COVID-19 redundancies could cost Irish Exchequer €500m - Crowe Ireland

COVID-19 redundancies could cost Irish Exchequer €500m

30/09/2020
COVID-19 redundancies could cost Irish Exchequer €500m - Crowe Ireland

The number of redundancies in the quarter June to August 2020 is up 240% when compared to the same quarter in 2019 and this is likely to be a key indicator of things to come over the next few quarters. 

As the Pandemic Unemployment Payment (PUP) levels are reduced and emergency provisions are lifted, there will be pressure on employers to either take staff back onto the payroll or make them redundant. At the end of August, there were 225,000 employees out of work supported by the PUP scheme. While the initial take back rate by employers was in the order of 7,000 individuals per week, recent figures show that the number of people availing of the PUP has increased again following the reintroduction of restrictions in certain counties. As a result, going forward there is likely to be a significant cohort of these individuals who will ultimately be made redundant. In order to fund the cost of these redundancies, many employers will need to use the Redundancy Payment Scheme, which is operated by the Department of Employment and Social Affairs (DEASP). 

Should employers find themselves in a position not to be able to fund their employee redundancy payments, they may be able to have the Redundancy Payments Scheme cover this cost initially, but it will leave the DEASP as a preferential creditor in the business for any payments made. 

This existing government support, while not highlighted in recently launched initiatives, is likely to be widely availed off as employees who have two years’ service and who are out on the PUP scheme, if not brought back, will need to have their redundancy paid to them. In the alternative scenario where the employer tries to deal with the employee without using this scheme, it is likely that employees will take matters into their own hands and pursue a Workplace Relations Commission order confirming their termination and their redundancy entitlements. 

The previous peak year for redundancy was in 2009, when 77,000 applications were processed through the Redundancy Payments Scheme. In that year the claim numbers averaged over 6,000 per month, or 10 times August 2020 levels. Based on the PUP continuing until April 2021, we are unlikely to see the full impact on redundancy claims until this temporary support ends. 

Nevertheless, recent trends suggest there could be over 2,000 claims per month from December this year onwards, with a massive spike then coming in May 2021 when the PUP support ends. Taking into account the numbers currently receiving the PUP payment, and the likely rate of people returning to work, a rough estimate would still see 100,000 redundancies taking place after April 2021. 

On this basis, 2021 has the potential to see more redundancies than at the height of the last financial crisis. This surge in redundancies could potentially cost the Irish Exchequer over €500m in 2021. 

This cost has the potential to increase when the ongoing protests from the ex-staff at Debenhams are considered. There is pressure on the government to review the current Redundancy Payment Scheme and to increase the statutory payment due from the current two weeks per year of employee service. Any increase in payments from the scheme will see the cost to the exchequer increase. 

Last September, Crowe called for the reintroduction of rebates from the Redundancy Payment Scheme for companies that were struggling to meet redundancy costs (view article). At that time, we made the call for this reintroduction based off the impact that Brexit may cause. The threat of a hard Brexit remains and now with the effects of the COVID-19 pandemic we believe that there is an even greater requirement for the reintroduction of these rebates. 

Reducing payroll cost is now a priority for most businesses. For advice on dealing with these payroll challenges and on how to fund a redundancy scheme, please contact a member of the restructuring and insolvency team.

Partner, Corporate Recovery - Crowe Ireland
Aiden Murphy  
Partner
Corporate Recovery
Declan Hanly, Associate Director, Corporate Recovery - Crowe Ireland
Declan Hanly
Associate Director, Restructuring & Insolvency