Pay increases to meet the cost of living crisis and the rise in National set Minimum pay.
With current level of high inflation, home energy costs and other impacts on the cost of living, wage inflation is also on the rise. The National set minimum pay amounts have increased significantly and with strike action becoming more prevalent, the level of pay increases can be significant.
However, although timing may not generally be seen as a challenge, there are significant periods of backdating calculation requirements in relation to Maternity leave and associated rights. An area that employers would generally want to avoid getting wrong else see reprisals both in reputation and the courts in committing maternity discrimination.
National Minimum Wage rise significantly
The government have implemented significant increases to the levels of the National Minimum Wage and the National Living Wage. And the Living Wage foundation applies similar rises to the real Living Wage and the London Living Wage, for which those employers signed up have a 6 month window from the usual announcement point each November to apply the rise, so, at the latest this generally falls into early May each year.
Pay rises, maternity and the Alabaster ruling
Mrs. Alabaster qualified for SMP and went on maternity leave from 8th January 1996. Her SMP was calculated on earnings received from the period 1st September 1995 to 31st October 1995. With effect from the 1st December 1995, Mrs Alabaster received a pay rise. However, this was not reflected in her SMP, as it was not within the ‘set period’ used to calculate average earnings. The European Court of Justice (ECJ) agreed with Mrs Alabaster in the view that the pay rise should have been reflected in her SMP payments and stated that:
Any pay rise awarded between the beginning of the period covered by the reference pay and the end of the maternity leave must be included in the elements of pay taken into account in calculating the amount of such pay. This requirement is not limited to cases where the pay rise is backdated to the period covered by the reference pay.
The important thing is that this ruling entitles employees to claim additional SMP if a salary increase took place with an effective date which falls in the period from the start of the ‘set period’ to the end of an employee’s maternity leave.
The impact on SMP
What constitutes a pay increase with regard to maternity benefit?
Occupational Maternity Pay (OMP)
With regards to Occupational Maternity Pay (OMP), the answer to ‘what is a pay rise’ may be simpler than for Statutory Maternity Pay (SMP). With OMP, the rules of the scheme are those of the employer and will be based also on the contract of employment.
Scheme rules may outline what is constituted as part of the OMP payment amounts. In many cases, the entitlement may be limited to basic pay or salary, in which case, a general change only to those amounts would constitute a rise.
Statutory Maternity Pay (SMP)
However, SMP is governed by average earnings calculations relating to Class 1 National Insurance Contributions (NICs) in the relevant period.
Of course, with many items now being subject to NICs, the picture gets a little hazier. After all, the following common payments to employees attract Class 1 NICs and are therefore included in NIable earnings for average earnings calculations:
- Car allowance
- London or large town allowances
- Home allowances exceeding the tax free amount per week
Deciding whether or not certain changes constitute a “pay rise” within the meaning of the ECJ and Department for Work & Pension (DWP) legislation is not exactly straightforward in many instances.
So what is the HM Revenue & Customs (HMRC) view of the issue?
Based from the SMP (General) Regulations, which were amended by SI2005/729 and came into force from 6 April 2005, it set out the change as: ‘…”statutory maternity leave” means ordinary maternity leave and any additional maternity leave under, respectively, sections 71 and 73 of the Employment Rights Act 1996.’
This is interpreted by HMRC and DWP as being ‘the period that the employee is absent on maternity leave whether ordinary or additional. The leave ends when the employee returns to work for her employer after having given acceptable notice of her date of return’.
The change in calculating average weekly earnings is set out in this legislation as in any case where
- a woman is awarded a pay increase (or would have been awarded such an increase had she not then been absent on statutory maternity leave); and
- that pay increase applies to the whole or any part of the period between the beginning of the relevant period and the end of her period of statutory maternity leave, her normal weekly earnings shall be calculated as if such an increase applied in each week of the relevant period.
Under these provisions, and in line with the ECJ, any pay increase awarded on, or after 6th April 2005, to a woman (who is, or goes, on maternity leave) or which would have been awarded to her had she not been on maternity leave, must be included in her average weekly earnings calculation for paying her SMP.
Can the SMP backpay top up be claimed from the government?
Employers can claim at least 92% of any SMP paid to an employee, and smaller employers can claim 100% along with an additional 3% compensation amount. This applies to any top up of SMP as a result of the Alabaster ruling. Report the added amounts on the next regular FPS and EPS.
Could multiple rises apply?
Yes – the period of coverage is lengthy, and in that time multiple rises to pay may occur whether increases due to an employer initiated pay rise, or a rise due to the National Minimum Wage or even the real Living Wage for those employers who are part of the voluntary arrangement.
So this only impacts the first 6 weeks higher rate?
In many cases that will be correct as the lower rate of SMP acts as a cap for weeks 7 through 39 of the maternity leave. However, some employees may receive a lower amount as their 90% of earnings average may be less than the lower SMP cap. These cases may also result in a higher rate being applicable during weeks 7 through 39 but capped.
So the increase can in some circumstances impact all paid maternity leave weeks.
Do we have to go back and recalculate all the pay period covered?
No and suggest don’t. It is dangerous to go back adjusting historic, tax, NI and pension contributions positions. The payments were not made in the past and you should leave history alone reflecting the reality of what actually happened at that time.
Work out the back payment difference and pay on your next regular pay cycle. Tax, NI and pension it at the point of payment.
There is no need to reopen past pay period and adjust historic FPS and EPS file submissions. Report the adjustment amounts on the next regular FPS and include the additional reclaim amounts on the next EPS totals for reclaim.
It’s all so complex, what if we do nothing?
An employer who fails to pay the correct amount of SMP faces a potential claim for maternity discrimination. Now many employees may not understand the rules and may take no action, however, they and the unions if involved, may pursue the employer for discrimination and underpayment.
Can payroll software handle an Alabaster rise?
This depends on each software capability. Many offer facilities to apply an Alabaster rise or allow adjustments to be made. It’s worth checking with your software supplier.
PAYadvice.UK 10/5/2023
