Steve Herbert, head of benefits strategy at Origen, looks at one of the potential problems for HR professionals raised by the changes to maternity rules in 2008.
“Mistakes, I’ve made a few” is of course one of the most memorable lines of Frank Sinatra’s signature tune My Way. More recently, UK MPs seem to have taken this song to heart, with virtually every indefensible expenses claim being marked down to either ‘a mistake’ or ‘error of judgement’, which at best seems fairly lame.
If nothing else, the above highlights a separate concern for HR professionals. If MPs can make such a pig’s ear of their own expenses, it follows that the legislation enacted by that same grouping may also be full of holes. Such an example may be the change to maternity law last year, and the impact on one popular employee benefit.
A lot has happened since the legislation has passed, so it is probably worth reminding the reader that in October 2008 the rules changed, and it became a requirement that all ‘non-cash’ benefits that an employee would usually enjoy must continue throughout the entire period of maternity leave. By and large this is a good thing, as it is another step towards levelling the playing field for those on maternity leave. As ever though, the devil is in the detail, and there is a potential negative impact for employers who offer childcare vouchers.
Childcare vouchers are a government initiative designed to assist working families back into the workplace. To achieve this, the government elected to fund this benefit through a mechanism known as salary sacrifice, and it is this choice of funding that leads to the problem area.
Salary sacrifice is a very effective and popular route of legitimately avoiding both income tax and national insurance on a given amount of salary. The employee agrees to sacrifice an amount of gross salary, and in exchange the employer offers to pay the equivalent amount direct to a benefit provider, in this case the childcare provider. This therefore avoids both income tax and national insurance, and is worth up to £1,195 per year to a higher rate tax payer.
Childcare vouchers are also popular with employers. Sixty-two per cent of respondees to the recent Origen survey confirmed they offered such schemes. The scheme is both family-friendly and cost neutral to the employer, as the employer also avoids a national insurance liability on the amount sacrificed.
So where is the problem? Technically, the employer is directly paying the childcarer, even though the cost is ultimately met from the employee’s salary. This therefore appears to be an employer-supported benefit, and as such the employer may have to continue the payments throughout the maternity absence. Worse still, the employer is unlikely to be able to deduct this cost from statutory maternity pay (SMP).
Social networking sites for new mothers picked up on this back in October, and there is already anecdotal evidence of employees either commencing, or increasing, the level of childcare vouchers shortly before going on maternity leave, in an apparent attempt to maximise the funding of their childcare by the employer. This just goes to prove that even those who are not MPs are sometimes tempted to stretch the rules a little. The practical upshot of this is that many employers are now re-evaluating whether they should offer this benefit at all.
Is removing the offer of childcare vouchers for all employees an overreaction to the potential threat? In my view, the answer is often yes, and I believe that employers can perhaps look at some alternatives. I am not suggesting that any answer is legally sound, but it’s possible that the risk may well be outweighed by the advantages.
What are the options?
Removing the 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. 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 can not 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.
While none of the above is likely to be bullet-proof in court, it will probably reduce the incidents of claims arising, given the employee agreement at the outset. Perhaps the possibility of sex discrimination claims can be further mitigated by reference to paternity absence as well?
Even in a worse case scenario, it should be noted that the actual cost exposure to the employer here is capped, given that the maximum amount that can be sacrificed through this initiative is £55 per week, and the maternity period is a maximum of one year.
This may only be a short-term problem. If a significant number of employers stop their schemes as a direct result of this issue, the subject is likely to accelerate to the top of the political agenda. A political U-turn in that scenario would not be unexpected, but in the meantime I would encourage employers to address this issue now, assess what is an acceptable risk and seek legal advice to support your decision.
In conclusion, pretty much any route the employer follows here is likely to carry some risk. Perhaps, like Sinatra, employers should look to do things ‘your way’, until the final curtain on this issue finally falls.