Many employers offer various benefits to their employees as part of a salary sacrifice scheme. Salary sacrifice (as the name suggests) involves the employee giving up part of their salary in exchange for a benefit. The advantage to the employee in doing so is that the benefit can often be paid without tax and NI deductions (which can be a considerable saving).
One of the most popular forms of salary sacrifice is for childcare vouchers – which can be used by parents to pay for nursery and other forms of childcare.
There is no case-law on whether such benefits constituted salary (which does not continue to be paid during maternity leave) or benefits (which do need to continue to be paid during maternity leave).
Most employers have relied upon the HMRC guidance which states clearly that an employer must continue to provide childcare vouchers (purchased as part of a salary sacrifice scheme arrangement) during an employee’s maternity leave.
This guidance was challenged by Peninsula Business Services in the recent case of Peninsula Business Services v Donaldson.
Peninsula ran a scheme that allowed employees to sacrifice part of their salary in return for childcare vouchers. However (in light of the HMRC guidance, and not wanting to pay such a benefit during maternity leave) Peninsula made it a condition of entry into the scheme that the employee agreed to suspend their membership during maternity leave – meaning that they would not be entitled to the vouchers.
The Claimant refused to join the scheme on this basis and issued a claim through an Employment Tribunal alleging pregnancy and maternity discrimination. She argued that Peninsula was treating women less favourably because of their pregnancy.
The Tribunal upheld her claim under the Equality Act 2010 relying on the HMRC guidance that (salary sacrifice) childcare vouchers are benefits. Peninsula appealed.
The EAT allowed the appeal. The EAT found that the HMRC guidance was incorrect and contrary to the tax legislation. The EAT found there was nothing to oblige an employer to fund childcare vouchers when an employee was on maternity leave. The EAT determined that childcare vouchers under a salary sacrifice scheme should be regarded as part of an employee’s salary rather than as a benefit. As such, employees on maternity leave have no entitlement to receive benefits for which they have sacrificed salary.
The situation would be different if vouchers were an ordinary benefit (i.e. not purchased through a salary sacrifice scheme). Additionally, employers with employees currently on maternity leave and benefitting from childcare vouchers (or other salary sacrifice benefits) should take advice before removing such benefits. It would also be prudent for employers to be clear to their workforce that going forwards they will not be funding salary sacrifice benefits during maternity leave periods –particularly if they have a maternity policy that says to the contrary.
If you need further advice on this issue please speak to your HR Advisor, contact FusionHR on 01924 827869 or email email@example.com.
Update provided by Paul Menham of gunnercooke, legal partner of FusionHR.