Sarah Connellan, Director, Employment Taxes, Deloitte and Wendy Doyle, Manager, Employment Tax, Deloitte look at how companies can support employees through a workforce reduction in order to ensure it is carried out in the best manner possible.

In the current economic climate it is difficult to escape the realisation that redundancy announcements have become commonplace and many organisations must now shed some of their workforce in order to weather this turbulent economic period.

By implementing any workforce reduction or redundancy programme, an employer has inadvertently sown the seed of doubt about the security of the business and the workforce itself.

It is however possible with effective planning and communication to avoid some of the stresses associated with job loss. An employer can provide assistance to departing employees, including taxation advice, pension, financial, legal, outplacement and social welfare assistance.

Employers should, if possible, only consider redundancy as a final option and alternative paths to redundancy should be explored after re-evaluation of employee profiles, for example redeployment to more productive areas, reduction in working hours or voluntary pay cuts.

There are many considerations that an employer should weigh up prior to implementing any workforce reduction. Statutory redundancy entitlements, if due, may be provided tax free if the employee has 104 weeks continuous service and the position is being made redundant.

Sound tax advice should be sought at the outset to ensure that any ex gratia package on offer is regarded as non contractual in nature, and hence that the payment may be subject to the favourable taxation exemptions and reliefs on termination.

Individuals' entitlements (present or future) to a tax free lump sum under the company pension scheme can have an impact on the tax exemption available on the termination of employment and should be given careful consideration.