Redundancy: How much will I get – and what should I do with it?

After years of economic growth, redundancies are once more back on the table, with many larger tech firms looking to respond to falling demand by letting staff go in their thousands. Irish workers tend to be faring better than those in other countries where big tech firms have bases, but Microsoft, Dell, Twitter, Stripe and Meta are just a few of those companies introducing redundancy programmes in Ireland.

If you have been selected for redundancy, or have been offered a package, what can you expect to receive?

This very much depends on the company you work for, as some will offer more generous terms than others. First, you need to consider your eligibility for any payment at all.

Depending on your length of service with your employer, you may be entitled to statutory redundancy, which will guarantee a minimum payment. Under law, to qualify for this payment, you need to have two years’ service (104 weeks) with your employer.

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If you meet this requirement, your payment will then be determined by the length of your service, as you get two weeks’ pay for every year of service, plus one additional week’s pay.

But this doesn’t mean, for example, that someone with 10 years service, earning €1,000 a week, will be entitled to a statutory payment of €21,000. This is because the weekly payment under statutory redundancy is capped at €600, which means the maximum payment for the person in our example will be just €12,600. (If you’re concerned, you can work out your potential statutory payment here).

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Remember, however, that statutory is the minimum allowed, and most employers will offer a top-up. When social media giant Twitter announced its recent lay-offs, it was reported to have offered statutory redundancy plus an “ex gratia payment of an additional month’s salary”, plus two weeks’ salary per completed year of service.

What about the tax situation?

The good news first: you won’t pay any tax on the statutory payment. And, if you get a lump sum as compensation for losing your job, part of it may be tax-free. This is because you are entitled to a number of exemptions.

First up is the basic exemption of €10,160, plus €765 for each complete year of service, which includes time worked before and after a career break (but not the actual career break); a period of job-sharing or part-time work; and all work carried out in Ireland for multinational companies. So, €25,460 for someone with 20 years’ service.

In addition, you can get an increased exemption of an additional €10,000 if you haven’t received a tax-free lump sum in the last 10 years and won’t get a pension lump sum payment now or in the future.

Alternatively, you can opt for the standard capital superannuation benefit. This normally benefits people with higher earnings and long service. It is calculated at 1/15th of the average annual pay for the last 36 months in employment. If it gives a greater tax-free lump sum, you can opt for this approach.

Consider someone with 20 years of service, earning €60,000 a year, who gets a lump sum of €100,000 when made redundant, as well as €20,000 from their pension scheme.

Under the basic exemption, this person would be entitled to €25,460, consisting of €10,160 + €15,300 (€765 x 20 years), and they would not be entitled to the additional increased exemption, as the pension scheme lump sum of €20,000 is greater than the €10,000 limit.

But what about the standard capital superannuation benefit approach? Well, this would give a tax-free lump sum of €60,000, based on the benefit calculation of (€180,000 ÷ 3 x 20 ÷ 15 - €20,000).

The balance, known as the taxable lump sum payment, is treated as part of your total income in the year you are made redundant, and is taxed accordingly.

When it comes to opting for the increased exemption or not, the decision is whether to waive your future tax-free lump sum from the employer and take a higher tax-free payment today, or whether to take the lower tax-free portion of redundancy and keep that future tax-free lump sum.

But each of these figures should be presented to you by your employer, with the calculation worked out, so you can determine which is the best option.

“It’s often surprising to me the amount of people who choose the reduced redundancy option, as it means they’re forward looking,” says Ross Curran, chief executive of Curran Futures, which offers specialist redundancy financial planning. In practice, it’s likely that availing of the increased exemption today will only be financially beneficial to a small number of people.

“I’ve only come across one case in 35 years of advice where it actually made sense financially to waive the right on the pension scheme,” says Eamon Porter, chief executive with Aspire Wealth Management.

Get the numbers

If you have been selected for, or are offered, redundancy, the first thing you should do is get a breakdown of the package on offer.

“You have to ask for the calculations,” says Curran. “It’s rare that you’re offered statutory, and that’s it.

“In almost every case we say to our clients, go back to HR, I need to see how you’ve come to this number,” he adds.

“In most instances we see, the employee will get presented with the statutory payment, then generally [they are] given two figures which is one increased exemption/with the standard capital superannuation benefit.”

There are a couple of reasons for this: first, mistakes do happen and, second, there may be a little room for negotiation. Is the employer rounding up or down time spent in the job in order to calculate “complete” years of service? What about holiday pay? Is it being incorporated into gardening leave? What about unused holidays from prior years?

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Moreover, there may be other aspects of remuneration included in the package – or not included, as the case may be. Stripe, in its recent round of redundancies, was reported to have clawed back pension contributions made to employees. This is allowable because pension contributions made to employees before they have two years’ service can be refunded to the employer.

Another consideration is whether restricted stock units are part of the employment package. It could be the case that, in the event of redundancy, the company decides to bring forward the vesting, which could leave the employee with a capital-gains tax bill, should they opt to sell them.

Financial decisions

As to what you should do with your money, this will likely come down to your own financial circumstances.

“Everyone’s family situation is unique,” says Porter. Your plans will also likely be determined by whether or not, and how quickly, you might find another job. In short, Porter’s advice is “don’t rush in”.

“You’ll have a number of people saying you should do this and that. In a lot of cases they might be well meaning, but they aren’t qualified to give advice,” says Porter, suggesting instead that people do a bit of an analysis of their finances, looking at the options if they do go into another job, and also if they don’t, and the lump-sum has to support them.

“The only thing I’d probably say definitively is that if you’ve any short-term debt on a particularly high interest rate, such as a credit card, I’d get rid of that,” he says.

For example, it might make sense to put some money towards your pension, “but if the priority is, put food on the table and to pay the mortgage”, this may not be appropriate, says Porter.

If bumping up your pension is important to you, Curran has an important tip. “It’s important to note that, technically, you’re not allowed to make an AVC (additional voluntary contribution) to an employment you’re no longer in,” he says, adding that if you’re going to do this, you should do it quickly. Alternatively, there could be an option to put pension contributions into a PRSA (personal retirement savings account).

And if you’re a member of a defined benefit scheme, and there is the possibility of being offered a transfer value, make sure you get proper advice before making any decisions.

Example: How much redundancy will I get?

– June had 20.02 years of service before being made redundant. While her gross weekly wage was €761.92, the statutory payment is capped at €600. With two weeks eligible a year, plus one bonus week, it means that June will receive a payment of €24,624 (41.04 x €600).

– Vanessa started work in 2004 and had 16.15 years of service before being made redundant in 2021. At the time, her gross weekly wage was €446.69. However, Vanessa had an absence due to maternity leave of 182 days. So will this impact her payment? No – she will be owed 33.3 weeks’ pay (two weeks per year plus one bonus week), so a total of €14,874.78.

– Jim also has 16.15 years of service, with a similar absence as Vanessa, of 182 days. However, his absence was due to a lay-off, which is deemed to be non-reckonable, and hence excluded from the calculation. So, he gets a lower payment, of €14,428.09.

Source: Department of Social Protection