Many employers provide a childcare voucher scheme for their employees, and this is usually offered on the basis of a salary sacrifice. The cost of the vouchers is deducted from an employee’s gross salary in return for childcare vouchers, and this has certain tax benefits for both employers and employees.
The difficulty comes when an employee who has entered the salary sacrifice scheme goes on a period of maternity leave. If the employee is paid Statutory Maternity Pay, there is unlikely to be sufficient salary to be sacrificed for the purposes of the scheme. If an employer continued to provide childcare vouchers during this period, it would need to do so at its own cost.
The guidance provided by HMRC has traditionally been that employers cannot compel employees to opt out of receiving childcare vouchers during maternity leave, and that it would be discriminatory to suspend membership of a childcare vouchers scheme during maternity leave. However, the position has recently been clarified in the case of Peninsula Business Services v Donaldson.
Peninsula had a scheme in place which provided employees with a reduced salary in return for tax-saving childcare vouchers. The vouchers were provided by a childcare voucher company. However, as part of the terms of the scheme, employees’ membership to the scheme would be suspended during various types of leave. These included maternity and paternity leave, and sick leave when the employee is entitled to only statutory sick pay.
Ms Donaldson wanted to join the childcare vouchers scheme while she was pregnant, before her maternity leave began. Her employer refused her entry to the scheme on the basis that she would not agree to suspend her membership during these various periods of leave. She issued a claim in the Employment Tribunal, on the basis that the requirement discriminated against women on maternity leave.
The Employment Tribunal decided that Ms Donaldson’s employer had committed an act of discrimination by making each employee’s agreement to suspend membership during maternity leave a requirement of joining the childcare vouchers scheme. The Tribunal’s decision was based partly on guidance that had previously been provided by HMRC, which stated that, during any period of ordinary maternity leave, contractual non-cash benefits provided under a salary sacrifice scheme ‘must continue to be provided’.
Peninsula Business Services appealed against this decision, and the Employment Appeal Tribunal (EAT) provided its decision on 9th March 2016.
The employer’s arguments revolved around the nature of childcare vouchers, and whether or not they counted as a benefit that must be continued during maternity leave. Peninsula also stressed that the cost of requiring employers to continue to provide childcare vouchers during maternity leave may discourage employers from offering them in the first place.
It was also argued that the HMRC guidance on this issue, which the Employment Tribunal took into account when making its decision, had no legal basis.
The EAT allowed the appeal, and substituted a decision that the claim should be dismissed. No legislative basis had been found to support the HMRC guidance that salary sacrifice childcare vouchers must continue to be provided throughout maternity leave. The key question was whether or not the vouchers constituted “remuneration”. If they did Regulation 9 of the Maternity and Parental Leave Regulations 1999 did not require this to continue during maternity leave. The EAT held that the vouchers did represent part of an employee’s salary, since pay had been substituted with vouchers under a salary sacrifice scheme. On this basis, the childcare vouchers were to be regarded as “remuneration” and, as such, could be discontinued during maternity leave.
The EAT also noted that it could not have been Parliament’s intention to require employers to continue providing childcare vouchers at a time when there was no salary that could be sacrificed in respect of them.
This provides some clarity for employers in respect of their childcare vouchers schemes, and as a result of this decision, employers know that they will not be required to pay for childcare vouchers during maternity leave. However, employers should still be careful to make sure that the suspension from the childcare vouchers scheme is not limited solely to those employees on maternity leave. It should apply to employees on any type of leave where their salary decreases so that there is no salary left to sacrifice, such as during sick leave and paternity leave.
