Few supports out there for the unemployed self-employed

The Irish Times – Monday, May 31, 2010 by Caroline Madden

The social welfare supports that are available to people who work for themselves are very limited but some benefits do exist.

ONE OF THE PERKS of being self-employed is that you can’t get fired. You can, however, find that your clients have evaporated, your contracts have dried up and your income stream has shrunk. Very often it is only at this point, when the self-employed face the harrowing prospect of becoming unemployed, that they realise with a shock just how limited the State supports available to them are in comparison to the entitlements of their PAYE peers.

First off, when an employee is handed their P45 they are entitled to a statutory redundancy payment plus one bonus week. At two weeks’ pay (capped at €600 per week) per year of service it isn’t huge, but nonetheless it helps to cushion the financial blow of losing your job. Generous employers will also bump this up with ex-gratia payments and, as recent history has shown only too well, senior staff often receive ‘golden handshake’ packages that include pension top-ups, the company car and so on.

Individuals who work for themselves, however, are not entitled to a statutory redundancy payment. Only if a person was wrongly deemed to be self-employed, for example if their employer classified them as a contractor in order to avoid paying PRSI, will they be able to claim a redundancy payment.

The bad news doesn’t stop there. When they then ring up their local dole office to enquire about State unemployment benefits, self-employed people will be informed that they are not entitled to Jobseeker’s Benefit (which is set at a maximum weekly rate of €196). The self-employed pay PRSI under Class S at a rate of 3 per cent (excluding levies), whereas employees, together with their employers, pay a total social insurance contribution of more than 14 per cent (excluding levies) under Class A. As a result, the social welfare supports available to people who work for themselves are very limited.

The Irish National Organisation for the Unemployed (INOU) advises that if a self-employed person worked as an employee in the last four years, they may have paid enough PRSI to be entitled to Jobseeker’s Benefit. However if the person doesn’t qualify for this payment, they may be entitled to claim Jobseeker’s Allowance. In order to claim this, you must be aged between 18 and 60, and resident in Ireland.

Furthermore, you must pass a means test.

The means test will be carried out at the applicant’s local social welfare office by a deciding officer to determine whether or not they are entitled to Jobseeker’s Allowance at all, and if so, how much that payment will be. The maximum weekly rate is also set at €196 for 2010.

The assessment will take into account factors such as savings (excluding the first €20,000), property other than the person’s home, and household income, including their self-employed earnings and a spouse’s income. It’s worth noting that you don’t have to close down your business or stop working as a self-employed person to qualify for the payment — the decision will depend on whether your income has dropped below a certain level.

“The assessment of your income from self-employment depends on what you can reasonably be expected to earn from your business over the next 12 months,” the INOU explains.

Your income over the past 12 months or longer will be used as a guide by the officer when determining your likely earnings for the year ahead. You may have to provide business records such as receipts and payments or audited accounts where applicable, to back up your claim.

However a person’s income over the past year may be a completely inaccurate reflection of their earning capacity for the next 12 months. For this reason, the INOU stresses the importance of explaining to the deciding officer any changes, economic or otherwise, that have affected (and are likely to continue affecting) your business. This may increase the possibility of receiving a Jobseeker’s Allowance payment, it advises.

When questioned last year about the disparity between the level of support provided to employees versus the self-employed, former social and family affairs minister Mary Hanafin said that there were no plans to extend cover for short-term benefits such as Jobseeker’s Benefit to the self-employed.

“Any such measure would have significant financial implications,” she said. “Consideration would also have to be given to an appropriate increase in the rate of the PRSI Class S contribution.” Unlike their fellow workers in the PAYE sector who do not have to shoulder the financial losses of their company directly, people who run their own businesses could be saddled with the debts of that enterprise if they have to call it a day and shut up shop.

The extent of their exposure depends on the structure under which they chose to operate their business. One of the key benefits of setting up a limited company is that the owner’s liability is limited to the amount of money they invest in it. If the business goes bust, only the assets of the company can be used to clear its debts unless the owner provided personal guarantees for the debts of the firm.

Unfortunately such guarantees became very common practice in recent years, and mean that business owners could stand to lose personal assets offered as security.

If, on the other hand, an individual chose to operate as a sole trader, which is the simplest and most common structure, then their liability is unlimited and their personal assets will automatically be on the line when it comes to paying off creditors.

Another difficult issue that the self-employed sector is grappling with is pension provision. While employees may wince at the losses their pension funds sustained during the financial crisis as equity markets nosedived, many still enjoy the benefit of having their retirement pots topped up by their company. (Many large corporations match their employees’ pension contributions). Not so for the self- employed, who invariably have to fund their pension entirely themselves.

Bill Anderson of Complete Financial says that pension provision has become a huge issue for self-employed people whose retirement nest eggs have been decimated. “A lot of work last year and this year would be [with new clients] making sure that they don’t lose any more money and trying to plan to make up for the gap,” he says.

Mr Anderson, who sits on the council of the Irish Brokers Association, says that they are trying to campaign for greater support for private pension funding, as this area tends to be very poorly funded.

Of course all of these problems are unlikely to elicit any sympathy from the general public,because of the perception that everyone in the self-employed sector was raking it in during the boom times. However, successful economies need people who are willing to take risks and create employment – whether for themselves or for others. Éamon Ó Cuív may want to bear this in mind in his new role as Minister for Social Protection, otherwise those entrepreneurs and risk-takers who are forgotten about this time around will not venture from the relative security of the PAYE sector again.

About Bill Anderson

Bill is a qualified financial adviser (QFA) and also a qualified accountant (FCCA).
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