The global economic climate has left many employers in Jamaica unsure about the stability of their businesses. Many employers find themselves caught between a rock and a hard place – as they grapple with one of the hardest decisions any employer will ever have to make, and that is “letting go” some of their most valuable, productive and long-serving employees in order to cope with the present harsh economic realities.
The Employment (Termination and Redundancy Payment) Act (“the Act”) recognised the potential hardship of these employees and provided a way in which these long-serving employees could be compensated for the loss of their jobs, in the form a redundancy payment. A statutory redundancy payment is due where an employee is made redundant with at least two years’ of continuous service. Seasonal workers may also be entitled to a redundancy payment in circumstances where the seasonal employee has been employed for two or more consecutive seasons on a continuous basis.
An employee is normally entitled to a redundancy payment where his contract is terminated because the employer has ceased, or intends to cease to carry on business in which the employee was employed; or where the employee is not longer required to carry out work of a particular kind; or where the employee has suffered personal injury which was caused by accident arising out of and in the course of his employment or where the employee has developed disease prescribed under the Act; or where a seasonal employee attends his workplace at the beginning of any season in accordance with instructions given by his employer and the employer fails to provide him with employment.
An employee who is dismissed by reason of redundancy must be provided with a written statement indicating how the redundancy payment is calculated. An employee (except a seasonal employee) is entitled to two weeks pay for the first ten years of employment and three weeks’ pay for each succeeding year. So an employee who is employed for 14 years will be entitled to 32 weeks pay. In the alternative the employee may receive 2/13 of his total salary earned in respect of the last 13 weeks of employment or where he has been employed for the first ten years and 3/13 of his total salary earned in respect of the at 13 weeks of employment for each succeeding year.
The redundancy pay for seasonal employees is the sum arrived at by multiplying two weeks’ pay (three weeks after ten seasons) by the number of consecutive years of continuous employment.
Redundancy payment must be calculated using earnings received in the last week of employment. These payments are also taxable. If the relevant taxes are not deducted from the redundancy payment, the employer may find itself in a position where it is liable for any tax payable. There are, however portions of the payment which are exempt from taxes.
The Income Tax (Termination of Employments) Order 1971 provides an exemption for certain proportions of the payment thereby allowing a tax-free portion of the redundancy payment.
The formula used to calculate the tax- free portion is very scientific and straight forward. It is just a matter of plugging relevant numbers in the equation provided below.
For employees who have been continuously employed for not less than three years and whose average emoluments for the last three years of employment were more than $7,000.00 per annum– the tax free portion should be 2¼ x Average Salary for the last 3 Years x number of Years of Service divided by 33¼.
Where the employment was for 331/3 years or more – the tax free portion would be 2¼ × average terminal pay for the last three years.
Statutory deductions will be applied in the normal way to the portion of the redundancy payment that is not exempt under The Income Tax (Termination of Employments) Order 1971.
Consequently, before handing over oftentimes “hefty” redundancy payment cheques it behooves employers to ensure that these payments are accurate and all the guidelines provided by the law are adhered to.