Campus Living Villages UK Ltd v Revenue and Customs Commissioners
This case shows the importance of specifically referring to the inclusion of statutory maternity pay (SMP) in settlement agreement.
Ms Sexton was Head of Finance at Campus Living. She was made redundant shortly before the birth of her child. As Ms Sexton had remained employed by her employer within 11 weeks of her expected week of childbirth, she was entitled to receive SMP from it. She claimed unfair dismissal and pregnancy discrimination. Her claim was settled by way of a COT3 agreement following conciliation by ACAS. The amount she received was £60,000 which included £20,000 as compensation for injury to feelings, £30,000 paid tax free and £10,000 which had income tax deducted from it, but not National Insurance. These payments were in “full and final settlement of all her claims”.
Ms Sexton subsequently claimed to HMRC that she had not received her SMP and that this was worth over £42,000. The reason for the high figure was that her pay during the eight week reference period used to calculate her average “normal weekly earnings for SMP” had been enhanced by the payment of a £44,000 discretionary bonus paid to her under her employer’s incentive scheme. At first instance, HMRC decided that SMP was payable under social security legislation and should be paid separately as it had not been included in the settlement.
Campus Living appealed to the Tax Tribunal. It held that HMRC had been correct to take into account the discretionary bonus when calculating Ms Sexton’s average weekly earnings as (para 39 of judgment) “‘earnings’ includes any remuneration or profit derived from a women’s employment… irregular or one-off payments including bonuses therefore count as ‘earnings’ as long as they are derived from the woman’s employment”. Ms Sexton’s employment contract provided for her participation in the employer’s short term incentive scheme and the Tax Tribunal agreed that the bonus paid to her was therefore derived from her employment and should be included in the calculation of SMP.
Separately, the Tax Tribunal went on to consider whether Ms Sexton could recover SMP even though she had signed the COT3 settlement agreement. It confirmed that receipt of SMP is a statutory right and cannot be contracted out of. Any agreement which purports to exclude the right to SMP is void to that extent. The breakdown of the settlement payment did not include Ms Sexton’s entitlement to SMP, nor were any NI contributions made, which are required to be made on SMP payments. The fact that ACAS advised on the settlement agreement did not change the position as ACAS is independent of HMRC and its acts or omissions cannot affect HMRC’s correct application of the law.
What to take away
It is important to remember that one-off payments such as a bonus can be included in the calculation of an employee’s earnings for SMP if they are paid during the SMP calculation reference period. If a claim is settled then the SMP payment should be clearly identified as a separate sum with the agreement and be subject to tax and National Insurance contributions.