In 2007, the Equal Opportunities Commission secured a landmark High Court ruling that UK law on pay and benefits during maternity leave does not meet EU requirements. New regulations are about to be brought in to correct the situation, but what is current law on maternity benefits, and how will it change?
The Department of Business, Enterprise and Regulatory Reform has just confirmed that these regulations will affect women whose expected week of childbirth (EWC) falls on or after 5 October 2008.
This article was originally published on 17 March 2008 and is not updated.
XpertHR provides up-to-date guidance on family-friendly rights, including maternity and paternity leave.
In this article, we clarify the existing law, how it is changing and what it will mean for your business.
Although the practical consequences of the new regulations will not be seen until these women start their additional maternity leave early next year, employers will need to be able to discuss the new rules with them before their leave starts, which could be as early as July 2008, and review their policies.
What happens to pay during maternity leave?
During maternity leave (both ordinary and additional maternity leave), the employee’s contract of employment continues, but she is not entitled to her wages or salary. She will instead be entitled to statutory maternity pay (SMP) if she meets the qualifying conditions relating to the length of time since she joined the company and the level of national insurance she has paid.
Shift pay, overtime, call-out and attendance allowances all count as ‘wages or salary’ and can be withheld during maternity leave. Car allowances and bonuses are more complicated.
The rules about pay will stay the same under the new law. However, you might choose to offer enhanced maternity pay (over and above statutory), for example, to attract and retain women in a competitive market. You are not legally obliged to offer any extra maternity pay and the fact that you offer a sick pay scheme that is more generous than the statutory sick pay scheme does not mean that you have to do the same with maternity pay.
What about benefits during maternity leave?
During ordinary maternity leave (OML), the employer must continue all benefits. This is the case even if the employee has no contractual right to the benefit and you have provided it only as a matter of discretion. Although you might have a general right to withdraw discretionary benefits from all employees, it would be an unlawful exercise of your discretion to withdraw it from an employee just because she is on maternity leave.
EEF believes you can currently discontinue benefits during additional maternity leave (AML) unless:
- this is out of line with your past practice or
- the benefit relates to pensions, life assurance, permanent health insurance or medical cover where the law is particularly complex.
The new rules, affecting women whose EWC falls on or after 5 October 2008, will mean that employees will be entitled to their full benefit package throughout both OML and AML, except in relation to pensions.
Company cars during maternity leave
You can take back a company car for the whole maternity leave period if it is provided purely for business use (for example if it is a pool car kept at work to be used by a number of employees). This will be the same when the law changes.
If some element of personal use is permitted, you must treat the car as a benefit and allow the employee to keep it throughout OML.
Once the law has changed, you will also have to allow the employee to keep the car during AML. For the time being, you can take the car back during AML although you should first think about:
- whether this is in line with your past practice and
- what you would do with the car. Many employers allow employees to keep their company cars during AML as well as OML because they have no other practical use for the car during this time. On the other hand, some employers prefer to save on insurance or running costs by taking the car back even if they have no use for it.
What if the employee on maternity leave has a car allowance?
Car allowances have always been problematic. If they are treated as part of wages/salary then you do not need to pay them during any part of maternity leave, but if the allowances are ‘benefits’ then you must continue to pay them during OML and, once the law has changed, AML as well. The problem is that it is often unclear whether they are part of the salary.
Car allowances usually appear separately on wage slips and are not pensionable. Employees often have the choice between a company car and a car allowance. These factors suggest that a car allowance should be treated – just like a company car – as a benefit rather than as part of salary.
However, EEF advises employers to treat car allowances as wages or salary, at least until there is case law which clarifies the position. This means that you would not pay the allowance during any part of maternity leave, even once the law has changed.
There are good arguments for this being the correct approach. First, where an employee qualifies for SMP, 90% of the car allowance will be paid as part of her SMP for the first six weeks. This is because this first part of SMP is paid at the rate of 90% of the employee’s ‘normal earnings’ and a car allowance would count as normal earnings for this purpose. Maintaining the car allowance as a separate benefit would therefore lead to a degree of double-payment for the first six weeks.
In addition, car allowances tend to be regarded as uplifts on salary and they attract National Insurance contributions, both of which suggest that they should be seen as wages not benefits.
Of course, if you have historically maintained car allowances throughout maternity leave then you may be contractually unable to draw back from that position.
What do we do about pension contributions during maternity leave?
The rules about pension contributions come under social security legislation, which is separate from UK maternity law and does not follow the same approach.
As far as the social security rules are concerned, the distinction between OML and AML is not relevant. Instead, the rules draw a distinction between paid and unpaid maternity leave. Paid leave is any time when the employee is receiving SMP or other pay. If the employee qualifies for SMP, this will be 39 weeks unless your policy is to pay company maternity pay extending beyond this period.
In a final-salary (defined benefit) scheme, you must treat any period of paid maternity leave as pensionable service. If the employee makes contributions to the scheme, then you can require her to keep up those contributions throughout her paid maternity leave. However, her contributions must be calculated on the basis of the actual pay she is receiving rather than her normal pensionable pay.
If she wants to make additional voluntary contributions then this may be possible under the employer’s scheme rules and you should check with your pension scheme advisers.
In a money-purchase (defined contribution) scheme, you must keep up your contributions to the scheme for the period of paid maternity leave. Your contributions must be based on the employee’s normal pay (ie the pay she would be receiving if she was at work). However, the employee’s contributions must be calculated on the basis of the actual pay she is receiving rather than her normal pay.
Reduced contributions on the employee’s part may, of course, reduce the amount of pension she ultimately receives, so you may want to remind the employee that she can, if she wants to, top up her contributions to their previous level. There is an argument that the employer should step in to ‘top up’ her contributions. However, most employers do not do so, and the argument remains untested.
The new regulations will not affect pension contributions, so these rules will stay the same.
Life insurance, health insurance and medical cover on maternity leave
EEF advises employers to treat life insurance, permanent health insurance and medical cover in the same way as pension rights, and maintain them throughout any period of paid maternity leave. This is because the definition of pension scheme in the relevant UK social security legislation is very wide and covers a scheme providing protection against sickness, disability and death as well as one providing for retirement. It is unclear if this definition captures life insurance, permanent health insurance and medical cover schemes but there is clearly a strong risk that it might do so.
In practice, many employers make a single lump sum payment to the insurers at the beginning of the policy year to cover all employees throughout the year. In those circumstances, it is often harder to remove cover from an employee than to retain it for her.
Once the law has changed, you should maintain permanent health insurance, life insurance and medical cover throughout the entire period of maternity leave.
What about holiday entitlement?
EEF believes that employees cannot take holiday and be on maternity leave at the same time. This means that an employee cannot take holiday during her maternity leave. This means that an employee must take holiday before she starts maternity leave or when she comes back. So an employee may lose some of her holiday if the holiday year ends when she is on maternity leave.
Employees have no statutory right to take bank holidays, but many employers provide for paid bank holidays in contracts of employment. In such cases, the employee is clearly entitled to take and be paid for any that fall before or after her maternity leave.
The legal position is less clear on bank holidays that occur during maternity leave. Employees sometimes argue they should be paid for bank holidays falling during maternity leave and many employers do make a payment, particularly during OML.
However, the legal position has not yet been properly tested in the UK courts. There is, however, a case about the related issue of teachers’ holidays which, although not about bank holidays, suggests that an argument for pay on a ‘missed’ bank holiday would fail. Until this issue is resolved by a specific UK case or addressed by government guidance, EEF advises that employers can rely on this decision and refuse requests for pay for ‘missed’ bank holidays. Of course, if historically you have paid for some or all bank holidays, you may be contractually unable to draw back from that.
Remember, even if you have a practice of paying for bank holidays which fall during maternity leave, the employee is still treated as being on maternity leave, not on holiday. As a result, the days you have paid for do not technically count as days of holiday.
Does holiday entitlement accrue during maternity leave?
The issue of how maternity leave affects holiday entitlement is currently confused. The position may be clarified, however, by a case in the pipeline about holiday during sick leave. This case is due to be decided later this year.
Under the current rules, EEF’s view is that an employer can make a pro-rata reduction of an employee’s contractual entitlement to reflect the proportion of the year that she is on AML, and most employers do so. In practice, this will only make a difference if the employee’s contractual entitlement, ignoring bank holidays, significantly exceeds statutory entitlement. The number of days affected is often very small.
When the law on benefits during AML changes later this year, the employee will be entitled to her full contractual holiday entitlement for the holiday year even if she is on maternity leave for some or all of it. However, you should also check that the holiday which the employee receives under her contract of employment meets the minimum statutory threshold under the Working Time Regulations. In April 2009, this will rise to 5.6 weeks (28 days for someone working a five-day week), so do not assume you will be meeting the minimum threshold, even if your company policy is relatively generous.
For example, say your company allows 25 days’ paid holiday per calendar year, plus bank holidays, for an employee working a five-day week. If the employee is on maternity leave for the whole calendar year, then although you might have paid for bank holidays falling during maternity leave, technically they will not count as holiday, so your policy will end up entitling her to 25 days. This is less than the new minimum threshold next year of 28 days, so you might need to top up her entitlement to 28 days.
Once the law on benefits during AML has changed, the position will become more straightforward. Then, the practical difficulty is likely to be the issue of carrying forward holidays rather than the calculation of holiday entitlement.
Equally, however, if an employee is allowed to carry forward all of her untaken holiday from one year to the next, she can return to work with a large amount of holiday stored up, potentially causing operational difficulties.
The problem can sometimes be avoided if, once you know that the employee is pregnant, her line manager reminds her about the company’s normal holiday rules on carrying forward of accrued but untaken holiday and explains that these will continue to apply subject to very limited exceptions.
You could encourage the employee to take some of her holiday entitlement immediately before her maternity leave begins or to terminate her maternity leave early and transfer onto holiday before the holiday year ends.
If the employee still does not use up all her holiday before the holiday year ends, apply your normal rules on carrying forward holiday entitlement, even if this results in the employee losing some holiday.
There is potentially one exception to this, which is where the employee could not reasonably have taken all of her statutory minimum holiday entitlement before going on maternity leave.
For example, if your holiday year begins on 1 January and the employee’s maternity leave begins on 15 January then she cannot take all her statutory minimum holiday entitlement before starting her maternity leave.
In these circumstances, EU law probably requires the employer to allow the untaken portion of her statutory minimum holiday entitlement to the following year. However, this is an issue which may be resolved by future case law and, given the potentially large amounts of holiday at stake, many employers choose a ‘wait and see’ approach of not allowing carry-forward under any circumstances and settling any complaints which arise about this.
Can the employee take a payment in lieu of untaken holiday?
Another way to deal with the problem of untaken holiday might be to make a payment in lieu. However, this only works if the employee agrees to it; the employer cannot impose it upon her, although she is unlikely to complain, particularly if she has exhausted her SMP.
Technically, it is only possible to make a payment in lieu for a limited amount of holiday – currently the amount of contractual holiday that exceeds the statutory minimum plus up to 0.8 weeks of the employee’s statutory minimum holiday.
From 1 April 2009, payment in lieu will not be permitted for any of the employee’s statutory minimum holiday. If you agreed with the employee to make a payment in lieu for more than these limited amounts, then you would not be able to enforce the agreement upon the employee if she later changed her mind.
What about bonus payments during maternity leave?
Employees are entitled to SMP, rather than ‘wages or salary’ during maternity leave, providing they meet the qualifying conditions. This will not be affected by the new rules.
In theory, a bonus which falls due during maternity leave counts as ‘wages or salary’ and is therefore not payable. However, there have been some decisions of UK courts and the European Court of Justice which have complicated this position.
If the bonus relates to a period of time before the employee started maternity leave, then you must make the payment in full even if she is on maternity leave when the payment falls due.
If the bonus relates to a period of time which includes a period of maternity leave then you must make a payment on a proportionate or pro-rata basis to reflect the proportion of the time when the employee was:
- working on compulsory maternity leave the period immediately following the birth)
- suspended on pregnancy or maternity grounds.
It does not matter whether the bonus is contractual or discretionary.
This may mean that you have to make an assessment of the employee’s performance over a shorter period of time than would normally be the case.
Performance measures such as sales targets or achievement objectives are typically set at the beginning of the year on the assumption that the employee will be at work for the whole year. Where the payment of bonus is dependent on the employee achieving such targets/objectives, you need to adjust them downwards or judge what the employee’s performance would have been had she been at work.
Where a bonus is not directly related to personal performance, the position is more complicated. In one case, concerning the relocation of Kays Catalogue from its original base in Worcester to a new site in Manchester, the employer offered a discretionary bonus to all employees who co-operated in ensuring an orderly and effective transfer and who remained in post until the relocation date. Two employees were on maternity leave throughout this time and did not receive the bonus.
According to the Employment Appeal Tribunal, it was sex discrimination not to provide the bonus. This case is at odds with the principle that women are not entitled to ‘wages or salary’ for maternity leave and it may have been wrongly decided. However, it is still binding on employment tribunals and so employers offering similar loyalty bonuses should pay them to women on maternity leave.
Occasionally employers make payments which are genuinely intended as gifts, such as certain Christmas bonuses. EEF feels these should also be paid to all women on maternity leave.
What if the employer wants to change its approach to maternity pay and benefits?
A historic practice can mature into a contractual entitlement through ‘custom and practice’. This means that, even if your contract of employment and maternity policy do not make explicit contractual promises about your approach to pay and benefits, you may be unable to draw back from your past practice unless you have the employees’ agreement. If employees will not agree to a change and you decide to implement the change anyway you may cause employee relations problems and face legal claims.
Maternity benefits at a glance
No need to be pay or provide in any part of maternity leave (unless your contract says otherwise)
- Shift pay
- Attendance allowance
- Overtime pay
- Call-out allowance
- Company car if provided purely for business use
Must pay in compulsory maternity leave period (which is between two and four weeks’ post-birth)
- Performance-related bonuses (contractual and discretionary)
Must pay or provide in ordinary maternity leave (first 26 weeks)
- Private use of company car
- Medical expenses cover
- Luncheon and childcare vouchers
- Private use of mobile phone
- Gym membership
All of the above benefits will need to be maintained during the full maternity leave period when the law changes.
Must pay or provide in paid maternity leave period (39 weeks unless you pay extra)
- Pension contributions/rights
- Life insurance, permanent health insurance, medical cover
When the law changes EEF advises that life insurance, permanent health insurance, and medical cover are maintained for the full maternity leave period.
Must pay or provide at all times during maternity leave
- Christmas bonuses and other gratuitous bonuses
- Loyalty bonuses
- Redundancy payment
Maternity benefits case study: South Staffordshire Water
Parents on the staff of South Staffordshire Water benefit from a subsidised, on-site day nursery for babies and pre-school children.
The nursery is operated exclusively for employees’ children and guarantees places for new parents when they or their partner returns from maternity leave and for all new starters. It opened in April 2007 as part of the company’s ‘Best of Both Worlds’ work-life balance programme which, among other benefits, provides flexible working opportunities for its 400 employees.
Sarah Collins, head of HR and training, views flexible working as an important management tool for retaining skills and know-how in the light of changing demographics.
The company is keen to support working parents and as part of its attraction and retention strategies offers ‘company maternity pay’, payable to new mums when they return to work. Similarly, new fathers receive two weeks’ paternity leave, one week of which is offered at full pay.
Childcare vouchers are available through a salary sacrifice scheme, while a holiday buy-back scheme allows all employees to take up to five extra days’ holiday a year.
South Staffordshire Water has a number of job-share and part-time roles and has accommodated reduced and compressed hours for employees, even at a senior level. The company last year also extended the right to request flexible working to all employees, removing any eligibility criteria.
“We believe that working with employees to agree flexible working arrangements has significant benefits for the company. In addition to retaining key skills and experience that might otherwise have been lost, there is a greater level of commitment and loyalty from employees, which in turn has a positive impact on performance,” says Collins.
EEF member case study: Siemens
As a fast-growing organisation with more than 20,000 employees in the UK, Siemens does business in a range of sectors from industry, healthcare and energy. Such diversity means Siemens operates in some extremely competitive labour markets, where identifying, developing and retaining scarce skills is critical.
One element of this is the company’s supportive approach to maternity, paternity and adoption. It sees the continuing confirmation of the employment relationship as central to maintaining this approach and line managers – as owners of that relationship – have a critical role to play. ‘Keeping in touch’ days are one of the ways it encourages this.
Siemens recognises the need for paid time-off for employees even in the early stages of pregnancy to attend relaxation and parentcraft classes to help them prepare for parenthood. Its maternity pay and leave supports employees while they are away from work, and for those with 26 weeks’ service or more, the company tops up statutory payments. Throughout maternity leave employees continue to be entitled to all their benefits, from healthcare to cars.
As a key aim is to retain employees, Siemens provides a generous return to work bonus of up to 35% of an employee’s monthly salary for a period of six months after their successful return. And to further help with childcare costs the company offers child care vouchers through a comprehensive flexible benefits scheme.
Recognising that balancing the demands of a young family and work can be challenging, Siemens supports flexible working to recognise the employee’s change of circumstances and retain their skills and experience.
EEF’s expert team helps 6,000 members across Britain to deal with the complete range of employment issues from maternity rights to grievance handling. It provides services at local and national level, building close relationships with the businesses it supports.
“Our aim is to deliver exceptional results for all our members,” says EEF chief executive Gilbert Toppin. “We believe that by understanding their needs, we can quickly recommend solutions that work.”
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