What has changed?
Pregnant employees are entitled to take up to 52 weeks' statutory maternity leave around the birth of their child. This is divided into 26 weeks' ordinary maternity leave (OML), and 26 weeks' additional maternity leave (AML). However, employees (subject to eligibility criteria) only receive 39 weeks' Statutory Maternity Pay (SMP) – this accounts for the entire OML period but only 13 weeks of AML. There is currently no SMP for the remaining 13 weeks of AML, although it is expected that the entire maternity leave period will attract SMP in 2010.
A woman having an expected week of childbirth (EWC) before 5 October 2008 is entitled to benefit from all her terms and conditions of employment, except her remuneration during OML. However, during AML, she is not entitled to all the benefits but only some contractual terms and conditions apply, including:
- Notice periods
- Redundancy compensation
- Disciplinary and grievance procedures
In April 2008, the provisions relating to maternity leave were amended in the Sex Discrimination Act 1975 (SDA) so that a woman who has an EWC commencing on or after 5 October 2008 is entitled to the same contractual terms and conditions enjoyed previously throughout her entire maternity leave period – that is, during OML and AML except for contractual provisions in relation to "remuneration".
Accordingly, she will be entitled to receive all her contractual benefits, save for "wages or salary", during OML and AML, irrespective of whether the leave is paid or unpaid. Examples of contractual entitlements that may be affected and will need to be provided throughout both OML and AML include:
- Contractual annual leave entitlement over and above the statutory minimum
- The period of time used for assessing seniority and service-related payments, such as pay increments
- Non-cash benefits such as company cars, mobile phones, accommodation
- Insurance policies available under the employee's contract of employment
- Non-cash vouchers, such as childcare vouchers.
What about pensions?
Paragraph 5 Schedule 5 of the Social Security Act 1989 (SSA) provides that an employer has an obligation to maintain an employee's pension benefits while she is on paid maternity leave. If an employee is obliged to contribute 5% of her salary and the employer contributes a further 5% for example, during paid maternity leave, the employee will have to contribute 5% of her maternity pay, whereas the employer's contributions would be 5% of the employee's normal salary. The situation is slightly more complicated in relation to salary sacrifice (see below).
Employers are also required to continue pension contributions during OML, regardless of whether the employee is in receipt of maternity pay.
The key question for employers revolves around whether or not pension contributions constitute "remuneration" or "wages and salary" and so are exempt from the new requirement to provide all contractual benefits to women throughout the entire maternity leave period, including any period of unpaid AML.
Guidance issued by Department for Business, Enterprise & Regulatory Reform (BERR) for employers states that:
"During any period that your employee is on additional maternity leave but not receiving any maternity pay – e.g. during the last 13 weeks of AML – you do not have to make any employer contributions to an occupational pension scheme unless the contract of employment provides otherwise."
Furthermore, guidance issued by HMRC states that:
"amendments made in 2008 to the Sex Discrimination Act have extended the period during which she may continue to benefit from contractual non-cash benefits during statutory maternity leave. (There will be no change to the position for sums payable as wages or salary or pension contributions.)"
So according to government guidance, employers only need to pay pension contributions while the employee is on paid maternity leave. However, the Employment Rights Act 1996 and the Maternity and Parental Leave etc Regulations 1999 simply refer to "remuneration" but the provisions in the SDA refer to "wages" and "salary". This would suggest that pension contributions are not caught by the exemption, which when added to some European case law suggests that pensions should be maintained throughout the entire maternity period. But even this is unclear, there is no definite ruling on this issue as other European case law has confirmed that pensions are deferred pay. In summary, it is not clear whether the SSA is now "redundant".
What if pension contributions are made via salary sacrifice?
Salary sacrifice describes a contractual arrangement where the level of the employee's cash salary is reduced, and another benefit is provided. The value of the other benefit may equate to the amount of salary "sacrificed". A salary sacrifice scheme is often used in relation to benefits such as child care vouchers and pensions. This leaves open the question as to the status of the "other" benefit for which salary has been "sacrificed".
Guidance published by HM Revenue & Customs (HMRC) in May states that:
- Where a salary sacrifice arrangement is in place, any enhanced contractual maternity pay should be based on a woman's reduced (i.e. post salary-sacrifice) salary.
- SMP that is payable cannot be further reduced by the terms of a salary sacrifice arrangement – SMP cannot be sacrificed in any circumstances.
- Authorised deductions may be made from SMP provided those deductions would have been made from the woman's cash salary (e.g. PAYE, National Insurance Contributions, or pension scheme contributions).
It is unclear whether, if pension contributions are processed via salary sacrifice, this constitutes a "non-cash benefit", and must therefore continue to be paid throughout the entire maternity leave period, paid and unpaid.
In relation to the 2008 amendments to the SDA, HMRC guidance states categorically that occupational pension schemes are excluded from the obligation on the employer to continue to provide a woman with non-cash benefits throughout her maternity leave. Unfortunately neither the BERR nor the HMRC guidance addresses the situation in which pension contributions are made via salary sacrifice and there is a period of unpaid maternity leave. Arguably here, the employee and the employer have expressly provided for a "non-cash" benefit to which the employee is entitled to under her contract of employment (which has been varied as a result of the salary sacrifice arrangement). If this were the case, there would be a persuasive argument that the employee is entitled to have employer pension contributions paid throughout the entire maternity period – paid and unpaid.
On balance, the more straightforward and clear solution is to offer an opt-out to women on maternity leave (and other members on family leave such as adoptive, parental, paternity leave) as is usual within these arrangements as a "lifestyle" event that is permitted by HMRC.
What does this mean in practice?
- If pension contributions are made via salary sacrifice, these deductions cannot be made from a woman's SMP, as she will be paid SMP on her reduced salary sacrifice benefits and employers will need to pay the employee on maternity leave her full SMP (based on her reduced salary) and also pay salary sacrifice contributions.
- If there is no salary sacrifice arrangement in relation to pension contributions, the employer and employee will need to continue to pay these throughout paid maternity leave as a minimum (see above).
Given the conflicting views on whether or not pension contributions should continue during unpaid maternity leave, employers are faced with a choice:
- Take a cautious view in light of the uncertainty, and pay contributions throughout the entire maternity leave period.
- Take comfort from the UK guidance on this issue, but accept the risk that this may be subject to challenge later on. The guidance only serves as an interpretation of the law – it is not the law itself, and is not immune to challenge.
Employers need to factor in "costs -v- risk" in choosing either approach, but we recommend the approach in point two above because once the payments are made (and the benefits have been earned) they cannot be retrieved!
Fortunately, the current uncertainty will be time limited. The problem has arisen as currently the statutory maternity leave period (52 weeks) is longer than the statutory maternity pay period (39 weeks). Once the period for leave and pay are equalised, expected 2010, the current difficulties will fall away as all maternity leave will be paid leave. Unfortunately, this will ultimately mean extra cost for employers.
The current guidance on whether or not pension contributions should continue during unpaid maternity leave is far from clear. We recommend that you seek further legal advice if you believe the developments could impact upon the administration of your pension scheme or the payment of non-cash benefits to employees on maternity leave.
In particular, we recommend you conduct a "family leave audit" or review of:
- your staff handbook;
- practices in relation to the payment of non-cash benefits to women on maternity leave;
- the rules of your pension scheme; and
- any provisions in relation to salary sacrifice
to check that they are compliant with developments and forthcoming legislation.