Many employers provide childcare vouchers to employees as a benefit, usually by way of a salary sacrifice arrangement. As childcare vouchers enjoy specific exemptions from income tax and national insurance contributions, both employee and employer benefit, with employers saving up to £402 per employee per annum.
How salary sacrifice arrangements work during statutory leave (e.g. maternity leave) has been a problem for some time. Women on maternity leave have protection from discrimination and their contractual rights are also maintained. Specifically, women are entitled to 'the benefit of all the terms and conditions of employment' except for ‘wages or salary'. Most have taken that to mean that any benefits which are not wages must be provided during leave, including childcare vouchers.
But what happens to vouchers that have been swapped for salary? A woman on leave may only receive statutory maternity pay (which cannot be sacrificed) or may even be unpaid. However, on the basis that childcare vouchers are a ‘benefit’ rather than ‘wages’ they would need to be maintained anyway. The generally accepted view was that employers would have to bear the cost of providing the vouchers during maternity leave, even though there was not enough pay available to operate the sacrifice arrangement.
This seemed counterintuitive and so it was hoped that the position would be clarified by a case brought by a pregnant employee, Laura Donaldson, against her employer Peninsula Business Services Ltd, whose childcare voucher scheme specified that vouchers would be suspended during maternity leave.
The first Tribunal confirmed the generally understood position: that suspending vouchers was unlawful. However, Peninsula appealed and the Employment Appeal Tribunal (EAT) agreed that suspension of the vouchers was permitted. The EAT said that 'properly analysed, a salary sacrifice scheme was a diversion of salary’ and a woman is not entitled to salary during maternity leave.
However, there are a number of reasons why employers should be cautious:
- Suspension of vouchers during maternity leave was already written into the terms of the Peninsula voucher scheme. If it isn’t, suspending vouchers could be a breach of the employment contract.
- Where vouchers are provided as a benefit without salary sacrifice, the EAT indicated (but did not decide definitively) that a woman was entitled to them during maternity leave. This leaves the position for childcare vouchers chosen by employees from a ‘benefits budget’, or vouchers provided unconnected with salary sacrifice arrangements, unclear.
- Donaldson was not represented by a solicitor at the EAT hearing. Could a future litigant who was represented make a better case for suspension being unlawful? The EAT warned that it was ‘apprehensive’ that it might not have considered all the relevant provisions and described its conclusions as 'tentative'.
More frustratingly, the EAT did not address the real contractual position for successful salary sacrifice. A diversion of salary is not enough to avoid the normal income tax and national insurance contributions payable on salary being applied- the contract between employer and employee must be varied, prior to salary becoming payable. That means the right to the salary is lost, not diverted, and the employee cannot swap the vouchers back for salary. As the EAT appeared to anticipate, its judgment may be vulnerable to attack.
As it stands, the focus could shift to other salary sacrifice funded benefits and whether those benefits could also be suspended during maternity leave. The impact on pension contributions made via salary sacrifice is particularly unclear, as a woman’s accrual in an occupational pension during maternity leave is protected by a different set of rules in the Equality Act 2010.
In the meantime, employers should:
- analyse the cost of funding vouchers during maternity leave and how it compares to the employer’s overall national insurance contributions, savings and other advantages of operating a childcare vouchers scheme, to see if the cost is justified;
- bear in mind that childcare support will transfer from the voucher scheme to government supported provision from 2017 – in other words the issue of childcare vouchers and maternity leave will disappear in the medium term;
- take advice on the legal risk of any decision to suspend vouchers during maternity leave or to alter the terms of a voucher scheme.
Paula Hargaden is senior associate in the Pensions & Incentives team at Burges Salmon
