Voluntary redundancy programmes. An alternative to collective redundancies.

Carrying out collective redundancies requires compliance with the procedure provided for by law. In practice, it also causes a lot of negative emotions and fears about the future among employees. Therefore, voluntary redundancy programmes may be an alternative worth considering.

Voluntary redundancy programmes are gaining popularity among Polish employers every year. They usually either precede the process of collective redundancies (and sometimes they completely replace collective redundancies) or are designed as long-term (several years) programmes to reduce employment in cases where urgent employment restructuring is not necessary.

Advantages and disadvantages

The advantage of such voluntary programmes is that they can also be addressed to employees who are protected against redundancies and who would not be eligible for redundancy under other circumstances. The psychological aspect should not be overlooked either. It is easier (for both parties) to part with an employee who wants to leave of their own accord.

On the other hand, it should be remembered that voluntary redundancy programmes are usually more expensive for the employer than ordinary collective redundancies. Persuading employees to decide to leave requires offering them an appropriate incentive. The benefits that an employee would receive under statutory provisions in the event of a reduction in employment are unlikely to encourage them to resign voluntarily.

In practice, companies wishing to persuade employees to leave voluntarily usually offer higher severance payments. Often, the offer also includes support for departing employees in finding new jobs or setting up their own businesses.

The disadvantage of voluntary redundancy programmes is that the employer has limited influence on the number of employees who are made redundant in this way. If the benefits granted under the programme are not very attractive, the number of employees who decide to take advantage of it may be lower than expected.

The employer's influence on who decides to leave may also be limited. Usually, the most qualified employees, who can easily cope in the labour market, are the most likely to take advantage of the programme. Such employees are usually the ones the company wants to retain. When preparing to introduce a voluntary redundancy programme, it is important to address such cases, e.g. by precisely defining the programme's target audience. In practice, the consent of a supervisor is often required to finalise an employee's departure. An alternative may be to design the programme benefits in such a way that they primarily address the needs of the selected target group. However, it will not always be possible to design the benefit package in this way.

It should be remembered, however, that voluntary redundancy programmes will not always be an adequate solution for reducing employment in a company. This is particularly true in cases where the employer, e.g. due to a change in the company's profile or production process, decides to part with all employees in a given department. In such a case, introducing a more costly voluntary redundancy programme will usually be counterproductive.

Legal realities

Voluntary redundancy programmes have been shaped by practice and are not currently subject to any specific statutory regulation. This does not in any way preclude their admissibility. When designing such a programme, several important issues should be kept in mind.

The advantage of the lack of regulation is that employers have greater freedom in shaping the content of the programmes. However, this does not mean that there are no restrictions whatsoever. The general legal framework, in particular labour law, will also apply in this case. For example, the selection of programme recipients cannot be based on discriminatory criteria such as the nationality or age of the employee. It should be remembered that the list of grounds for discrimination in Poland is open-ended, and therefore any differentiating factor that is not objective may be considered discriminatory. It will also be ineffective to deprive employees participating in the programme of their rights guaranteed by labour law.

Furthermore, the provisions of the voluntary redundancy programme will be interpreted in the context of the purpose of its introduction. This purpose is usually to reduce the number of employees in the company. Therefore, the way in which the terms of the programme are constructed may determine the degree of independence of the employer in introducing and applying the programme.

If the voluntary redundancy programme meets the conditions for the application of the collective redundancy procedure, cooperation with the employee side (trade unions or elected employee representatives) may be necessary for its introduction. This is because it is assumed that although in the case of voluntary redundancy programmes the employment contract is terminated at the employee's request, it is the employer who initiates the entire process (the employee would not have decided to leave if the programme had not been introduced). In such a case, the need to involve the employee side will be determined by numerical criteria and the time frame of the programme.

Taxation of benefits for voluntary departure from the company

Until a few years ago, there were doubts about the tax status of benefits paid under voluntary redundancy programmes, specifically the possibility of applying for exemption from personal income tax (PIT) under Article 21(1)(3) of the PIT Act. This provision provides the basis for PIT exemption for compensation or damages if their amount or rules for determining them result directly from the provisions of collective labour agreements, other collective agreements based on the Act, regulations or statutes referred to in Article 9 § 1 of the Labour Code.

Originally, tax authorities issued divergent individual interpretations based on this provision. In order to standardise the application of the above provision, on 23 June 2016, the Minister of Finance issued a general interpretation according to which, in order for benefits paid by employers to benefit from the above tax exemption, they must meet all of the following conditions:

  • they must be compensation or damages;
  • they must be paid as a result of events that constitute a tort or a fault on the part of the employer;
  • the exemptions referred to in point (a) -g of Article 21(1)(3) of the PIT Act (i.e. in particular, they are not severance pay and compensation for shortening the notice period of an employment contract, severance pay paid on the basis of the provisions of the Act on group redundancies or compensation awarded on the basis of the provisions on non-competition).

This essentially determines that benefits granted under voluntary redundancy programmes are not exempt from PIT and must be taxed. This approach is generally shared in the judgments of administrative courts. The obligation to collect and pay advance payments for this tax rests with the employer. Benefits related to voluntary redundancy, as paid in connection with the termination of employment, will be exempt from social security contributions. From the perspective of public levies, the status of benefits paid under voluntary redundancy programmes is therefore analogous to benefits paid for collective redundancies.

Carrying out a collective redundancy requires compliance with the procedure provided for by law. In practice, it also causes a lot of negative emotions and fears about the future among employees. Therefore, voluntary redundancy programmes may be an alternative worth considering.

Voluntary redundancy programmes are gaining popularity among Polish employers every year. They usually either precede the process of collective redundancies (and sometimes they completely replace collective redundancies) or are designed as long-term (several years) programmes to reduce employment in cases where urgent employment restructuring is not necessary.

Advantages and disadvantages

The advantage of such voluntary programmes is that they can also be addressed to employees who are protected against redundancies and who would not be eligible for redundancy under other circumstances. The psychological aspect should not be overlooked either. It is easier (for both parties) to part with an employee who wants to leave of their own accord.

On the other hand, it should be remembered that voluntary redundancy programmes are usually more expensive for the employer than ordinary collective redundancies. Persuading employees to decide to leave requires offering them an appropriate incentive. The benefits that an employee would receive under statutory provisions in the event of a reduction in employment are unlikely to encourage them to resign voluntarily.

In practice, companies wishing to persuade employees to leave voluntarily usually offer higher severance payments. Often, the offer also includes support for departing employees in finding new jobs or setting up their own businesses.

The disadvantage of voluntary redundancy programmes is that the employer has limited influence on the number of employees who are made redundant in this way. If the benefits granted under the programme are not very attractive, the number of employees who decide to take advantage of it may be lower than expected.

The employer's influence on who decides to leave may also be limited. Usually, the most qualified employees, who can easily cope in the labour market, are the most likely to take advantage of the programme. Such employees are usually the ones the company wants to retain. When preparing to introduce a voluntary redundancy programme, it is important to address such cases, e.g. by precisely defining the programme's target audience. In practice, the consent of a supervisor is often required to finalise an employee's departure. An alternative may be to design the programme benefits in such a way that they primarily address the needs of the selected target group. However, it will not always be possible to design the benefit package in this way.

It should be remembered, however, that voluntary redundancy programmes will not always be an adequate solution for reducing employment in a company. This is particularly true in cases where the employer, e.g. due to a change in the company's profile or production process, decides to part with all employees in a given department. In such a case, introducing a more costly voluntary redundancy programme will usually be counterproductive.

Legal realities

Voluntary redundancy programmes have been shaped by practice and are not currently subject to any specific statutory regulation. This does not in any way preclude their admissibility. When designing such a programme, several important issues should be kept in mind.

The advantage of the lack of regulation is that employers have greater freedom in shaping the content of the programmes. However, this does not mean that there are no restrictions whatsoever. The general legal framework, in particular labour law, will also apply in this case. For example, the selection of programme recipients cannot be based on discriminatory criteria such as the nationality or age of the employee. It should be remembered that the list of grounds for discrimination in Poland is open-ended, and therefore any differentiating factor that is not objective may be considered discriminatory. It will also be ineffective to deprive employees participating in the programme of their rights guaranteed by labour law.

Furthermore, the provisions of the voluntary redundancy programme will be interpreted in the context of the purpose of its introduction. This purpose is usually to reduce the number of employees in the company. Therefore, the way in which the terms of the programme are constructed may determine the degree of independence of the employer in introducing and applying the programme.

If the voluntary redundancy programme meets the conditions for the application of the collective redundancy procedure, cooperation with the employee side (trade unions or elected employee representatives) may be necessary for its introduction. This is because it is assumed that although in the case of voluntary redundancy programmes the employment contract is terminated at the employee's request, it is the employer who initiates the entire process (the employee would not have decided to leave if the programme had not been introduced). In such a case, the need to involve the employee side will be determined by numerical criteria and the time frame of the programme.

Taxation of benefits for voluntary departure from the company

Until a few years ago, there were doubts about the tax status of benefits paid under voluntary redundancy programmes, specifically the possibility of applying for exemption from personal income tax (PIT) under Article 21(1)(3) of the PIT Act. This provision provides the basis for PIT exemption for compensation or damages if their amount or rules for determining them result directly from the provisions of collective labour agreements, other collective agreements based on the Act, regulations or statutes referred to in Article 9 § 1 of the Labour Code.

Originally, tax authorities issued divergent individual interpretations based on this provision. In order to standardise the application of the above provision, on 23 June 2016, the Minister of Finance issued a general interpretation according to which, in order for benefits paid by employers to benefit from the above tax exemption, they must meet all of the following conditions:

  • they must be compensation or damages;
  • they must be paid as a result of events that constitute a tort or a fault on the part of the employer;
  • the exemptions referred to in point (a) -g of Article 21(1)(3) of the PIT Act (i.e. in particular, they are not severance pay and compensation for shortening the notice period of an employment contract, severance pay paid on the basis of the provisions of the Act on group redundancies or compensation awarded on the basis of the provisions on non-competition).

This essentially determines that benefits granted under voluntary redundancy programmes are not exempt from PIT and must be taxed. This approach is generally shared in the judgments of administrative courts. The obligation to collect and pay advance payments for this tax rests with the employer. Benefits related to voluntary redundancy, as paid in connection with the termination of employment, will be exempt from social security contributions. From the perspective of public levies, the status of benefits paid under voluntary redundancy programmes is therefore analogous to benefits paid for collective redundancies.

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