Tax-free payments in return for agreed pay restructuring

Tax relief is to be made available on individual "lump-sum payments" of up to IEP 10,000 over a five-year period to employees who agree to pay restructuring of "at least 10%." This new initiative was contained in Ireland's Finance Bill, 1997 which gives effect to the 1997 Budget introduced by the Minister for Finance in January.

Under a novel provision in the Finance Bill, 1997 which gives effect to this year's Budget, employees are now entitled to tax relief on individual lump-sum payments paid in the context of company restructuring. The payments can be made by companies to their employees for agreeing to pay restructuring, which must involve overall pay reductions of at last 10% of an employee's average salary for the previous two years and must remain in force for at least five years. While it is possible that basic pay could be hit by the measure, the sort of payroll reductions envisaged are more likely to effect non-basic pay items such as overtime, bonus payments and shift allowances.

In an explanatory memorandum which the Department of Finance supplied with the Finance Bill, the rationale behind the initiative (under section 12 of the Bill) is explained as follows:

"section 12 provides for a relief from income tax for lump-sum payments made to employees under certain company restructuring schemes involving agreed pay restructuring. The section applies where a company, which is faced with an actual or imminent substantial adverse change in its competitive environment, restructures its operations to ensure its survival, by agreement with the work force, and receives a certificate from the Minister for Enterprise and Employment, certifying that it may be treated as a qualifying company for the purposes of the relief."

Limited time-frame

Two key elements of the scheme are specifically included to prevent its abuse. Firstly, it will have a limited five-year time span and secondly, all agreements under the scheme must be registered with the Labour Relations Commission (LRC).

A certificate must also be granted by the Minister for Enterprise and Employment who will be advised by the LRC. During the five-year period of any agreement, the company concerned will have to confirm to the LRC, on an annual basis, that the terms of the agreement continue to be complied with. If the conditions for granting the tax relief are breached, any relief granted will be withdrawn.

The relevant section of the Bill provides that where a company restructures its operations "by agreement with the workforce" to secure its survival, tax relief will be made available on lump sums paid by the company concerned to its employees to achieve and compensate for a substantial cut in pay. This will have to be "at least 10%" of average pay for the previous two years and the reduction must remain in force for at least five years.

The maximum lump sum to be tax relieved is IEP 6,000 plus IEP 200 per year of service up to an overall maximum of IEP 10,000. The Bill states that payment of normal general pay-round increases and increments will be allowed.

Social partner support

The Irish Business and Employers Confederation (IBEC) and the Irish Congress of Trade Unions (ICTU) have backed the initiative which was signalled in Ireland's recently concluded central agreement, Partnership 2000 (IE9702103F).

It has been reported that a major multinational company, with the help of other exporting companies which are also facing necessary restructuring, played a key role in persuading the Department of Finance and the Department for Enterprise and Employment to back the move.

The development must be understood in the context of companies which are seeking to modernise and restructure, through the introduction of initiatives such as new working time arrangements like annualised hours, new working methods, team-based working, "delayering" and "skill-based change". It could also help to avoid job reductions.

Apart from labour-intensive, long-established private sector firms, the scheme could also help public sector companies which are currently engaged in major restructuring programmes. For example, Ireland's three main transport companies - all part of the state-owned CIE Group- are currently attempting to negotiate major cost reductions. The various trade unions involved have been fiercely resisting such a potential loss of pay to their members and the initiative may help overcome sharp differences between management and the unions concerned.

Reports in the Irish press that the move was triggered by fears of exchange rate volatility and the potential for exchange rate problems when Ireland joins the expected Economic and Monetary Union (EMU), were strongly denied by an ICTU spokesperson. It was pointed out that separate clauses in the current Partnership 2000 national agreement are intended to deal with any exchange rate and EMU related issues. However, it is important to point out that there is nothing in the wording of the Bill which would prevent companies which might get into exchange rate problems from seeking to avail of the scheme.

Commentary

The initiative appears to be broadly aimed at two types of companies. Firstly, it provides long-established firms and their employees with an incentive to proceed with essential restructuring in order to face competitive challenges. Most of these sort of companies tend to operate along more traditional industrial relations lines and are unionised. Secondly, it could greatly assist state-owned companies such as CIE, Aer Lingus or Telecom Eireann. Most of Ireland's state companies are either engaged in restructuring or are faced with the necessity of doing so. Therefore, securing trade union agreement to reduce overall payroll costs over a specific period may be greatly assisted by the new scheme.

The scheme is arguably an imaginative initiative by the social partners at a time when competition is forcing the pace of change. It could, therefore, help to save jobs as well as assisting companies to retrain and maintain competitiveness. The scheme could also be useful to companies which experience exchange rate problems, particularly post-EMU entry, even though EMU is not referred to in the relevant section of the Finance Bill.

Safeguards which are built into its operation, involving both the LRC and the Minister for Enterprise and Employment, should ensure it is not abused. The fact that it is time-limited and each case will be monitored annually by the LRC, will help to maintain the integrity of the scheme.

It must be said that the move is also further evidence that the ICTU is willing to show leadership at national level in order to help its members meet the challenge of change posed by global competition at the level of the firm. Therefore, it can be portrayed as a logical extension of some of the key recommendations made in ICTU's 1995 Managing change report. This advocated that the trade union movement should adopt a positive approach to change rather than a more traditional, defensive or adversarial posture. ICTU's agreement to countenance pay reductions, over a limited period, is further evidence that trade union leaders understand the central importance of the maintenance of competitiveness. (Brian Sheehan, IRN)

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