Reduce your labour costs without excessive pain

By Hujo Gunn
First published in The Sunday Business Post
3 August 2008
Reproduced by permission

Question
I own a mid-sized mortgage brokerage, which expanded during the property boom of recent years. However, there has been a dramatic fall-off in business this year, and I may have to reduce my workforce. Can you advise me on my options?

Answer
Many Irish companies are facing changes in their business environment, brought on by factors including the economic downturn, increased costs and competitive pressures.

These changes can pose significant organisational and human resources challenges - including staff layoffs - as businesses attempt to cut costs, improve earnings, or increase productivity.

However, depending on your particular circumstances, you might be able to achieve the necessary efficiencies without having to make employees redundant.

There are other options worth considering, including:

  • a reduction in working hours for permanent full-time employees
  • restraint on wages or bonuses, perhaps in return for future increases, share allotments, etc
  • shifting part of the workforce to part-time status
  • retraining staff to increase productivity levels
  • redeploying staff to more productive areas
  • early retirement
  • leave of absence
  • a recruitment freeze or natural attrition, ie, not replacing staff who leave.

Of course, there are situations when redundancies become inevitable; these raise questions and challenges for an employer.

Due to the unique challenges presented by redundancy programmes, many employers seek specialist input and/or consider outsourcing the project management aspects of redundancies to ensure implementation.

The issues that will need to be addressed include communications with staff, the legal requirements surrounding redundancies, the exit package to be paid to departing staff, and the tax implications of redundancy payments.

Employee communication
Losing your job is a stressful experience, and clear communication with employees is essential. Prudent employers offer outplacement and ‘career-transitioning’ services to provide psychological and practical support to departing employees.

Employees often view such counselling as an opportunity to enhance their employability. An outplacement programme can also help to foster the commitment of the ‘surviving’ employees, who may be suffering low morale and reduced commitment to the organisation.

Many employers will also arrange for employees to receive group or one-on-one financial counselling sessions, to outline their severance payment entitlements, tax position, social security entitlements, pension and investment options.

Legal requirements
Employers need to ensure that they comply with all of the various legal provisions relating to redundancy. Careful consideration needs to be given to the selection criteria that will be used to choose which employees will be made redundant, as there is considerable legislation in place protecting employment rights.

Whatever selection process is put in place, it should not directly or indirectly discriminate against certain categories of employees (ie, age, sex, race, religion, etc).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 later claims for unfair dismissal.

The exit package
The law does not require employers to provide severance payments other then statutory redundancy, but it is not uncommon for employers to make enhanced severance payments as a matter of company policy or pursuant to a negotiated severance agreement. In a unionised environment, the amount payable will usually be negotiated with the relevant trade union(s).

Tax and PRSI issues
While statutory redundancy payments are exempt from income tax, employers need to be aware of the rules governing these payments.

The tax treatment of enhanced severance payments is more complex, particularly if employees have worked in a number of companies of the same group (either in Ireland or abroad) and also where pension benefits arise.

Such payments can attract six different types of tax exemption in Ireland. Employers also need to be aware of the level of payments which can be made free of PAYE and PRSI, if they are to properly communicate the benefits of the severance package to employees.

As an employer, it is essential that you properly plan, communicate and deliver your commitments to departing employees - this will help to avoid disengagement by the remaining employees, who will be vital to the continued performance of the business.