Running a Severance Programme – The Practical Side
Employment Tax Update, Winter 2012
As organisations continue to restructure activities and costs, reductions in workforce continue to be a key issue in organisations efforts to remain competitive and well-positioned for future success. In this context, the way in which a severence or redundancy programme is managed can directly impact the state and shape of the future organisation. What follows are some practical tips to position your company for success in any restructuring or downsizing activity.
For any successful severence programme, the company must consider whether a genuine redundancy situation as defined exists and secondly, that the employees are selected for redundancy on a fair basis. The selection process is often one of the most challenging aspects in any redundancy. The mechanism used for selecting employees for redundancy is important in terms of ensuring the organisation keeps the right skills and talent for the future business.
Voluntary or Involuntary
Employers must decide whether to achieve redundancies through voluntary or involuntary means. They may also chose to terminate employees employment outside a formal redundancy programme if they so wish in order to deal with people management or succession planning issues. However great care is needed in such situations. Many companies choose an involuntary process on the basis that it gives greater control, you the company over the selection process.
Depending on the size of the organisation and the number of proposed redundancies, a collective redundancy situation may arise.This can however be a complex issue. If these provisions apply, the employer is obliged to notify the Department of Enterprise, Trade and Employment. There are also obligations to consult with employee representatives at least 30 days before any formal redundancy notification.
An employer may wish to give consideration in advance to the level of any redundancy package on offer. All employees with two years’ continuous service will be entitled to a statutory redundancy payment, but many employers also offer an additional ex gratia payment.
If an employer is hoping to achieve the reductions through a voluntary process, the package may need to be benchmarked and set at a particular level to attract volunteers. The level of the package offered can also impact both on the morale of the remaining employees and on the publicity surrounding a redundancy announcement.
Planning & Timing
It is key that employers spend sufficient time at the beginning of the process focusing on the desired outcomes from a business perspective and build a realistic timeline bearing in mind the minimum notice requirements, any collective consultation requirements as well as business needs. Time and energy spent in upfront planning can reap significant rewards for the restructured business, by ensuring that the reshaped organisation has the skills, talent and focus to move forward.
Non contractual payments made severing on employment may be subject to favourable tax exemptions and reliefs under current Irish tax legislation. The tax exemptions and reliefs available are dependent on the individual's personal circumstances. Employers can also make certain retraining and legal services available to employees in a tax efficient manner provided the necessary conditions are met.
Other aspects an employer will need to consider:
- How the employee communication process is handled will have a significant impact on both the departing staff and those who will be remaining with the organization. Accordingly, significant time and resources many need to be devoted to this area
- Awareness of the information required to prepare the severance calculations (e.g. average gross remuneration over the past three years, service history, payments in lieu of notice, etc.) early in the process, so that the company can consider how to extract the data from their payroll (and HR) systems
- Interaction of the tax exemptions with the individual’s future pension lump sum from the company pension scheme on retirement and this information is obtained from the company’s pension providers in a timely manner
- The employer or their advisor will need to liaise with the local Revenue district to ensure swift processing of applications for certain exemptions, if appropriate
- Provision of severance calculations highlighting the various tax exemption options available and the estimated net cash position
- Schedule briefings with the employees to explain the tax, pension and social welfare implications of their termination of employment
- Submission of Form RP50s to claim the 15% rebate from the Department of Social Protection if relevant for terminations prior to 31 December 2012; and
- Ensuring the correct tax and social security treatment is applied through the payroll on all components of the severance package for each individual
- Breaks in service history or time spent working abroad and their impact on the tax exemptions and the statutory redundancy payment
How Deloitte can help
If you would like information as to how Deloitte can assist your organisation with severance related issues, minimising tax risk, to identify cost control or process improvements, to resolve potential compliance issues or employee communications please contact:
+ 353 1 417 2432
+ 353 1 417 1 2372