Blog: Childcare vouchers and maternity leave – what on earth’s happening?

Maternity rights can be a tricky enough area for employers to navigate at the best of times and a lack of relevant case law in this area doesn’t help. Now a very odd EAT decision has lobbed a grenade into the well-established understanding of what happens to a woman’s salary-sacrificed childcare vouchers during maternity leave.

In its recent controversial decision in Peninsula Business Services Ltd v Donaldson, the Employment Appeal Tribunal (EAT) appears to have overturned the understanding that salary-sacrificed childcare vouchers must continue throughout maternity leave.  However, the decision is (with the greatest respect) so odd and open to criticism that on this occasion we’re actually going to recommend that you don’t follow it.

What’s the background?

As you probably know,  during maternity leave a female employee is entitled to the benefit of all the terms and conditions of her employment that would have applied had she not been absent, except her remuneration. Remuneration is legally defined as “sums payable to the employee by way of wages or salary”.  So, in simple terms, salary and wages do not have to be paid during maternity leave but all non-cash benefits do. This should be easy… but it isn’t.  There appears to be a grey area surrounding where ‘wages and salary’ finish and non-cash benefits begin.

Additionally, we have the extra layer of salary sacrifice schemes to consider.  Again, as you probably know, a salary sacrifice scheme works, as the name suggests, by the employee sacrificing an agreed amount of salary (a permanent contractual reduction in salary) in return for non-cash benefits such as childcare vouchers.  Both employee and employer gave significant tax advantages, so, all in all, a win-win. For those of you who have ever received childcare vouchers, you will know that, once converted into vouchers you cannot convert them back into cash, nor, sadly, can you use a surplus of them to pay for your summer holiday or even your weekly supermarket shop!  So, quite a long way from having cash in your bank account.  And the HMRC declares them definitely to be non-cash benefits.

Understandably, therefore, employers have invariably taken the view (supported by their legal and tax advisers) that salary-sacrificed childcare vouchers are definitely to be treated as a non-cash benefit and so must be continued during an employee’s maternity leave, even for the period when she may be on zero pay.  This has been the established position for many years now.

Lobbing in the grenade

So the EAT’s recent decision in the Peninsula case has certainly created a lot of ripples, at the very least.  Peninsula offers a salary-sacrificed childcare vouchers scheme to all its staff.  However, in an apparent attempt to avoid having to pay childcare vouchers during maternity leave, Peninsula made it a contractual condition of the scheme is that if an employee takes maternity leave, their provision of childcare vouchers would be suspended and salary would be treated as returning to its previous level for that period.  Ms Donaldson objected to this and the Employment Tribunal agreed with her – they took the view that this was a non-cash benefit that should be continued during maternity leave. Peninsula therefore appealed to the EAT, which overturned the Tribunal’s judgment and decided that Peninsula’s approach of suspending the salary sacrifice scheme for the duration of the maternity leave was lawful.

The EAT’s decision was that that childcare vouchers provided by way of salary sacrifice should be regarded as remuneration (wages and salary), rather than a non-cash benefit. In particular, it decided found that  the phrase “salary sacrifice” was misleading, commenting that “it is in reality not a sacrifice but a diversion of salary, which the employee has earned but which is redirected prior to it being placed in the employee’s pay packet, in order to purchase vouchers”.

Our view

With the greatest respect to the EAT, that is a really odd conclusion to come to.  Interestingly, the EAT appeared to concede that it was on rather dangerous ground.  In its judgment it made the curious remark that it may perhaps not have identified all the relevant legal provisions involved in the issue and it said that it expressed its conclusions “somewhat tentatively”. You don’t often see that amount of ‘hedging’ in a higher court decision.  It surely has  “Ms Donaldson – please appeal to the Court of Appeal” written all over it.

I am not sure that most employees (or their advisers) would agree with the EAT’s rather simplistic analysis, since it ought to be clear to everyone that the salary sacrifice model is indeed a contractual arrangement in which the employee does indeed agree that they are giving up their right to their full salary in return for a particular benefit and tax/NIC advantages. The ‘diverted salary’, if you want to call it that, is being changed into something else, namely a voucher which can only be used to pay for childcare. This also means that should the employee’s salary ever be used to make important calculations (such as statutory maternity or redundancy pay), their lower varied salary must be used.

From my reading of this case, the EAT were hampered in their decision by the fact that Ms Donaldson did not appear nor make any representations. A one-sided debate doesn’t usually trouble the EAT, but when it concerned the workings of a salary sacrifice scheme, there seems to be a fundamental misunderstanding from the court as to how these schemes actually work.

What now?

Our advice is very much to proceed with caution.  This decision has been widely criticized and will surely be the subject of a future appeal. We happen to think that the decision is just plain wrong, which occasionally happens, and the chance it being overturned is very high.  Do not make any changes to your salary sacrifice or childcare voucher schemes.  Even if you wanted to adopt the Peninsula approach, it’s like that you would have to renegotiate every one of your salary sacrifice agreements with each female employee, so hardly practical anyway.

For those employers who have been routinely providing childcare vouchers during maternity leave, it will probably be the case that the minor financial inconvenience of funding childcare vouchers (maximum £243 per month) for up to 12 months is outweighed by the savings made under employers’ NIC and the goodwill generated with employees. Also, some employers might have a contractual maternity policy that provides that childcare vouchers will continue during maternity leave – in which case, it is not a case of simply stopping them.

Watch out on our news service for further developments on this topic.  In the meantime, if you wish to chat about your childcare vouchers or other salary sacrifice scheme, do get in touch with me.

Anne-Marie Boyle
Senior Solicitor

email Anne-Marie