Dealing with layoffs

By Hujo Gunn
First published in Business & Finance
1 August 2008
Reproduced by permission

Hujo Gunn, director of HR services with PricewaterhouseCoopers, offers pointers as to how to minimise the sting of redundancy.

Many Irish companies and multinationals based in Ireland are facing tough decisions due to the economic downturn, increased competitive pressures and significant falls in the stock market value of their shares. Such pressures pose significant organisational and HR challenges as businesses attempt to cut costs, improve earnings or increase prodtictivity - and invariably such changes can lead to workforce reductions. However many employers opt to implement redundancies without fully exploring the alternative solutions available such as:

  • retraining to increase productivity levels;
  • reduction in working hours of permanent full-time employees;
  • redeployment to more productive areas; and
  • wage or bonus restraint, perhaps in return for future increases, share allotments, etc.

In light of the economic uncertainty and business pressures, companies HR functions should be reappraising their focus and contribution. A natural response based on previous economic downturns might be to focus purely on costs, supporting restructuring and headcount reductions while improving the efficiency of HR service delivery. But now that we are in a more service - and knowledgebased, human-capital-driven economy, this outlook needs to change. Of the top threats to business seen by global chief executive officers in a recent study, the business environment and regulation are significant, but people issues are the only one of the most significant barriers that businesses can control.

It is more important than ever to motivate and develop high-performers, improve performance management and put in place robust incentive plans and programmes for effective employee communication and engagement. It would be a mistake for companies to focus totally on costs, when the talent agenda remains ever-more critical to employers and the future influence of the HR function.

Efficient redundancies
In some situations, even after implementing some of the above initiatives, redundancies can still become inevitable and this can pose significant challenges for an employer as many complex issues need to be addressed.

Tax and PRSI aspects: The tax treatment of unconditional severance or ex gratia payments is a complex area, particularly if employees have worked in a number of group companies (either here or abroad) and also where pension benefits arise. While statutory redundancy payments are exempt from income tax and PRSI, ex-gratia payments can attract six different types of tax exemption currently in Ireland. Employers need to be aware of the correct tax exemptions to be applied and the Revenue clearances required before any taxfree payment can be made. Where errors are made in these calculations, significant liabilities can arise for employers and it is not uncommon for Revenue to carry out routine PAYE audits shortly after a company has a workforce restructuring.

Legal and tax compliance: Employers need to ensure they comply with all of the various legal provisions relating to redundancy. It is essential to ensure that whatever selection process is put in place is not seen to directly or indirectly discriminate against certain categories of employees (ie on age, sex, race, religion etc) as there is considerable legislation in place protecting employment rights. The "last in/first out" principle does not work in all circumstances and employers need to seek proper advice in this area to help avoid claims tor unfair dismissal, which could land the employer in court.

Companies are not obliged by law to provide additional severance payments other than statutory redundancy; however it is not uncommon for employers to make enhanced severance payments as a matter of company policy or pursuant to a negotiated severance agreement with unions.

Employers need to be aware that statutory redundancy refund claims can be refused where proper notification of collective redundancies is not made to the Department of Enterprise, Trade and Employment and also where claims are submitted late.

There is also recent legislation introduced obliging employers to report to Revenue all severance payments made on account of injury or disability after the end of the tax year.

Employee communication planning: Job loss is a very stressful experience and early communication to employees can be essential to help achieve a smooth transition. Many employers will arrange for employees to receive group or one-on-one financial counselling sessions, to oudine their severance payment entitlements, tax position, social security entitlements, pension and investment options. Some employers also offer otitplacement and career-transitioning interventions to provide psychological and practical support to departing employees. An outplacement programme can help to foster the commitment of the "surviving" employees, who may be suffering low morale and reduced commitment to the organisation but who will be vital to ensure the continued performance of the business into the future.

Due to the imique challenges presented by redtmdancy programmes, both in terms of previous experience and internal HR resource constraints, many employers seek specialist input and/or look to outsource the project management aspects in order to ensure successful implementation.

The earlier that immediate attention is paid to the practical tedundancy and career transition issues, the easier it becomes for companies to handle the workforce management aspects of the transition.

Hujo Gunn is a director with PricewaterhouseCoopers' human resource services group, which provides assistance to employers of all sizes engaged in reshaping their workforces.