Salary Sacrifice Arrangements During Statutory Leave - What's the Latest?
An important consideration when contemplating the introduction of a salary sacrifice scheme is what happens when an employee benefitting from the scheme goes on maternity leave
An important consideration when contemplating the introduction of a salary sacrifice scheme is what happens when an employee benefitting from the scheme goes on maternity leave.
HMRC guidance, Statutory maternity leave - salary sacrifice and non-cash benefits (the HMRC Guidance), states that non-cash benefits provided under a salary sacrifice scheme must continue to be provided during maternity leave but that statutory maternity pay (SMP) must still be paid in full, ie. it cannot be reduced by way of salary sacrifice. This can place a significant financial burden on employers. However, the position is changing.
What's Changing?
Regulation 9 of the Maternity and Parental Leave Regulations 1999 (the Regulations) provides that during ordinary maternity leave and additional maternity leave, an employee is entitled to all the usual benefits of her employment, except her remuneration, which is replaced by statutory maternity pay (SMP), or contractual maternity pay.
Remuneration is defined as sums payable to an employee by way of wages or salary. The HMRC Guidance is therefore based on the premise that certain benefits provided under a salary sacrifice arrangement (for example, childcare vouchers) are properly classified as 'non-cash benefits'.
Consequently, advice has been to continue salary sacrifice arrangements and the provision of the related benefit during periods of maternity leave to avoid claims of discrimination. As SMP cannot be reduced, the employer has to fund the cost of the benefit when the employee is in receipt of SMP only, and when SMP ceases but whilst maternity leave continues.
Other periods of statutory leave where an employee is in receipt of paternity pay, adoption pay, shared parental pay and statutory sick pay must be treated in the same way by extension of this principle.
This can of course place a significant financial burden on the employer, particularly so where the benefit in question is a valuable independent school place.
However, in the recent case of Peninsula Business Services v Donaldson, the Employment Appeal Tribunal (EAT) reversed this position and, in so doing, has given employers cause to reassess their obligations.
Peninsula Business Services v Donaldson
Peninsula suspended the provision of childcare vouchers to the employee once her maternity leave commenced, although she continued to be a member of the salary sacrifice scheme.
This led to a claim from the employee that she had been discriminated against on the grounds of sex, and for asserting the right to maternity leave.
The Employment Tribunal that first heard this case decided that the action taken by Peninsula was discriminatory. In reaching this decision it took into account the HMRC Guidance.
However, Peninsula successfully appealed against the decision. In doing so, it argued that the critical question was 'the proper understanding of a salary sacrifice scheme' and in particular whether the vouchers constituted remuneration or a non-cash benefit. If they constituted remuneration then the employee had no right to benefit from them during maternity leave.
The EAT agreed with Peninsula's argument, crucially deciding that the vouchers constituted remuneration and not a non-cash benefit because:
- the scheme involved a redirection of salary
- the vouchers were not provided as a benefit in addition to salary but in place ofsalary
The provision of the vouchers could therefore lawfully be suspended during maternity leave. The EAT commented that the HMRC Guidance had no legislative force and was based on a mistaken interpretation of the Regulations.
Practical Considerations for Schools
There is nothing to suggest that the principles in Peninsula are not applicable to all salary sacrifice schemes, including those for school fees. The effect of this is that an employee on maternity leave has the right to be a member of a salary sacrifice scheme but the school does not have to fund the cost of the school place when the employee is in receipt of SMP only (or where they have exhausted their statutory pay).
This will also apply to periods of statutory paternity leave, shared parental leave, adoption leave and sick leave when the employee is in receipt of statutory and not contractual pay.
In those circumstances, if the employee wants their child to continue occupying the school place, then the school is entitled to require them to pay for the full cost of it (less any applicable fees discount) from another source of income. As gross salary cannot be sacrificed during these periods the saving on income tax and National Insurance contributions will be lost.
However, as this was an EAT decision, there is scope for further case law to develop these principles.
Whilst the legal position may have changed following the Peninsula case, schools should of course consider the potentially negative impact on employee relations of suspending benefits provided under a salary sacrifice scheme during maternity leave (or other relevant period of leave), particularly as this will typically be a time when the employee has less money available.
Schools which continue to provide the school place under the salary sacrifice scheme during a relevant period of leave (and who thereby effectively agree to fund its provision for that period) will not be able to reject an application to join the scheme because it is known that the employee will be going on a period of relevant leave in the near future. To do so would present a significant risk of a discrimination claim.
Schools should therefore give thought to the type of practice they wish to adopt prior to setting up a scheme, or whether to change established practice as a result of this decision. Schools who wish to change their practice should give consideration to, and take advice on, how best to reduce the risk of potential claims from affected staff.