202 Relief for agreed pay restructuring

Summary

This section exempts from income tax certain lump sum payments paid to employees under an agreed pay restructuring scheme. The exemption only applies where the employer company is faced with a substantial adverse change in its competitive environment and restructures its operations, by agreement with its work force, to ensure its survival – and has been certified as such by the Minister for Enterprise, Trade and Employment (“the Minister) on the advice of the Labour Relations Commission (“the LRC”). The restructuring must involve pay reductions of at least 10 per cent of basic pay and must remain in place for at least 5 years. The maximum tax-free lump sum per employee is as follows:

Details

Definitions

(1) Some of the more important definitions are —

“basic pay” is the employee’s emoluments (within the meaning of section 472) excluding benefits in kind but including overtime (this is the base for determining the required 10 per cent pay cut).

“qualifying company” is an employer company which is certified by the Minister for Enterprise, Trade and Employment as a qualifying company.

“qualifying employee” is an employee in receipt of the PAYE tax credit provided for by section 472.

“relevant agreement” is a collective agreement (that is, an agreement between the employer and one or more trade unions representing the employees) involving more than 50 per cent of the total work force or more than 75 per cent of a particular category of the workforce (including a plant or a section) provided that at least 75 per cent of the workers in that category are party to the agreement. It must provide for lump sum compensation payments in return for pay reductions of at least 10 per cent (which must continue for at least 5 years). The agreement must be registered with the LRC.

“relevant date” is the date the agreement is registered with the LRC.

Certification

(2)(a) & (c) On the making of an application by a company, the Minister for Enterprise, Trade and Employment may, in accordance with guidelines agreed to by the Minister for Finance, certify that the company may be treated as a qualifying company. The application must contain all relevant information concerning the company, its trade or business, and the terms of the proposed agreements as may be specified in the guidelines.

(2)(b) The Minister for Enterprise, Trade and Employment may not so certify an employer company unless satisfied, on the advise of the LRC, that —

• the company is confronted with a substantial adverse change in its competitive environment which will determine its current or continued viability,
• it is necessary to enter into a pay restructuring agreement with its qualifying employees to accommodate that change and maintain its viability, and
• the proposed agreement is for the sole purpose of rectifying the adverse change.

(2)(d) & (f) The certification may be subject to conditions and can be revoked if any of the conditions are not complied with.

(2)(e) Costs (for example, consultants’ fees) incurred by the LRC in advising the Minister on the competitive threat faced by the applicant company and the need for pay restructuring must be met by the company.

(2)(g) The relief is scheduled to end on 1 January, 2004 (that is, no certificate can issue after that date).

Monitoring

(3) The pay restructuring agreement must be registered with the LRC, and the employer company must in each of the following 5 years confirm in writing to the LRC (within 1 month of each of the 5 anniversaries of the registration) that the terms of the agreement continue in force.

National wage agreements and incremental scales

(4) For the purpose of determining whether the percentage pay cut is maintained during the 5 year period, pay increases arising from Partnership 2000 or any similar agreement and incremental scale payments are ignored.

Extent of the exemption

(5)(b) A lump sum payment to an employee by a qualifying company under a “relevant agreement” is exempt from any charge to income tax to the extent that it does not exceed an amount calculated as follows—

• where the reduction in pay is at least 10% but not more than 15% – €7,620 plus €255 for each year of service up to a ceiling of 20 year’s service,
• where the reduction in pay is more than 15% but not more than 20% – €7,620 plus €635 for each year of service up to a ceiling of 20 year’s service,
• where the reduction in pay exceeds 20% – €10,160 plus €765 for each year of service up to a ceiling of 20 year’s service.

(5)(c) Where more than one payment is made to an employee in respect of the same employment, or different employments within the same group of companies, the payments are aggregated. If multiple payments exceed the exemption threshold as set out, that threshold is deemed to be set —

• where the payments are made for different years, first against a payment received in an earlier year, and
• where the payments are made in the same year, against a payment received earlier in a year of assessment before a payment received later in that year.

Withdrawal of relief

(6) Where the Minister for Enterprise, Trade and Employment revokes a certificate, or the company fails to make an annual return to the LRC or an employee receives a pay increase apart from the permitted exceptions, the relief is to be withdrawn by making an assessment under Case IV of Schedule D for the year of assessment in which the relief was granted.

Interaction with redundancy, etc payments

(7) Where an employee receives a payment to which section 123 applies (for example, an ex-gratia redundancy payment) within 5 years of the registration of the pay restructuring agreement, any tax-free element of the “section 123” payment (as calculated under section 201 or Schedule 3) is reduced by the relief given under this section.

(8) The exemption in section 201 and the top-slicing relief in Schedule 3 do not apply to any payment within this section.

Relevant Date: Finance Act 2021