Employers are facing up to far higher childcare voucher costs than they anticipated, but lack of government clarification means confusion continues to reign over salary sacrifice during maternity leave. John Charlton reports.
Update on Statutory Maternity leave and salary sacrifice
According to XpertHR guidance, where a salary sacrifice arrangement is in place during the defined period for calculating SMP, the employee’s average weekly earnings calculation will be based on the lower salary and amended benefit provisions.
This could therefore adversly affect the amount of SMP payable or could even mean the employee is not entitled to SMP if the salary sacrifice reduces the average weekly earnings to below the lower earnings limit for national insurance contributions. Read more
Only now is the true picture of the cost of childcare vouchers to employers – since regulatory changes last October – beginning to emerge.
New mothers who went on maternity leave in October have now gone beyond the 39-week period, during which many are entitled to contractual maternity pay from their employers. Some are now in the three-month period immediately before the end of their 52 weeks of maternity leave, and are not being paid by their employer.
Nevertheless, they are almost certainly entitled to their contractual benefits – including childcare vouchers – and these will likely have to be paid for in full by their employers, by dint of EU directives and amendments to appropriate UK law.
British Chambers of Commerce (BCC) policy adviser Abigail Morris says members are contacting the organisation at local and national level for advice on the implications of offering childcare vouchers via salary sacrifice.
“They want to know the financial risks,” says Morris. “We tell them that once a new mother stops receiving maternity pay – and is still on maternity leave – the employer will have to pay the full cost of the voucher. Only now are some employers cottoning on to the full costs of offering childcare vouchers.”
She adds that a recent BBC news story claiming the BCC was advising members to withdraw from childcare voucher schemes was not true. “We only provide information,” insists Morris.
Morris says inquiries started to come in about six months after changes to maternity pay and conditions were introduced on 5 October. These changes mean that new mothers are entitled to the same terms and conditions that would have applied had they been at work, including the final 13 weeks of the 52-week maternity leave period.
The changes were stipulated by the EU Equal Treatment Directive and the Pregnant Workers’ Directive, and resulted in amendments to the Sex Discrimination Act 1975 and the Maternity and Parental Leave Regulations 1999.
Jane Anderson, a solicitor at Matthew Arnold & Baldwin, says: “There is currently uncertainty over whether an employee’s entitlement to childcare vouchers should be treated as part of the employee’s remuneration or as a non-cash benefit. The issue is untested in the tribunals and courts, but last year HM Revenue & Customs (HMRC) published guidance that childcare vouchers are non-cash benefits rather than remuneration, even if they have been provided by way of salary sacrifice.
“If this is correct, the effect is that the value of childcare vouchers should not be included for the purpose of calculating statutory maternity pay (SMP) and the employee is entitled to the childcare vouchers during her maternity leave without sacrificing any SMP. This interpretation is debatable though, as it is supported by the fact the vouchers are non-transferable and cannot be converted to cash.”
As for advice for employers worried or confused about where they stand legally on childcare voucher provision, Anderson adds: “Advice is not based on legislation or precedent because the situation remains unclear. However, by ceasing to pay the agreed amount of salary sacrifice into childcare voucher schemes while employees are on maternity leave, employers risk facing claims from employees for unlawful deduction from wages, breach of contract, sex discrimination, being subjected to a detriment connected with taking maternity leave, or even constructive dismissal.”
Steve Herbert, head of benefits strategy at Origen, says removing the voucher scheme is legally the only safe approach. This may, however, appear harsh to your staff and lead to a worsening in employee relations. So if you wish to retain your scheme, what options are available to you?
“There are two key principles that employers need to be aware of when offering salary sacrifice,” explains Herbert. “The first is that you must offer the scheme on the same terms to all; the second being that it is good practice to agree the sacrifice on an annual basis. This annual review gives both the employer and employee an opportunity to adjust the levels paid and implement new criteria as required.
“Certainly, it will be possible to set criteria in the rules that prohibit employees attempting to milk the system by late changes. You may even wish to go one step further, and actively state that the employer cannot afford to meet this cost during the maternity period, so by joining the scheme the employee accepts that childcare vouchers will cease for that period of time.
“Whatever ruling and wording that you eventually come up with, it should be made clear to the employee that these are the terms the employer will adhere to, and by joining the scheme, the employee is accepting such terms. It should also be made clear that the other alternative is scrapping the scheme altogether, and that as a caring employer you are trying to find a practical solution to avoid this.”
National childcare charity the Daycare Trust wants the government to clarify the legal situation around childcare vouchers. “We don’t want to see a mass exodus,” said the trust’s joint chief executive Alison Graham. “It’s a very important scheme. What we need the government to do is to set out some clear guidelines so everyone knows where they stand.”
But the Department for Business, Innovation and Skills seems to see little reason for clarification. A spokesman says that if mothers on maternity leave were paid contractual maternity pay by their employers, and had entered into a salary sacrifice scheme for childcare vouchers, then they were entitled to receive them if and when contractual maternity pay ceased during the 52 weeks of maternity leave.
Graham says: “If the problems persist, though, it might be that the government needs to step in and give financial assistance to employers.”
However, given the parlous state of public finances, this is highly unlikely, and employers will be duty bound to pay for childcare vouchers – even if it is through gritted teeth.
Good for employers’ reputations
The key benefit of offering childcare vouchers is an enhancement in reputation and employer brand, Personnel Today research suggests. A strong majority (91%) either agreed or strongly agreed that offering childcare vouchers improved company reputation, while 88% agreed or strongly agreed that it boosted employee retention.
But Richard Davies, head of employee benefits at provider P&MM, says many employees are not even aware that vouchers are an option. “The problem has often been reported that not enough parents are aware that their employer offers assistance in paying for childcare through a salary sacrifice scheme. Such schemes offer an appealing, money-saving benefit to staff as well as savings in national insurance contributions for the organisation, so it’s a win-win situation for all involved.”