Aer Lingus agrees €29.5 million ‘leave and return’ tax settlement

The airline Aer Lingus has concluded a tax settlement worth €29.5 million with the Irish tax authorities arising from a controversial ‘leave and return’ redundancy scheme in 2008, which was part of a €92m million company-wide cost reduction plan. The scheme saw 1,073 airline staff leave the company on attractive terms and 715 return shortly after on lower terms and conditions. Government investigations finally concluded that the scheme did not comply with redundancy laws.

Background

A 2008 cost-saving programme involving Aer Lingus and the Services Industrial Professional and Technical Trade Union (SIPTU) resulted in 1,073 airline staff leaving the company on attractive severance terms, with 715 of them being taken back within weeks on newly negotiated lower terms and conditions.

The plan, agreed during the term of former Chief Executive Dermot Mannion, was described late last year as ‘a bogus redundancy scheme’ by Bernard Allen, Chair of the Dáil (parliamentary) Public Accounts Committee. Negotiations were assisted by the Labour Relations Commission, the Labour Court and the now defunct social partnership organ, the National Implementation Body.

The company originally claimed that the workers concerned had ‘left and returned’ to substantially new jobs, entitling them to the normal tax arrangements that apply in a formal redundancy situation. But the Revenue Commissioners were never convinced this was the case and the Department of Jobs, Enterprise and Innovation made no firm commitment that it agreed with the company’s argument.

The key issue in this case was whether the workers concerned could be said to have left and returned to perform significantly different work.

The most significant test case in this area involved Waterford Crystal and the Unite trade union, who in 2005 negotiated a complex severance agreement, part of which involved the re-deployment of skilled glass blowers and cutters to basic general operative positions. Formal Revenue approval was secured in that case because the redeployments were treated, for tax purposes, as exactly the same as redundancies. The critical factor in the Waterford case was the fact that the work being performed by the workers changed in a fundamental way – from high skill to low skill. This did not appear to happen in the Aer Lingus case.

‘Most unusual occurrence’ according to minister

In January 2011 the now former Minister for the Department of Enterprise, Trade and Innovation, Batt O’Keeffe, described the ‘leave and return’ scheme in Aer Lingus as a ‘most unusual occurrence’. He said his officials had to be very careful to ensure that the plan met all the formal criteria for redundancy. If it did not, the potential for the taxpayer could be horrific, he warned.

In a statement as recently as October 2010, Aer Lingus said it remained convinced that:

…the exits of these 715 staff were legitimate redundancies under the Redundancy Payments Acts 1967-2007. We continue to engage with the Department of Enterprise Trade and Innovation in relation to this matter.

However, two and half years after the agreement was negotiated, in February 2011, it was revealed that the Revenue had reached a settlement with Aer Lingus under which the company would pay €29.5 million in tax. Meanwhile, the company announced it would no longer pursue the redundancy rebate which, in normal circumstances, it could seek separately from the Department of Enterprise, Trade and Innovation.

The industrial relations dimension

A critical factor from the perspectives of both industrial relations and the law was that the agreement had been formally registered in the Labour Court. The main trade union involved, SIPTU, said it was satisfied that the terms of the wider agreement, as it impacted on its members, would be unaffected by the arrangement between Aer Lingus and the Revenue. In other words, the company would be making good the tax shortfall, and not the union members.

The tax settlement with the Revenue relates to costs arising from payments made to staff who left under the 2008 restructuring programme, including normal income tax foregone, social insurance payments, interest and penalties.

In the aftermath of the settlement, Aer Lingus said it was reviewing the whole episode, which means the company will have to look both internally and externally to assess how it initially made the wrong decision on the ‘leave and return’ scheme. This will involve a close examination of any advice it received.

According to the specialist weekly, Industrial Relations News (IRN), which raised doubts about the ‘leave and return’ scheme when it was first announced, the Revenue has ‘sent out a warning to any company or union seeking to negotiate similar deals’. Indeed, it had already done so when a similar scheme proposed by the Dublin Airport Authority in 2010 was strongly rejected by the Revenue.

Brian Sheehan, IRN Publishing