Employees can receive childcare vouchers either on top of their normal salary or by salary sacrifice. Under a salary sacrifice arrangement, an employee agrees to a variation to their contract terms, reducing their salary to receive the vouchers. This has certain tax and NIC advantages to both the employer and employee.
It has long been a questionable issue, without any deciding case law, whether there is a duty to pay the vouchers during maternity leave. During maternity leave an employee is entitled to all the usual benefits of her employment, except her remuneration. Statutory Maternity Pay or the employer's own maternity pay scheme replaces this. If the vouchers are a non-cash benefit, legislation provides that an employer should continue to provide them. However, if they are remuneration, legislation provides that they do not continue during maternity leave.
There are arguments for an employer needing to provide the vouchers during maternity leave as they amount to a non-cash benefit. An employer cannot convert them into cash and they are payable to a third party, and not the employee. HMRC has agreed with this view, even where the employer provides them by a salary sacrifice. This does mean that employers face extra costs in funding childcare vouchers during the whole maternity leave period.
This issue has now come before the employment tribunals. Peninsula Business Services required its employees to leave the scheme during maternity leave. Ms Donaldson objected to this and brought a claim before the tribunal alleging this amounted to discrimination. An employment tribunal found in her favour. The tribunal found that it was discriminatory to have a condition of entry to the scheme that employees have to withdraw from the scheme while on maternity leave.
Peninsula appealed against the Employment Tribunal's decision. This month, the Employment Appeal Tribunal (EAT) has decided in Peninsula Business Services Ltd v Donaldson that it is not discriminatory to suspend childcare vouchers paid by salary sacrifice during maternity leave. The EAT held that the vouchers represent part of the employees’ salary as the vouchers are a substitution for pay under a salary sacrifice scheme. On this basis, Regulation 9 of the Maternity and Parental Leave Regulations 1999 applies and an employer can regard the vouchers as remuneration. Therefore, Peninsula was within its rights to suspend the vouchers during periods of maternity leave. The EAT held that there was no legislative basis to support the current HMRC guidance. This means that the vouchers do not constitute a "non-cash benefit", but are instead considered to be "remuneration" when deciding what does and does not have to be continued during maternity leave.
The EAT also held that Parliament cannot have intended for employers to have to continue to provide childcare vouchers during maternity leave. This added cost for employers could discourage them from offering a childcare voucher scheme in the first place.
The Peninsula case has at last provided some long-awaited clarity in this area. Since childcare vouchers provided by a salary sacrifice scheme amount to remuneration, an employer need not provide them during maternity leave. This will be welcome news to some employers. However, those employers that provide enhanced maternity pay may find the decision has less of a cost impact. This may mean that they continue to provide them in any event. Caution should be exercised before relying on this case however. The EAT was tentative in its findings and we do not know if Ms Donaldson will appeal. Issues with contractual entitlements may also arise.