Redundancy Payment Rights

With job losses running at record levels, many people now have reason to be grateful for the increases in the statutory minimum redundancy rate agreed between the social partners some years ago.

This increase saw the minimum payment level rise, from one half week's pay per year of service for persons aged below 41 and one week per year for those above that age, to two weeks' pay per year for everyone. The entitlement to an additional week's pay on top of this was retained.

The maximum level of pay on which the rate of payment is calculated was also increased to €600 per week, or €31,200 per year.

It is questionable whether these quite generous increases could have been negotiated in anything but the most benign of economic circumstances, but agreed they were and many workers are now benefiting as a result.

Before discussing redundancy payments it is worth establishing exactly what a redundancy is.

Redundancy does not mean dismissal or any other form of departure from employment where the employee concerned is actually going to be replaced.

Job

The concept of redundancy refers to the job rather than the individual and means that a job must cease to exist as a result of a business cutting staff numbers or closing down.

There are other circumstances where a redundancy can arise, such as where a company ceases certain activities.

It is up to individuals, their trade union representatives (should they have any) and the employer to negotiate the exact terms of a redundancy settlement.

Many employers are quite generous, paying multiples of the minimum laid down by law.

Others may not have the means to do so, or indeed be unable to by virtue of having gone into receivership or liquidation.

It is also worth noting that the terms of the redundancy payments legislation only apply to staff with more than two years' service with an employer.

The minimum redundancy entitlement laid down by law, as stated earlier, is two weeks per year of service subject to a maximum weekly salary of €600, plus one additional or bonus week.

Service

So, a person with five years' service would be entitled to a minimum of 11 weeks' pay. At the maximum rate this would work out as €6,600.

Parts of years also count. So, if a person has five years and six months of service they would be entitled to 12 weeks' pay -- five-and-a-half times two weeks plus the additional week.

Holiday periods, absences from work for reasons such as maternity and paternity leave and short term sick leave are all counted as part of service and cannot be deducted from a person's entitlement.

When a person is made redundant for the first time they are allowed receive up to €10,160 tax free. In addition, they are allowed to receive a further €765 for every full year of service tax free.

So, a person with five years' service would be entitled to receive up to €13,985 without paying tax on it.

Also, if a person being made redundant is not a member of an occupational pension scheme, a further €10,000 is added to the amount which can be received tax free.

Persons in occupational pension schemes can also avail of this increased exemption but have to waive their right to a tax free lump sum payment from the scheme to get the full increase.

Increase

Otherwise the increase is lowered by the amount of any tax free lump sum due to the person either at the time of redundancy or in the future.

In this case, if the person concerned was to receive a tax free lump sum of €6,000 from their pension, the increase on their exemption would be reduced to €4,000.

Approval from the Revenue Commissioners is required in order to obtain an increase to the basic exemption.

Siobhan O'Moore is Manager Private Client -- Taxation Advisory Services, Mazars