Salary sacrifice and childcare benefits: legal Q&A

Employers remain confused about whether they are required pick up the bill for childcare voucher schemes when their employees go on maternity leave. Bob Fahy, a solicitor at Matthew Arnold & Baldwin LLP, answers some of the key questions employers have been asking.

Q What are the basic maternity leave regulations that apply to childcare vouchers taken by women who are on maternity leave?

A Employees are now entitled to receive all normal contractual benefits throughout their maternity leave period (up to a maximum of 52 weeks) except for “remuneration”, which means wages or salary as distinct from “non-cash benefits”. Their entitlement to remuneration is replaced during maternity leave by statutory maternity pay (SMP).

The childcare voucher system operates by way of a salary sacrifice where an amount is deducted from the employee’s gross salary, in return for an equivalent value of childcare vouchers on which no tax or national insurance is payable. Both the employer and the employee benefit from national insurance contributions savings. The “sacrificed” money is paid by the employer into a designated account with a third party provider who pays the money to accredited carers.

The crucial issue is whether such vouchers are part of the employee’s remuneration which is replaced by SMP, or a non-cash benefit which must be maintained throughout maternity leave.

Q When can an employer stop paying maternity pay?

A SMP must be paid at 90% of the employee’s normal salary for the first six weeks of maternity leave, and at the prescribed statutory rate (which from 5 April 2009 is £123.06 per week) for the next 33 weeks. Employers can stop paying maternity pay at the end of this period or, if the employee returns to work earlier, on the date she returns.

Q Under what circumstances are childcare vouchers paid for via salary sacrifice a contractual benefit?

A There is currently no definitive answer to this question. Guidance from HMRC says childcare vouchers are a non-cash benefit, and women should therefore be entitled to benefit from them throughout their maternity leave (without any deduction from their SMP). However, this guidance is not binding on employment tribunals. Unless this point is tested in the tribunal system, we will not be able to say for sure that HMRC’s interpretation is the correct one.

The vouchers are non-transferable and cannot be converted into cash by the employee, which suggests that HMRC is right (although the fact that salary is being sacrificed to get the vouchers may suggest otherwise). It could be argued that the value of the benefit is the tax saving to the employee, rather than the cost of the voucher itself, and that this is all an employer needs to provide, but HMRC does not accept this argument.

Q Why should an employer pay for them when salary sacrifice ends because the woman on maternity leave isn’t being paid?

A The point is that if childcare vouchers are a non-cash benefit, then employers are required to continue to provide all such benefits throughout the maternity leave period as a matter of law. The lack of a salary sacrifice from the employee does not (from HMRC’s view at least) make any difference.

Q What risks are run by employers that refuse to pay for the vouchers once the employee stops receiving pay?

A Apart from potential claims by employees, if the employer ceases to pay the agreed amount of salary sacrifice to the third-party provider that administers the childcare voucher scheme on behalf of the employer, the employer is at risk of a breach-of-contract claim.

Q What penalties may be imposed?

A This will depend very much on the circumstances of the individual case, but could include damages for breach of contract, or compensatory awards for unfair dismissal or discrimination.

Q What actions can affected employees take against the employer?

A Employees could bring claims for breach of the Maternity and Parental Leave Regulations 1999, sex discrimination or, if the employee resigns alleging a fundamental breach of her contract, constructive unfair dismissal.

Q What options are open to employers that are unhappy about paying the full cost of childcare vouchers when salary sacrifice no longer applies?

A They could withdraw from such schemes altogether, but depending on the way in which they offer this benefit to employees, they will have to think carefully about the way they seek to vary their employees’ benefits. They could simply take the risk of not making such payments during maternity leave and argue their point in court if the decision is challenged by an employee, but this carries obvious risks.

I have also seen arguments that employers could have a clear contractual policy on childcare vouchers, detailing the rights of both employer and employee to opt in or out of the scheme in certain prescribed circumstances, one of which for the employer would be when the employee goes on maternity leave. However such a policy may itself be challenged on the grounds that it amounts to discriminatory treatment on the grounds of sex, so I don’t think that takes the employer much further.


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