It's no sacrifice?
Do childcare vouchers given as part of a salary sacrifice scheme have to be continued during maternity leave? Sarah Peacock looks at the EAT's decision in Peninsula Business Services v Donaldson and considers how easy it is for employers to rely on it.
This article first appeared in Payroll World Magazine (May 2016)
Peninsula Business Services v Donaldson concerned a female employee, Ms Donaldson, who refused to join a salary sacrifice scheme which suspended childcare vouchers during maternity leave. The Employment Appeal Tribunal (EAT) ruled that this was not discriminatory and that childcare vouchers via salary sacrifice were a 'diversion of salary', which did not need to be continued during maternity leave. It rejected specific HMRC guidance stating the opposite.
Is the decision as simple as it sounds? What does it mean for other benefits during maternity leave?
In employment law the starting point is Regulation 9 of the Maternity and Parental Leave etc Regulations 1999 (MPL). These provide that:
- During maternity leave an employee is entitled to the benefit of all terms and conditions, except ones about remuneration; and
- 'Remuneration' means sums payable by way of wages or salary.
The question for the EAT was, are childcare vouchers provided via salary sacrifice 'remuneration'? Yes, ruled the EAT: salary sacrifice is a 'diversion of salary', redirected to purchase vouchers. Therefore the vouchers did not need to be continued during maternity leave.
The EAT also held that Ms Donaldson could not claim indirect sex discrimination (that it applied equally to men, but put women and Ms Donaldson at a particular disadvantage) about a term of her contract. It had to be an 'equality of terms' claim, similar to an equal pay claim.
Is the ruling reliable?
Ms Donaldson was not at the hearing and not represented. The EAT's judgment frequently mentions not having all the arguments and relevant legislation before it, and expressed conclusions 'tentatively'.
Additionally, the ruling doesn't appear to recognise the contractual nature of salary sacrifice schemes. HMRC will not view as salary sacrifice a scheme which enables employees to 'purchase' benefits through the employer deducting salary. Salary sacrifice permanently changes the employee's contract and reward package to a lower salary with additional benefits. Whilst HMRC guidance is not determinative, it is based on established case law that there is no true salary sacrifice if the employee could insist on their original salary at any time.
By this analysis, childcare vouchers via salary sacrifice are no different to other childcare vouchers. They both form part of a reward package of remuneration (which need not be continued through maternity leave) and benefits (which must be continued). Indeed, the EAT specifically confirmed that childcare vouchers outside salary sacrifice are a benefit which must be continued.
Furthermore, employees who have sacrificed salary are only entitled to SMP and occupational maternity pay based on their reduced salary. If the EAT is right, employees lose out by getting neither childcare vouchers nor maternity pay based on their previously higher salary – unless they opt out of the scheme before maternity leave (a common and sensible practice).
Commentators have also questioned why Ms Donaldson's indirect sex discrimination claim was rejected.
Finally, Ms Donaldson refused to join the scheme, so her claim under the MPL failed partly because the vouchers weren't part of her terms and conditions. Women already in schemes or on maternity leave may be in a stronger position to challenge the EAT's reasoning, and pursue the discrimination point.
Employment Tribunals must follow the ruling and many employers may want to rely on it, but it may yet be appealed. However, for policy reasons some employers may choose to continue to provide childcare vouchers.
Employers would be unwise to assume that this ruling affects anything other than childcare vouchers via salary sacrifice.
Firstly, as discussed above, childcare vouchers provided outside a salary sacrifice scheme are unaffected and must continue to be provided.
Secondly, it is unlikely to affect pension contributions made via salary sacrifice. Employment legislation makes specific provision regarding pensions during maternity leave. Employer pension accrual/contribution must continue during paid maternity leave (generally up to 39 weeks) at pre-maternity leave levels. During unpaid maternity leave, UK law does not require pension accrual/contribution, although this is potentially not compliant with EU law. These provisions are unlikely to be affected by the mechanism of salary sacrifice.
The entitlement for childcare vouchers to continue may be contractual, and changing existing schemes, particularly where women are already on maternity leave, may be an unpopular and potentially dangerous move. Childcare voucher schemes close to new entrants from 2018. As a result, many employers may be more swayed by the employee relations perspective than any potential savings under this ruling.
- The EAT's ruling on childcare vouchers via salary sacrifice does set a precedent, but should be treated with caution;
- Benefits outside a salary sacrifice scheme, including childcare vouchers, should continue to be provided throughout maternity leave as normal;
- Other benefits provided by salary sacrifice could be reviewed, but pensions are regulated by separate employment law provisions and are unlikely to be affected.