A Guide to worker Entitlements and Tax Implications For Employers in Restructuring and Redundancy

Asset - A Guide to worker Entitlements and Tax Implications For Employers in Restructuring and Redundancy

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A guide to employee entitlements and tax implications for employers in restructuring and redundancy situations

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In the last 12 months around 50,000 more habitancy 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 carport for companies seeking to sacrifice 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 boss for 2 years or more.

* The payment is in the form of a tax-free lump-sum payment.
* Tax free means no Paye, Prsi, condition Levy or revenue Levy.
* The payment is calculated on the wage or wages of the employee and the length of service.
* All eligible employees are entitled to 2 weeks' pay for every year of assistance (over the age of 16) + 1 additional 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 foremost to be aware that there are distinct periods that are not taken into account as assistance in production the calculation of the length of an employee's assistance (e.g. Any duration over 26 consecutive weeks where the employee was off work due to illness).

Refund of distinct elements of Statutory Redundancy

All employers are obliged to pay this statutory redundancy by way of lump sum to qualifying employees and must faultless a Form Rp50. Both the boss and the employee must sign this form and if the boss gives permissible notice of redundancy (at least two weeks) the boss will be entitled to a 60% rebate from the collective guarnatee Fund. The Redundancy Payments Section of the group processes applications for these rebates. The boss 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 range or enforcement in case,granted the business provides an authorisation for payment of the rebate direct to revenue using the appropriate form which has been agreed between revenue and the group of Enterprise, Trade and Employment.

If an boss 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 collective guarnatee Fund (Department of Enterprise, Trade and Employment) together with documentary evidence such as audited accounts. The boss will then become a preferential creditor of the group and will owe 40% of lump sum to the collective guarnatee Fund.

Discretionary Lump sum payments (Ex gratia/Enhanced payments) made by an boss may qualify for potential tax relief depending on circumstances -

Basic Exemption

In expanding 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 assistance with their employer.

Simple example

An employee has worked for his boss for 10 years. His boss 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 ready to employees who either are not a member of an occupational pension project 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 old ten years.

Where an employee is a member of an occupational pension project 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 choice based on the mean of the last 3 years wages x no. Of years assistance less value of any tax free lump sum.

Top Slicing Relief

The three reliefs discussed above rule the tax exempt part of a lump sum received. Once the assessable part of a lump sum has been determined, top slicing relief ensures that the rate of tax payable on the part which is assessable is no greater than the mean rate of tax paid for the 3 years prior to redundancy or retirement.
Taxable lump sum * (tax rate applied to lump sum - mean tax rate paid for the old 3 years) = estimate of top slicing relief

Insolvency or sale of business

* Employees replacement with the sale of the business.
* In some insolvency cases an boss may not be able to pay employees (preferential creditors) and even if there are sufficient assets the employees may have to wait a principal duration 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 & distinct part time employees covered.
* Form Eip1 (employees application) & Eip3 (Liquidator) should be submitted to the group of Enterprise,Trade and Employment
* The group 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 boss refuses to pay redundancy?

An employee should first send his boss a Form 77, applying for a redundancy payment. If the boss 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 well production the payment, the employee can then apply to Redundancy Payments Section of the group for payment from the collective guarnatee Fund (Sif). If the boss 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 covering of the three-year duration ending on the date of termination of employment are disregarded.

When reckoning or calculating the actual length of an employees assistance for redundancy payment purposes, the following periods over the last 3 years of assistance only should be taken into account, (the absences listed here are called reckonable absences):

• The duration the employee well in work
• Any duration of absence from work due to holidays
• Any duration of absence from work due to illness (see below for non-reckonable periods of illness)
• Any duration absent from work by bargain with (typically career break)
• Any duration of basic and additional maternity leave allowed under legislation
• Any duration of basic adoptive/parental/carer's leave
• Any duration of lock-out from employment
• Any duration where the continuity of employment is preserved under the Unfair Dismissals Acts.

However, in production 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 duration over 52 consecutive weeks where the employee was off work due to an injury at work
• Any duration over 26 consecutive weeks where the employee was off work due to illness
• Any duration on attack
• Any duration 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 boss counters by gift 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 private contracts and employers must check this.

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