 30%, the Top Slicing Relief is as follows:

Tax payable on €20,000 @ 41% = €8,200

Tax payable on €20,000 @ 30% = €6,000

Tax payable using Top Slicing Relief will be reduced by €2,200 (€8200 - €6000) 

Top Slicing Relief is claimed at the end of the tax year in which you receive the lump sum.

Steps for calculation the taxable portion of a termination payment.


  1. calculate the basic exemption

  2. calculate the SCSB

  3. use (apply) the higher of these two amounts to get your exemption

  4. Consider has the employee any foreign service and reduce the taxable portion of the termination amount by the Foreign Service Relief formula.

  5. Remember no PRSI is payable on the lump sum (including any taxable portion)

  6. PAYE must be applied to the taxable portion of the lump sum

  7. Consider Top Slicing Relief

  8. Health Levy is payable on the taxable portion of the lump sum

A

When can an employee claim statutory redundancy without being dismissed?

n employee may be entitled to a redundancy payment, if he/she has been laid off or kept on short-time:

  • for 4 or more consecutive weeks, or

  • for 6 or more weeks in a period of 13 weeks of which not more than 3 weeks were consecutive.

To claim such payment he must give his employer notice of his / her intention to claim redundancy payment in respect of the lay-off or short-time, after the expiry of either period and not later than 4 weeks after the cessation of the lay-off or short-time.

Counter Notice by employer

The employer may contest liability for a redundancy payment claimed by an employee on lay-off or short-time as outlined above, where the employer reasonably expects that 13 weeks continuous work can be provided commencing within 4 weeks of that date

The counter notice must be served within 7 days of the notice

of intention to claim redundancy.

Consider any possible alternatives to redundancy


Before considering or implementing redundancies could sufficient staff savings be made by any other measures ?

Example: 1). Short Time

2). Week-on Week-Off

3). 10% wage reduction in staff gross pay

4). Pay freeze

5). Employer Pension contribution freeze

6). Bonus / commissions freeze

etc. etc.

Permissible Grounds for Redundancy


1). The total closure of the employer’s business, or its cessation in the

place where the employee worked

2). The disappearance of the employee’s job specifically i.e. diminution of the

requirement in the business for employees to carry out work of a particular kind

3). A reduction in the numbers of the workforce overall

4). The replacement of the employee by someone who can also do the

work in a manner “for which the employee is not sufficiently qualified

or trained.”

5). The replacement of the employee by someone who can also do

other work for which the employee is not sufficiently qualified/trained

Fair Selection of employees for redundancy


Employers must be seen to operate a fair selection process in a redundancy situation. There must be no possible suggestion of “unfairly” picking employees for redundancy. The selection process must be fair and impartial and moreover be seen to be so.

An example of some possible selection criteria could be:-

  • Last in first out

  • Highest wage cost

  • Skill no longer required

  • Type of work no longer viable

Etc.

An example of what you can not use for selection criteria could be:-

  • Age of a staff member

  • Sex of a staff member

  • Nationality of a staff member

  • Sexual orientation of a staff member

  • A personal dislike of a staff member

  • Religious persuasion of a staff member

Etc.

I

Minimum Notice

f an employee has been in ‘continuous service’ with the same employer for at least thirteen weeks, they are entitled to a minimum period of notice before they can be dismissed. This notice period varies according to length of service.

Length Of Service                             Minimum Notice

Thirteen weeks to two years                              one week

Two years to five years                                     two weeks

Five years to ten years                                      four weeks

Ten years to fifteen years                                  six weeks

More than fifteen years                                     eight weeks

Please Note: Contractual periods of notice may be longer than these statutory provisions. They can never be shorter.

A

What Is Continuous Service?

ny provision in a contract of employment for shorter periods of notice than those provided for in the Acts, has no effect.

An employee’s service is regarded as continuous unless s/he is dismissed or voluntarily leaves the job. Continuity is not usually affected by strikes, lay-offs or lock-outs, nor by dismissal followed by immediate re-employment. The transfer of a trade or business from one person to another does not break continuity and, in such cases, an employee’s service with the new owner includes continuous service with the previous owner.

However, for the purpose of these Acts, an employee who claims and receives redundancy payment in respect of lay-off or short-time, is considered to have left their employment voluntarily.

Redundancy Flow Chart


Jobs Have to Go


Ask for Voluntary

Redundancies

Use fair employee

Selection process

Is Employee entitled to Statutory Redundancy?

No !

Give correct length of notice of termination.

Pay final pay.

Pay notice pay (if applicable)

Pay untaken annual leave.

Pay any back week or week-in-hand.

Does employee get a termination lump sum payment?

Tax, record and document all final pay, etc.

Give P45 and final payments on last day.

Yes !

Give correct length of notice of termination.

Calculate Statutory Redundancy payment and prepare Form RP50.

Pay final pay.

Pay notice pay (if applicable)

Pay untaken annual leave.

Pay any back week or week-in-hand.

Pay Statutory Redundancy. (Tax Free Payment)

Does employee get a termination lump sum payment?

Tax, record and document all final pay etc.

Give P45 and final payments on last day.

Get RP50 signed by employee.



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