When a company closes or business slows, employers may have to consider making redundancies. However, different employment contracts may require different approaches to redundancy payments.
Employers have a lot to consider with redundancies. One wrong move can lead to hefty compensation awards through WRC claims.
This makes it vital that employers handle redundancies and redundancy payments correctly.
Redundancy payment definition
The definition of a redundancy payment is a sum of money payable under statute or under the terms of a legal agreement, to a redundant employee. This is usually a lump sum that is proportional to the length of time the employee has been in employment with a company.
What is included in redundancy payments depends on many factors like whether the redundancy is compulsory or voluntary and the financial position of the employer.
Those made redundant may receive a termination payment in addition to their statutory redundancy payment and any pay that is due under the notice provisions in the contract.
Payment in lieu of notice (PILON) must be equal to the amount an employee would receive for the duration of their notice period.
Examples of Redundancy Payments in Ireland
What is included in redundancy payments depends on many factors. There are two main types of redundancy pay.
These are statutory redundancy payments and voluntary redundancy payments.
Statutory redundancy payments enjoy a basic exemption from tax and the employee takes the entire statutory redundancy payment tax free.
All employees that are made redundant must receive statutory redundancy pay.
Statutory redundancy pay has a rate of two weeks’ pay for every year of service, as well as one additional week’s pay. There are conditions to qualifying for these payments:
- There is a limit of €600 per week
- The redundant role no longer exists
- The employee must be over 16
- The employee must have a minimum of 104 weeks, or two years, of employment with the employer
- The employment must be fully insurable under the Social Welfare Acts
These payment limits mean that even those on a higher salary than €600 per week will receive less than their usual salary per week. A simple example of this type of pay would be the following calculation:
An employee, Alan, has worked for a company, Smith Inc., for 10 years. His average monthly salary was €3,000, making his average weekly salary €750. However, the limit on redundancy pay lowers this to €600 per week.
As Alan worked at Smith Inc. for 10 years, he will receive 20 weeks’ pay, plus one extra week’s pay. This brings the total to 21 weeks’ pay at €600 per week, resulting in a total statutory redundancy entitlement of €12,600.
How are redundancy payments taxed in Ireland?
Taxation of redundancy payments in Ireland varies depending on whether the employee received a payment over and above the statutory entitlement.
However, if the entire redundancy payment is a statutory redundancy payment, the lump sum is tax-free. In the UK there is a £30,000 exemption to paying taxes, but in Ireland tax treatment is different.
If an employer makes an ex-gratia redundancy payment over and above the statutory entitlement, the ex-gratia payment will be subject to income tax. This means that our previous example of Alan at Smith Inc. would not pay any tax on his redundancy payments of €12,600 as the employee received statutory redundancy only.
Notice periods & notice pay
Employers must provide a notice period to employees in the event of redundancy. This can vary, depending on an employee’s length of service.
In some cases, there may be no requirement for the employee to work the notice period during the process of a redundancy, with payment in lieu of notice being paid instead.
The notice period for redundancy varies depending on the terms of the employment contract. In the absence of contractual notice, statutory notice periods must be taken into account which range between a week’s notice and 12 weeks’ notice, depending on how long the employee has worked at the company.
If they have worked between one month and two years, the employee must receive at least one week’s notice (note only employees with at least two years’ service qualify for statutory redundancy). If they have worked between two years and 12 years, the employee must have one week’s notice for each year of employment. For example, Alan of Smith Inc. would have 10 weeks’ notice.
12 weeks’ notice is the statutory limit though. So, even if an employee has worked with a company for 50 years, they will still only receive a notice period of 12 weeks unless the employment contract provides otherwise.
It is also worth noting that an employee should receive their holiday pay too. An employer can choose to allow holiday bookings during a notice period. However, if they don’t then they must pay the employee any remaining unbooked holidays.
Redundancy payments acts
Redundancy payments acts in Ireland cover redundancy payments in the event that an employer cannot.
These acts have changed over the years, varying from Redundancy Payments Acts 1967 to 2007. However, these redundancy payments acts were consolidated into the Redundancy Payments Act 2017.
Help with redundancy payments
It’s never easy for a company to deal with redundancies. The payments involved can riddle a difficult decision with confusion.
This is why some businesses may need help navigating them.