Maternity: bonuses and pay rises

Caroline Blackwood of Osborne Clarke continues this month's series of articles on recent developments concerning maternity rights with a look at the payment of bonuses and how to handle pay rises in respect of employees on maternity leave.

Bonuses

The payment of bonuses for employees on maternity leave raises several questions, for example whether the employee is entitled to receive a bonus at all and, if so, whether the bonus can be paid pro rata to reflect the time the employee was on maternity leave.

The case law and statutory provisions on this issue are complex and, at times, inconsistent. The position differs depending on whether the bonus is contractual or non-contractual.

Contractual bonuses

Contractual benefits are dealt with under the Equal Pay Act 1970, which was amended on 1 October 2005 in relation to the payment of bonuses. The change clarifies that pay by way of a contractual bonus must be made to an employee in respect of both the time that she is on compulsory maternity leave and the time after she returns to work from maternity leave (just as it would have been had she not been on statutory maternity leave). There is no reference to payment having to be made in respect of the time that an employee is on maternity leave other than the two-week compulsory period.

Therefore, with the exception of the two-week period of compulsory maternity leave, employers can pro rate contractual bonuses to reflect periods of absence from work on maternity leave.

Bonuses that are explicitly contractual in employees' contracts of employment will be covered by these provisions. Many bonuses that are not referred to in contracts, or even those that are explicitly stated to be discretionary, will be contractual and covered by the above provisions if they are, in fact, paid every year to all employees without any discretion being exercised - for example, this will often apply to Christmas bonuses. This was the position in Hoyland v Asda Stores Ltd [2006] IRLR 468 CS, where the Court of Session found that a bonus that was stated to be discretionary was contractual.

Non-contractual bonuses

The law in respect of discretionary bonuses is, unfortunately, less clear. Failure to pay a purely discretionary bonus to an employee on maternity leave would be dealt with under the Sex Discrimination Act 1975. In GUS Home Shopping Ltd v Green [2001] IRLR 75 EAT the Employment Appeal Tribunal ruled that employees on maternity leave must be paid a discretionary bonus in full. However, this decision has since been questioned and limited to its particular facts. Other decisions, notably from the European Court of Justice (ECJ), in cases such as Gillespie and others v Northern Health and Social Services Board and others [1996] IRLR 214 ECJ, indicate that a pro rata approach is acceptable, as an employee on maternity leave is in a special position, and cannot claim equal pay to that of a man working normally. However, there is a risk that an employer could be held liable to pay a full discretionary bonus to an employee on maternity leave.

Pay rises

The position in respect of pay increases awarded during maternity leave is a little clearer than that in respect of the payment of bonuses.

Statutory maternity pay

The amount of statutory maternity pay (SMP) payable by the employer is calculated based on the amount of earnings paid by the employer to the employee in the eight-week period up to and including the 15^th week before the expected week of childbirth (the 'relevant period').

SMP is paid at the rate of 90% of the employee's average earnings for the first six weeks. Where the 90% rate is less than the standard rate of SMP (currently £108.85 per week), it would also be paid for the remaining 20 weeks of the maternity pay period.

The Statutory Maternity Pay (General) (Amendment) Regulations 2005, which came into effect on 6 April 2005, require employers that award a pay rise that is effective any time between the start of the relevant period (ie the 23^rd week before the expected week of childbirth) and the end of the maternity leave (ordinary or additional) to recalculate the amount of SMP payable. This period could be as long as 17 months. For example, if an employer awards a 3% pay rise that takes effect during an employee's maternity leave, it would have to be applied to the earnings used to calculate the amount of SMP payable to the employee. This could result in a new rate of SMP being due where SMP is already being paid or has already been paid in full (if the employee is now on additional maternity leave). Where the employee received 90% of her salary for the first six weeks of maternity leave, an additional payment would be due in respect of this period. Where the employee received 90% of her salary for the whole 26-week maternity pay period, a recalculation in respect of the further 20 weeks of SMP would also be required. In effect, this means that the pay rise is backdated for SMP purposes, and that the employee on maternity leave would receive her pay rise earlier than other employees.

Enhanced contractual maternity pay

Unfortunately, the position is less clear in terms of how enhanced maternity payments should be treated and whether a pay rise should be applied to any contractual maternity pay; there is no firm guidance available for UK employers.

In Alabaster v Woolwich plc and Secretary of State for Social Security [2004] IRLR 486 ECJ the ECJ implied that a pay rise should be applied to enhanced contractual maternity pay as well as to SMP, but it was not expressly stated how this should take effect.

Common opinion is that a pay rise should be applied to enhanced contractual maternity pay if the enhanced contractual maternity pay is calculated on the basis of the employee's pay before her maternity leave (ie paid as a percentage of salary). This would mean that the pay rise has to be backdated and the enhanced contractual maternity pay recalculated from day one of the relevant period.

If maternity pay is calculated other than by reference to an employee's pre-maternity leave pay, the position is less clear; for example, if the employee's enhanced contractual maternity pay is equal to (or a percentage of) the amount that she would have been receiving had she not been on maternity leave during the pay period in question, arguably the pay rise would not need to be backdated.

Employers therefore need to decide how to deal with pay rises for enhanced contractual maternity pay, taking into account exactly how their specific enhanced maternity pay entitlements are structured.

Next week's article will feature a case study on maternity rights.

Caroline Blackwood is a training and know-how lawyer in the employment, pensions and incentives department at Osborne Clarke (Caroline.Blackwood@osborneclarke.com).

Further information on Osborne Clarke can be accessed at www.osborneclarke.com.