Redundancy

There is no Redundancy Law in Jersey and many businesses do not have redundancy schemes. However, if an employee is selected unfairly for redundancy a claim of unfair dismissal may be possible, depending upon whether the employee’s length of service allows such a claim.

 Under the Employment Law 2003, a statement must be made as to whether or not a redundancy scheme exists. The termination of employment  provisions provide for up to 16 weeks notice for employees with 15 years service or more (lesser periods of notice for less service). Some larger organisations do operate a redundancy policy in Jersey, on occasions exceeding the level required by UK law.

The following must, therefore, be regarded as general information only and is largely based on the situation that exists in the UK. It does, however, give an overview of good practice.

Income Tax and Social Security Contribution Implications

We have received a great many questions about the tax and social security implications of certain lump sum payments. To help clients, we have sought advice from the relevant departments, and have been advised as follows.

Taxable

(a) A sum paid under a contract of service, but excluding a genuine redundancy payment even if the redundant employee had a contractual right to such a payment (see Note below);

(b) A sum paid in consideration of an agreement not to resign or continue to serve in an office or employment.

NOTE: The non-assessment of a redundancy payment to which there exists a contractual right is concessional.

Not Taxable:

(c) Compensation for loss of office *;

(d) Salary or wages in lieu of notice*;

(e) Damages for breach of contract of service;

(f) A lump sum to commute a pension;

(g) A gratuity given on or after retirement entirely at the discretion of the employer.

*Provided that the employer/employee has no contractual obligation/right to make or receive the payment.

Payments in lieu of notice and "garden leave".

The phrase "payment in lieu of notice" is used to describe a range of payments made in a variety of legal situations. In considering the taxation of such payments it is therefore important to establish the precise circumstances in which they are made.

In particular it is necessary to distinguish between a "payment in lieu of notice" and "garden leave". In the latter an employee will typically be given proper notice of termination of employment but told not to attend work during the notice period. As proper notice is given, payment for the period to the termination date cannot properly be described as made "in lieu of " notice. The payment is simply the salary due for the period of notice and so is taxable whether or not it is paid as a lump sum. In this case, the employment continues to the termination date whether the employee works or not.

Where a "payment in lieu of notice" is given instead of notice, whether it is taxed depends on whether it is contractual or a payment of damages.

Contractual payments.

Following on from the decision in the U.K. tax case of EMI Group Electronics v Caldicott, where an employee receives a "contractual" payment in lieu of notice , the payment is chargeable to tax as an emolument from the employment.

A "contractual" payment in lieu of notice is one that has its source in the contractual arrangements between employer and employee. Such arrangements can take a variety of forms, including:

• The main contract
• A side letter to the main contract document
• A Staff Handbook
• A Letter of Appointment
• A redundancy agreement

Sometimes these arrangements give the employer a choice or discretion of giving notice or making a "payment in lieu of notice". That was the situation in the EMI case where under the terms of the contract the employer has a "reserved right" to make a payment in lieu of notice. It was accepted that the right was exercised and the Court of appeal held that such a payment is chargeable to tax. An employer in this situation can choose not to give proper notice and also not to make a payment in lieu under the contract. If so, the terms of the contract are breached, and a payment for that breach is not liable to tax. It is dealt with as a damages payment.

Instead of acting unilaterally, the employer and employee may reach an agreement to terminate employment without proper notice on payment of a "payment in lieu of notice".

Where this is done before termination is in prospect, it is simply a variation in the terms of employment and any subsequent "payment in lieu of notice" will be contractual and taxable.

If it is done only as part of the process of termination, the payment will not be from the employment but from the agreed terms for its destruction and is dealt with as a damages payment.

JACS Settlements – applicability of Social Security contributions.

Following discussions with Social Security Department, the following has been agreed.

When a JACS Settlement is reached, in certain circumstances all or part of the financial settlement to the employee may be liable for deduction of Social Security Contribution at the rate of 6%, subject to the earnings ceiling of £3242 as at 01/01/2007. In other words, the maximum Social Security contribution required to be deducted will currently be £194.52. The employer will be required to make his employer contribution of 6½% subject to the same earnings ceiling.

The following elements of any financial settlement (up to the earnings ceiling) will be liable for Social Security purposes:

• Statutory or contractual notice
• Wages or salary payments
• Holiday pay
• Contractual bonus or commission

The following elements of any financial settlement will not be liable for Social Security purposes:

• Redundancy payments (this will need further advice from Social Security when statutory redundancy payments are introduced).
• Any compensation paid by the employer in respect of damages or as a "gift" (JACS refers to such "gifts" in the same way as does Income Tax Department i.e. "loss of office compensation").

Generally speaking, the majority of JACS’ settlements fall into the category of "gift" above. Where other categories above apply, the Settlement Agreement should make clear any split between elements that are and elements that are not liable for Social Security. It would be better for all if the payment to the employee is net and the employer makes the necessary payment to Social Security in the normal quarterly return.

The guidance on whether a payment is taxable or non-taxable remains unchanged.

July 2007

What is redundancy?

In general terms, redundancy arises when :-

• the whole business closes down, or is expected to close down;
• the business closes down in a particular place, or is expected to close down;
• the requirements of the business for employees to carry out work of a particular kind cease or diminish because :-
  • the business diminishes
  • productivity increases
  • the work is done in a different way

What is a redundancy payment?

In the UK, the Employment Rights Act 1996 states that a worker will have a right to receive a redundancy payment, subject to a qualifying period of two years continuous service, if he/she is dismissed by reason of redundancy. For the purposes of the Act a worker is taken to be dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to:

• either that the employer has ceased or intends to cease to carry on the business for the purposes of which the employee was employed by him/her,
• or has ceased or intends to cease to carry on that business in the place where the worker was employed.

Consequently, workers in the UK who are made redundant who have been continuously employed on a series of continuous temporary contracts for two years or more will normally be entitled to receive redundancy payments.

The Social Security Minister expects to introduce statutory redundancy pay to Jersey in 2008. As at July 2007 the public consultation procedures had been completed - the next step is to produce a draft law to put to the States. Further information can be found on the Social Security website.

Where can you get more information?

UK based information about calculating redundancy pay can be found in the Department of Trade and Industry’s booklet PL808 on their website www.dti.gov.uk/er/

JACS can offer advice

ACAS publication:
Redundancy handling