Employers' obligations surrounding childcare benefits
Employers are facing up to far higher childcare voucher costs than anticipated, but lack of clarification from the government means confusion reigns over salary sacrifice during maternity leave. John Charlton reports.
On this page:
Mothers entitled to same terms and
conditions as those at work
Calculating statutory maternity pay
Legal
situation
Good for employers' reputations
Legal Q&A.
The true cost of childcare vouchers to employers since regulatory changes last October is only now beginning to emerge. New mothers who began their maternity leave in October have now passed 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 employers.
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 levels for advice about 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."
But 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.
Mothers entitled to same terms and conditions as those at work
Morris says inquiries started to come in about six months after changes to maternity pay and conditions were introduced in October 2008. 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, solicitor at law firm 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.
Calculating statutory maternity pay
"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 that the vouchers are non-transferable and cannot be converted to cash." (See legal Q&A below).
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 consultancy 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," says 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."
Employers remain confused about whether they are required pick up the bill for childcare voucher schemes when their employees take maternity leave. Bob Fahy, solicitor at law firm Matthew Arnold & Baldwin, answers some of the key questions.
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 that is replaced by SMP, or a non-cash benefit that 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. 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 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 Staff 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 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 staff, 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, 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 circumstances, one of which would be when the employee goes on maternity leave. However, such a policy may be challenged on the grounds that it amounts to discriminatory treatment on the grounds of sex.
