Salary sacrifice scheme

During ordinary maternity leave (which is the first 26 weeks of leave) and additional maternity leave (the further period of 26 weeks), an employee is entitled to all their usual terms and conditions of employment, including benefits, save for those terms which relate to “remuneration”, which is defined as wages or salary.

Unless an employer provides for something more favourable, an eligible employee’s remuneration is decreased to the statutory amounts, which are:

  • First six weeks: the “earnings-related rate” (90% of the employee’s “normal weekly earnings”) or the “prescribed rate” (currently £139.58) whichever is higher;
  • Following 33 weeks: the prescribed rate or the earnings-related rate, whichever is lower
  • Remaining 13 weeks: unpaid

Childcare vouchers

Many employers make childcare vouchers schemes available to their workforce, usually by way of salary sacrifice. Due to the significant tax savings, these schemes prove popular with employers and employees.

However, how should childcare vouchers be treated during maternity leave when there is no salary to sacrifice? Should they be treated as “remuneration” and therefore suspended, or are they a non-cash benefit, which would need to continue?

Following guidance from HMRC first published in 2008, the general consensus was that these vouchers fell into the latter category and so employers needed to keep paying them during maternity leave.  But, this came at an additional cost to the employer; as it is not possible to make deductions from any statutory pay entitlement, this meant that employers had to cover the cost of the childcare vouchers during maternity leave as they were unable to make the equivalent deduction from the employee’s wages as they would have prior to any period of maternity leave.

The EAT decision

In the recent case of Peninsula Business Services v Donaldson, Ms Donaldson claimed it was discriminatory to suspend these vouchers during her maternity leave.  At first instance, the Tribunal agreed.  However, Peninsula Business Services appealed this decision.  The EAT overturned the Tribunal’s decision, saying that childcare vouchers should be classed as “remuneration”.  It follows that they do not have to be provided during maternity leave.

The EAT said that childcare vouchers weren’t really a salary “sacrifice” as such, rather a diversion of salary to a third party and therefore should be considered to be remuneration.  Otherwise, said the EAT, the employee is getting a windfall at the expense of the employer, which presumably was not the intention of Parliament.