The rights and benefits extended to new parents by their employers have been
on an increasingly complex path. Just this week the government has said it will
introduce a six months’ paternity leave package from 2011. Although recent
changes to maternity leave have attempted to clarify the area and provide for
equal rights of maternity leave for all employees, regardless of length of
service, some tricky issues remain. Of particular interest for professional
employers are non-cash benefits provided by way of a salary sacrifice scheme.
Over recent years rights to maternity pay and maternity leave have changed
considerably (see box). Possibly the most important change for many women and
their employers is the right to take a full year of maternity leave. Until this
amendment, only employees with more than one year’s employment could take a full
year’s leave. Women are entitled to receive all contractual benefits during
maternity leave, the only exception being their “remuneration”, which is defined
as “wages or salary”.
Making a sacrifice
“Salary sacrifice” or “salary exchange” is where an employee agrees to a
reduction in salary, in return for a non-cash benefit (see What is Salary
Sacrifice? at bottom of page). One of the main non-cash benefits provided
by employers are childcare vouchers. An estimated 20% of employers provide
childcare vouchers to employees, often through a salary sacrifice arrangement.
Other non-cash benefits include cycle to work schemes and private medical
As all women are now entitled to retain benefits for a full year’s maternity
leave, the cost to employers of providing non-cash benefits through maternity
leave has increased.
The issue arises as to whether employers can cease to provide salary
sacrifice benefits during maternity leave, or otherwise recover the cost of
these benefits from employees. As yet there have been no test cases on this
issue, so it is not known what view tribunals will take on how non-cash bene
fits provided by way of salary sacrifice should be treated under the Maternity
and Parental Leave regulations.
HM Revenue & Customs’ position is that non-cash benefits are benefits
rather than “remuneration”, even if they have been provided by way of salary
sacrifice. Guidance produced by the taxman says that while an employee may agree
to a reduction in salary to receive the benefit, there is no legal connection
between the two.
The fact that the employer and employee have entered into a contractual
variation of the contract to reduce the employee’s salary is seen to be a
completely separate issue from the fact that the employer has agreed to provide
the employee with certain benefits, even if the cost of those benefits equals
the reduction in salary. The result is that the value of the benefit should not
be included for the purpose of calculating Statutory Maternity Pay, and the
employee is entitled to continue to receive the benefit during her leave.
HMRC’s advice confirms that an employee may voluntarily opt out of receiving
their non-cash benefit (subject to the terms of the contract) during any period
of maternity leave, but the employer cannot compel her to do so. If the
employee’s earnings increase following withdrawal from the salary sacrifice
scheme, then her SMP will increase.
Options for employers
On the basis of HMRC’s advice, non-cash benefits cannot be considered wages or
salary, and thus any attempt to discontinue provision of the benefit during
maternity leave will constitute a breach of the MPL regulations. Some companies
administering non-cash salary sacrifice benefits take a different view from that
of HMRC, and consider such benefits to be merely an alternative way of paying
salary. It has been suggested that in these circumstances, the employer might
include appropriate contractual wording to provide that the employee is only
entitled to the benefit during weeks in which she is in receipt of sufficient
salary to cover them. However, if the taxman’s view is correct, such wording
could be an unlawful attempt to contract out of the MPL Regulations.
Another approach may be to offset the cost of continuing the benefit against
any enhanced maternity pay. Many professional employers provide enhanced
maternity pay which goes above SMP levels. As enhanced pay is a contractual
arrangement, it may be possible to agree a reduction in this enhanced pay to
cover the cost of continued non-cash benefits, although HMRC has made clear that
no deductions may be made from SMP. If enhanced pay is provided for only part of
the maternity leave, it may also be possible to deduct sufficient amounts from
the enhanced pay to offset continued provision of non-cash benefits during the
unpaid remainder of maternity leave, although this has yet to be tested.
However, employers should be aware that any amendment to female employees’
contractual entitlement to benefits to deal with this issue would give rise to a
potential sex discrimination claim. Amending the entitlement to benefits of all
employees to try to address this issue would be less likely to constitute less
favourable treatment of women, although if such a variation were to put female
employees at more of a disadvantage than male employees, claims for indirect sex
discrimination may arise.
Without clear guidance from the tribunals, and on the basis of HMRC’s
position, there is a clear risk of discrimination claims arising if employers do
not continue to provide non-cash benefits during periods of maternity leave,
even if they are provided as part of a salary sacrifice scheme. Hopefully the
position will become clearer once the tribunals have been asked to consider this
The Work and Families Act, together with the Maternity and Parental Leave,
etc Regulations introduced a number of changes, including: enabling women to
take a full year’s maternity leave, regardless of their length of service,
increasing statutory maternity pay period to 39 weeks for those who qualify and
introducing keeping in touch days allowing mothers to spend up to ten days
working during their maternity leave, without losing their maternity rights.
What is Salary Sacrifice?
Salary sacrifice is a contractual arrangement in which the employee agrees to
a reduction in salary, in return for a non-cash benefit of the same value. While
the total benefit to the employee and cost to the employer remain unchanged,
there will be tax advantages for both, as the employee will only pay tax and
employee’s National Insurance Contributions on the reduced salary and the
employer will only pay employer’s NICs on the reduced salary. The arrangement
must be recorded in an agreed variation to the employee’s contract of
Rob Washington is an associate at Hogan & Hartson
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