Out-Law News 3 min. read

Not discriminatory to discontinue childcare vouchers during maternity leave, EAT rules


It was not discriminatory that a childcare voucher scheme, provided to employees by way of salary sacrifice, was suspended when an employee was on maternity leave, the Employment Appeal Tribunal (EAT) has ruled.

Overturning the employment tribunal's original decision in the case, the EAT ruled that the vouchers were "properly to be regarded as part of remuneration", meaning that an employee could not be entitled to them when she was not entitled to her monthly salary. The position would be different if the vouchers were provided as a benefit "additional to salary", the judge said.

"Though the phrase [salary sacrifice] is in common use, and is referred to by that colloquial description in the legislation … it is something of a misnomer," said Mr Justice Langstaff. "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 within the employee's pay packet, in order to purchase vouchers to the value of the salary utilised."

"The continued provision of vouchers during maternity leave both produces a windfall benefit for [an employee] who is in such a scheme but also - more importantly - imposes a cost upon the employer ... If entering such a scheme had the consequence that once employees became pregnant the employer would face a cost beyond that it would already face by provision of statutory maternity pay, it would have the effect of discouraging employers from offering such a scheme ... We do not think that parliament can have intended this consequence," he said.

However, employment tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com, was unconvinced by the EAT's reasoning. He said that it was possible that the EAT had misunderstood the tax issues underpinning salary sacrifice schemes.

"The effect of salary sacrifice is that the employee is now only entitled to the non-cash benefit that results from the variation - it isn't just a 'diversion' of the original, as the EAT judge found in this case," he said. "If that were the case it wouldn't be a valid sacrifice in the first place. So, logically, I can't see why the position should be any different to the situation where the vouchers are provided as an additional benefit."

The case had been brought by Laura Donaldson, who had argued that it was discriminatory of her employer, Peninsula Business Services, to require her to agree to suspension of the vouchers during her maternity leave as a condition of her joining the scheme. Donaldson had wished to join the scheme while she was pregnant, but was not allowed to do so when she refused to agree to this condition.

The scheme, which was operated by a third party childcare voucher company, provided vouchers through a salary sacrifice arrangement, paid for from the employee's basic salary before tax and national insurance contributions. An employee on maternity leave is entitled by law to "the benefit of all of the terms and conditions of employment which would have applied if she had not been absent", with the exception of any remuneration that would normally have been due to her in the form of wages or salary.

Finding in favour of Donaldson, the original employment tribunal had relied on guidance produced by HM Revenue and Customs (HMRC) which states that employees remain entitled to any non-transferrable non-cash benefits during ordinary maternity leave and additional maternity leave. However, the EAT said that it could not find any legal basis for this guidance, and instead came to its decision based on the contents of the 1999 Maternity and Parental Leave Regulations.

"Upon a proper interpretation of the application of those regulations, the guidance was in error, for provisions as to remuneration were to be excluded, and the benefit in the present case was not one provided over and above the amount of unadjusted normal remuneration," said Mr Justice Langstaff.

This would not have been the case had the vouchers been provided as an additional benefit, over and above the employee's salary, he said.

"There are many cases in which an employer will provide vouchers as a benefit additional to salary," he said. "In such cases, Regulation 9 of the 1999 Regulations requires that vouchers continue to be supplied during maternity leave."

"It does not matter that the employee concerned may be said not to have the same need to pay for childcare during the period of maternity leave, since she is likely to be readily available to provide some care for her other children, if any, as well as her baby, at the time: if she does not use them during and shortly after childbirth, there is nothing to prevent such vouchers being kept for later use."

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