Covid Layoffs – Employees Need Support With Their Finances
With the coronavirus crisis set to continue for some time to come, it is a sad economic fact that many redundancies are inevitable due to the turmoil caused by the disease.
For sectors hit hard, redundancies are likely to be a necessary business decision. But at this time, it is important to remember that laying off staff has real human costs. The experience can be tough for everyone involved – the employee and their co-workers and line managers. Employers have a responsibility to support staff in the best way they can, and that will involve offering support at this most difficult of times.
Redundancy can be an incredibly stressful time, both emotionally and financially. Add to that worries about lockdowns, fears for the future in the post-pandemic world and concerns about loved ones. Moreover, millions will be seeking economic support and sound advice during the economic crisis at a time when external sources of support are under increasing pressure.
There are several things that individuals can do for themselves to ease the transition from employed to redundant. Not only that, responsible employers should transparently offer advice to staff at risk of losing their jobs. This post will consider the general approach to handling redundancies transparently and sensitively and point to the financial options that staff will have as they approach a major change in circumstances.
For the Employer – Approach the Human Side of the Situation
A reasonable employer who has decided to make redundancies will have explored all possible alternatives and confirmed that the move to lay off staff is a last resort.
Simply sharing that this decision has not been arrived at lightly is an important first step for employers and their staff. In addition, providing information to employees can help them better understand the business position and begin to accept why this has been a necessary step for their employer to take.
The more transparent an employer is around how, when, and how the redundancy will occur, the less likely the situation will become an adversarial one.
Likely, many employees will not have experienced redundancy before. That means they will need to know how the process works and how and where to seek advice to relieve the added unease of not knowing where they stand or where to go from here.
Similarly, managers and HR teams should be open about the rights of staff in redundancy situations. This includes their right to appeal. This will help employees feel more informed, but it will demonstrate genuine care and concern for those affected, which will help ensure a more positive lasting impression of their employment despite the difficult circumstances.
The following steps are important for employers to consider and employees to understand:
- A fair selection process must have been followed. This means a demonstrable objective and non-discriminatory selection criteria must have been applied and applied consistently for all.
- In the current employment market, finding a new job might feel almost impossible. That means a responsible employer should do what they can to help employees find their next role. This may mean talking through their options or putting them in touch with contacts who could aid their job search or other employers who may be looking to hire.
- Even if the business decision has concluded that only a small number of redundancies are required, it must be remembered that there is likely to be a wider impact from any downsizing decision. Having a colleague facing redundancy can cause distress and upheaval within a team. It may cause fellow employees to fear for their own job security and disrupt the workplace dynamics.
- Line managers and senior personnel should encourage affected staff to be able to approach them, or another appointed person, with questions or concerns. Reassurance should be offered wherever possible.
- Usually, the first £30,000 of a redundancy payout is tax-free.
- Anything over £30,000 is added to an employee’s “income” and has tax charged on it at the prevailing nominal rate.
- National Insurance is not paid on redundancy monies.
- Employees should consider whether any taxable portion of redundancy pay will push them into a higher tax bracket based on their income and payout. If this is the case, there may be better ways to minimise tax, such as putting some funds into the individual’s pension pot. An HR department or pensions team should be able to advise on this.
- Employees should work out what assets they have. These could include pensions, savings, ISAs, property and investments.
- Then they should calculate their liabilities, for example mortgage(s) and debt(s).
- Next, work out essential expenditures such as child care payments, insurance and utility bills.
- Everyone has a multitude of other household bills, and these will have to be factored into the budget while also considering what could be reduced or done away with altogether.
- Firstly, redundancy payments should be used for essential living expenses. That is particularly so for anyone who feels they may be out of work for some time. There will be many people in this situation during the pandemic and into the post-COVID world
- Many insurers offer mortgage protection policies that will cover repayments for up to two years should the individual lose their job. The cover is usually expensive, but a claim should be made as soon as possible.
- There is some state aid available in the form of the Support for Mortgage Interest (SMI) scheme. However, the borrower must have been unemployed for 39 weeks before any payments can commence. SMI will cover only the interest element of mortgages up to £200,000. A maximum rate of interest is also applied, and payments are made directly to the lender.
Consider Using Redundancy Payments to Repay Debts
It is often worth employees using some of their redundancy payments to reduce costly debts if it is affordable. The most expensive ways of borrowing tend to be credit cards, store finance and small short term loans.
Is Retirement an Option?
If an employee is nearing retirement age, they may consider the idea of taking retirement early.
Much depends on the individual’s circumstances, but for some, this may be more achievable than they think. For example, an employee could use their pension tax-free cash to pay off any outstanding debt, including a mortgage, and as a result, they may be able to maintain their standard of living.
Consider Pension Options
Employees can keep their pension with their current employer’s scheme once made redundant. The monies will remain invested and secure until they reach retirement age.
Some people opt to move their pension to the pension scheme at their new workplace or private pensions. This has advantages for those who would prefer to keep all of their pensions together in one place. It makes sense from a purely administrative point of view. However, there can be a cost associated with transferring a pension. Employees should check charges and options before deciding on whether to move their pension.
Pay More Into Their Pension
If they can afford to do so, it may be prudent for employees to consider using a portion of their redundancy payment to move funds into their pension to boost savings for retirement.
There are limits on the tax relief that can be received from pension contributions each year. This means that it is important that this is checked carefully first. Nevertheless, for those approaching retirement, adding to pension funds could be a particularly attractive way of providing a final boost to the value of their pension pot.« Have a Merry Debt Free Christmas Managing Your Finances During Covid-19: 7 Practical Tips »
Word spreads fast in workplaces. Poor communication creates an atmosphere for gossip and rumours to take hold. That means that line managers should update employees regularly (even if there’s nothing to report). Likewise, staff should be kept informed as the situation progresses.
Having considered the above and the necessity to offer advice and support, here are the basics of a redundancy check-up for both individuals and the staff that manage them.
Understand the Taxation Rules on Redundancy Payments
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Adopt an Unblinkered Approach to Budgeting and Financial Position
If you’re an employee facing redundancy or an employer having to make redundancies, budgeting and assessing the financial position as an individual has never been so important. Many larger organisations will run workshops on adopting sound financial principles for those at risk or facing redundancy.
We may think that budgeting is simple. You add up your income and deduct your expenses. But for many people who have not experienced redundancy, it may not be something they’ve had to consider too much until now.
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Look Into Mortgage Repayments
Mortgage interest rates are normally significantly lower than those for other debts. Many mortgages also include options for payments holidays, particularly relating to redundancy. Using a payout to pay off a mortgage is not always a great idea. However, if employees don’t have other debts, it may be prudent for them to overpay on their mortgage to save on interest and the amount paid each month.
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