Maternity and Adoption Leave – BERR fails to clarify important issues with the new RegulationsSunday, September 7th, 2008
This is a technical article, explaining a number of issues that require clarification from the Department for Business, Enterprise and Regulatory Reform (BERR) if employers are going to apply correctly the new maternity and adoption leave rules from October 2008. Unfortunately, BERR appears reluctant to help employers apply its own employment law correctly. The issues discussed in this article cover the ongoing provision of benefits during maternity and adoption leave, in particular, the payment of employer pension contributions, the accrual of pensionable service , and the treatment of car allowances and housing allowances.
From October 2008, significant changes are being made to the employment law provisions of maternity and adoption leave. The changes have been made by means of the Maternity and Parental Leave etc. and the Paternity and Adoption Leave (Amendment) Regulations 2008. In this article, they are called the “Amendment Regulations”.
The changes relate to an employee’s entitlement to contractual benefits during additional maternity leave and additional adoption leave, i.e. the second 26-week period of maternity or adoption leave.
- Before October 2008, there is entitlement to full contractual benefits during ordinary leave, i.e. the first 26-week period of leave, but entitlement to only a limited set of benefits during additional leave.
- From October 2008, there is entitlement to full contractual benefits during both ordinary and additional leave, i.e. for the full 52 weeks of leave. The new rules apply where,
- in the case of maternity leave, the expected week of childbirth starts on or after 5 October 2008, or
- in the case of adoption leave, the expected date of place falls on or after 5 October 2008.
- There is one exception to the benefits that apply throughout the 52 weeks of maternity and adoption, namely remuneration, defined as “sums payable by way of wages or salary”. If entitled, the employee receives statutory maternity pay (SMP) or statutory adoption pay (SAP) in place of remuneration for up to the first 39 weeks of leave.
To bring these provisions into law, the Amendment Regulations make changes to
- the Maternity and Parental Leave etc Regulations 1999 (called the “Maternity Regulations” in this article), with reference to maternity leave, and
- the Paternity and Adoption Leave Regulations 2002 (called the “Adoption Regulations” in this article), with reference to adoption leave.
Remuneration and sex discrimination
In 2005, in order to comply with changes to the European directive on equal treatment in employment,. the government added section 6A to the Sex Discrimination Act 1975 (SDA) to make it clear that it is not discriminatory when a woman, as set out in the Maternity Regulations, does not receive
- her remuneration during maternity leave, other than statutory or occupational maternity pay, or
- her full contractual benefits during additional maternity leave.
The changes that are made to the Maternity Regulations and Paternity Regulations are prompted by a ruling of the High Court in 2007 that the changes made in 2005 did not properly reflect the changes to the European Directive and that equal treatment requires full contractual benefits to be provided during both ordinary and additional maternity leave. The changes in October 2008 are intended to give effect to that High Court ruling.
As a result, section 6A of the SDA has been rewritten and now provides simply that it is not discriminatory when a woman does not receive her remuneration during maternity leave, other than statutory or occupational maternity pay. There is no reference to contractual benefits provided during either ordinary or additional leave as it would now be discriminatory not to provide full benefits during the whole of maternity leave.
The new section 6A also includes some useful additions to the definition of “remuneration”. These are referred to later in this article.
Equal treatment and pension contributions
One important issue that has been the subject of considerable misunderstanding over many years has been the requirement, as defined in Schedule 5 of the Social Security Act 1989 (SSA), for employees on paid maternity, paternity, adoption or family (e.g. parental) leave to be treated equally with employees who are still at work, with reference to “employment-related benefit schemes”. This legislation implements a European directive relating to equal treatment for men and women in occupational social security schemes. Its intention is to prevent sex discrimination in relation to employment-related benefit schemes, such as occupational pension schemes.
The particular aspect of this “equal treatment” legislation that is significant in the context of maternity and adoption leave is the requirement for employers to maintain employer pension contributions (if the employee is in a contractual pension scheme) at the same level as they would have been if the employee had been at work and receiving normal pay, for as long as the employee is on paid leave. So, for example, if a woman receives SMP for 39 weeks of the 52-week maternity leave period, the employer is obliged to pay full pension contributions for those 39 weeks. If the woman also receives occupational maternity pay for the final 13 weeks of leave, full employer pension contributions are due for those weeks too. (The woman herself is only required to pay employee contributions on the amount of contractual or statutory pay she actually receives.)
If the “equal treatment” provisions of Schedule 5 of the SSA did not exist, employers would still be required to maintain pension contributions on the basis of employment law. Until October 2008, an employee is entitled to full contractual benefits during ordinary maternity or adoption leave, including pension entitlements. Unlike the SSA provisions, there is no requirement for the leave to be paid. There is, therefore, a double statutory requirement to pay full pension contributions – for the period of paid leave under the SSA “equal treatment” rules, and for up to 26 weeks (whether paid or unpaid) under the employment law provisions of the Maternity Regulations and Paternity Regulations.
When entitlement to full contractual benefits is extended to additional maternity and adoption leave in October 2008, it would be expected that the employment law obligation to pay full pension contributions during ordinary leave would be extended to the full 52 weeks of leave. However, the government took the view that the maximum period for which full pension contributions need be paid under the European directive and case law is the period for which leave is paid. As a result, when amending the Maternity Regulations and Paternity Regulations, a clause was added that, despite entitlement to full contractual benefits for the whole of ordinary and additional leave, restricts the period for which full employer pension contributions are required to the maximum required by the SSA, namely, the period of paid leave.
In the case of ordinary and additional maternity leave, it is regulation 9 of the Maternity Regulations that has been changed to give effect to these requirements. The heading of regulation 9, for example, is now “Application of terms and conditions during ordinary maternity leave and additional maternity leave”. Paragraph (1)(a) of regulation 9 now refers to an employee taking “ordinary maternity leave or additional maternity leave” as being entitled to her full contractual benefits. And paragraph 4, which restricts entitlement to full employer pension contributions to that required by the SSA, states:
“In the case of accrual of rights under an employment-related benefit scheme within the meaning given by Schedule 5 to the Social Security Act 1989, nothing in paragraph (1)(a) concerning the treatment of additional maternity leave shall be taken to impose a requirement which exceeds the requirements of paragraph 5 of that Schedule.”
This paragraph is called the “Schedule 5 restriction paragraph” in the remainder of this article. Note that it only applies to contractual benefits provided during additional leave.
Equal treatment and pensionable service
A similar situation exists with regard to pensionable service. Under the provisions that apply before October 2008, as defined in regulation 18A of the Maternity Regulations and regulation 27 of the Paternity Regulations, only the 26 weeks of ordinary leave count towards pensionable service. If an employee returns at the end of ordinary leave, there is continuous service for pension purposes. However, the 26 weeks of additional leave do not count towards pensionable service, so an employee returning at the end of additional leave still has accrued only 26 weeks of pensionable service, not 52 weeks. However, Schedule 5 of the SSA also applies in this situation. As a result, if any of additional leave is paid, the paid period does count towards pensionable service. For example, if an employee is on paid leave for 39 of the 52 weeks leave, there are 39 weeks of pensionable service accrued.
From October 2008, regulations 18A and 27 are reworded to remove this loss of pensionable service during additional leave. However, rather than automatically giving 52 weeks of pensionable service to an employee who is on leave for 52 weeks, the same Schedule 5 restriction paragraph is included so as to continue to limit pensionable service to the period of paid additional leave.
Issues raised with BERR
A detailed consideration of these October 2008 changes, the reasons behind them and the amendments that have been made to legislation has raised a number of important issues. The author raised three particular areas of concern with the BERR press office in July, although similar issues have been raised by others, including the Institute of Payroll Professionals (IPP). The three questions relate to:
- entitlement to full employer pension contributions when an employee is not entitled to any payment, statutory or contractual, while on maternity or adoption leave
- the implications for employer pension contributions during adoption leave of the failure to include the Schedule 5 restriction paragraph in the Paternity Regulations
- the published statements of HMRC that the “remuneration” to which an employee is not entitled during maternity and adoption leave includes cash car and housing allowances.Pension contributions when an employee is not entitled to paid leave
When an employee is entitled to maternity or adoption leave but not to SMP or SAP, perhaps because average earnings are too low, there is, nevertheless, entitlement to full contractual benefits during ordinary leave but not, until October 2008, during additional leave. If the employee is a member of the employer’s contractual pension scheme, there is, therefore, as provided by employment law, entitlement to full employer pension contributions during ordinary leave but not during additional leave.
The issue that we asked BERR to clarify concerns the situation of such an employee from October 2008. There is, in principle, an entitlement under employment law for full pension contributions during additional leave. However, does Schedule 5 of SSA apply to an employee who is not entitled to any paid leave? There are two possible scenarios:
- If Schedule 5 of SSA applies to an employee who is not entitled to paid leave, it would mean that the Schedule 5 restriction paragraph also applies. The current situation continues – there is entitlement to full pension contributions during ordinary leave under employment law, but not during additional leave because there is no paid leave.
- If Schedule 5 of SSA does not apply to such an employee and, as a result, the Schedule 5 restriction paragraph does not apply, it would mean that full contractual benefits apply during the whole of additional leave and the employee would be entitled to full employer pension contributions for 52 weeks – a more advantageous outcome than applies to employees whose leave is paid.
Pension contributions for employees on adoption leave
Although the High Court ruling was made in the context of maternity leave, the government, not unreasonably, decided to apply the same legislative changes prompted by that ruling to adoption leave. So, for example, regulation 18A of the Maternity Regulations and Regulation 27 of the Paternity Regulations, in the context of pensionable service rights, both include the new Schedule 5 restriction paragraph. Pensionable service entitlements are restricted to the period of paid leave during both additional maternity leave and additional adoption leave.
However, although the Schedule 5 restriction paragraph has been added to Regulation 9 of the Maternity Regulations in the context of maternity leave, it has not been added to the equivalent Regulation 19 of the Paternity Regulations in the context of adoption leave. There is nothing in the Paternity Regulations to limit the employer’s employment law obligation to pay full employer pension contributions during the whole of additional adoption leave.
As this discrepancy between the new maternity and adoption provisions is unexpected, we asked BERR to comment on whether the omission of the Schedule 5 restriction paragraph from the Paternity Regulations was deliberate or an oversight.
Remuneration and cash car and housing allowances
Ever since HMRC published its detailed guidance document Statutory maternity leave – salary sacrifice and non-cash benefits in May 2008, there has been considerable confusion and discontent with the distinction drawn between “remuneration” and what it calls “contractual non-cash benefits”. In particular, HMRC describes cash allowances, such as car allowances and housing allowances, as “remuneration” which does not have to be paid during ordinary and additional leave, even though such allowances are contractual alternatives to a company car or company living accommodation.
The Maternity Regulations and the Paternity Regulations refer to the definition of “terms and conditions of employment” given in sections 71, 73, 75A and 75B of the Employment Rights Act 1996 (ERA). They are defined in those sections as including “matters connected with an employee’s employment whether or not they arise under [his] [her] contract of employment” but not “terms and conditions about remuneration”.
The meaning of “remuneration” is clarified somewhat by the Maternity Regulations and the Paternity Regulations. They state that “only sums payable to an employee by way of wages or salary are to be treated as remuneration”. However, page 14 of HMRC’s employment law guidance refers, not just to “wages or salary”, but also to “cash benefits”, a term that does not appear in the legislation, and states that both “wages and salary” and “cash benefits” are treated as remuneration. Among the examples it gives of cash benefits are “cash allowances (e.g. housing allowance, car allowance, fuel allowance, or first aid allowance)”.
The terms “cash benefits” and “non-cash benefits” are used in the tax legislation and HMRC uses the terms extensively in its tax manuals. However, the terms are not used in employment law and it is not clear why, in its guidance document and in the context of maternity and adoption leave, HMRC introduces the terms “cash benefits” and “non-cash benefits”, thereby drawing a distinction that does not appear in employment law. The employment law distinction is simply between
- “all of the terms and conditions of employment which would have applied if [the employee] had not been absent” and
- “terms and conditions about remuneration”, or “terms and conditions about sums payable by way of wages or salary”.
It is useful to note that BERR uses the term “non-pay benefits” rather than “non-cash benefits” throughout its Explanatory Memorandum to the Amendments Regulations, which more accurately describes the distinction.
Further assistance is provided by the definition of “remuneration” given in section 6A of the SDA, already discussed in the section Remuneration and sex discrimination, above. In that section, remuneration is defined as “benefits
- that consist of the payment of money to an employee by way of wages or salary, and
- that are not benefits whose provision is regulated by the employee’s contract of employment.”
As section 6A is clarifying the sex discrimination issues that are raised by the Maternity Regulations, it is valid to use this much clearer definition to determine whether cash allowances fall within the meaning of “remuneration”. It may be debatable whether cash car allowances and cash housing allowances are “wages or salary” – although common sense says they are not – but it is clear that they are benefits “whose provision is regulated by the employee’s contract of employment”. It would have been helpful for the SDA definition of “remuneration” to have been included in the Maternity Regulations and the Paternity Regulations.
If an employee’s terms and conditions make provision for the employee to choose between a company car or a car allowance, or between company living accommodation or a housing allowance, those allowances are benefits “regulated by the employee’s contract of employment” – they are not “remuneration”.
It is fair to acknowledge that there are some counter-arguments to this. Employees receiving such allowances are likely, for example, to include them when quoting their earnings for mortgage application purposes. They are also liable for PAYE tax and Class 1 NICs in the same way as wages and salary. However, allowances are not normally used to determine overtime payments or pension contributions. When employer and employee agree a salary sacrifice, it is the wage or salary that must be contractually reduced, not any allowances. And, in any case, there is no indication in employment law that the tax treatment of allowances is in any way relevant to their status as benefits.
On the other hand, a cash allowance that is normally paid to an employee to top-up the employee’s wage or salary, such as a regional weighting or a first aid allowance, may reasonably be described as remuneration and, as a result, not payable during ordinary and additional leave.
We asked BERR, therefore, to comment on HMRC’s interpretation of “wages and salary” and its seemingly incorrect statement that contractual car and housing allowances do not have to be paid during ordinary and additional leave. We pointed out that, as a result of this guidance, it would be possible for an employee who had opted to take a housing allowance instead of a company house to have that allowance withdrawn for a year, with the result that she could lose her living accommodation during maternity leave because she can no longer afford to pay the rent. Similarly, an employee who chose to take a car allowance instead of a company car may not be able to continue to make personal contract hire payments or loan repayments and could lose the car as a result.
Lack of guidance from BERR
Clarification of these issues has not been forthcoming from either HMRC or BERR.
For example, Ken Gurr, director of HRD & Payroll Solutions, wrote to John Hutton, Secretary of State for Business, Enterprise and Regulatory Reform, on 27 May 2008 asking first of all why HMRC was publishing guidance on employment law and not BERR. Among a number of other issues, he questioned HMRC’s interpretation on page 14 of their guidance that a “car allowance”, provided as an alternative to a company car, falls within the definition of “remuneration”, thereby allowing employers to stop paying it during ordinary maternity leave.
Ken eventually received a reply dated 1 August 2008 from the “BERR Ministerial Correspondence Unit” containing very general comments about his questions but giving no answers to his specific questions. There was no reference to cash allowances.
BERR’s reply to the author’s three questions was, if anything, even less helpful. Other than four paragraphs describing in detail the background to the October changes and promoting the new guidance on BERR’s Business Link website, the only relevant comments made were:
- “The Sex Discrimination Act 1975 (SDA) and the Maternity and Parental Leave Regulations etc 1999 (MPLR) amendments do not affect pension rights during maternity leave.” – clearly wrong, as the Maternity Regulations include the new Schedule 5 restriction paragraph.
- “For ease of understanding, the guidance refers to non-cash benefits, whilst this is not a legal term it does reflect the language used by employers to describe the sort of benefits that are covered by this aspect of law.” – it is surely the responsibility of government departments to use terms that correctly explain the law, and why did BERR choose to use the more appropriate term “non-pay benefits” instead?
- “We are unable to give legal advice on individual circumstances and recommend seeking independent legal advice on any further queries you may have.” – all of the matters raised were policy issues and did not relate to individual cases.
We have made it clear to BERR that their reply was unacceptable and we are waiting for a more informative and reasoned response to the issues raised.
HMRC guidance document Statutory maternity leave – salary sacrifice and non-cash benefits
The Maternity and Parental Leave etc. and the Paternity and Adoption Leave (Amendment) Regulations 2008
Explanatory Memorandum to the Maternity and Parental Leave etc. and the Paternity and Adoption Leave (Amendment) Regulations 2008
Business Link – Terms and conditions during maternity leave
Business Link – Benefits during maternity leave
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