We frequently receive queries from clients about what happens to childcare vouchers provided via a salary sacrifice scheme during maternity leave – are they a benefit that must continue to be provided or can they lawfully be discontinued?
Needless to say, as with anything to do with the rights of women during maternity leave (I’m thinking bonuses, bank holidays, etc.) this is a complicated area and there has been much debate on this issue. The prevailing view, however, has been that childcare vouchers are a benefit and must therefore continue to be provided during maternity leave (and adoption and shared parental leave, for that matter).
If we take women on maternity leave, the legislation makes it clear that they are entitled, during any period of leave, to the benefit of all of the terms and conditions of employment which would have applied if they had not been absent, with the exception of “remuneration” which is defined as any sums payable by way of wages and salary. In other words, a woman is not entitled to receive her normal wages and salary (as these are replaced by SMP or contractual maternity pay, or both), but she is entitled to continue to receive benefits such as private healthcare, paid holiday, the use of a company car (if provided for personal as well as business use), etc.
When it comes to childcare vouchers, the key question therefore is whether they constitute remuneration or a benefit. Up until recently there has been no case law on this issue and most employers have proceeded (sometimes reluctantly) on the basis that childcare vouchers provided via a salary sacrifice scheme are benefits that must continue to be provided. They were supported in this approach by HMRC’s Guidance entitled “Statutory maternity leave – salary sacrifice and non-cash benefits” which said that contractual non-cash benefits such as childcare vouchers provided under a salary sacrifice scheme “must continue to be provided” during maternity leave.
This week the EAT has had an opportunity to consider this question in Peninsula Business Services Ltd v Donaldson. In this case Ms Donaldson brought various claims against her employer, Peninsula, after it said she would only be entitled to participate in its salary sacrifice scheme if she agreed that during periods of maternity leave her right to receive childcare vouchers would be suspended and her salary payments would revert to normal, i.e. the pre-variation position. As Ms Donaldson was pregnant at the time she wanted to enter the scheme she objected to this pre-condition and claimed that Peninsula’s conduct amounted to unlawful discrimination on the grounds of pregnancy and maternity, indirect sex discrimination and an unlawful detriment because she had sought to take maternity leave.
At first instance the Tribunal upheld her complaints. The Employment Appeal Tribunal has, however, taken a different view and in doing so has caused a bit of a stir.
For starters, the EAT said that HMRC’s guidance that childcare vouchers “must continue to be provided” was wrong and had no legislative force. It referred in rather scathing terms to the Guidance having been drafted by some “unknown official” and, whilst clear and “cosy”, was over simplistic and not a proper basis for decision making in the courts.
The EAT took the view that salary sacrifice schemes do not provide a benefit instead of or in addition to salary, but are rather a “diversion” of salary from the pay-packet to the voucher provider. As such, childcare vouchers provided via such schemes should be regarded as part of remuneration and do not therefore have to be continued during maternity leave (and presumably not during adoption leave or shared parental leave either, as the wording in the legislation is the same). The EAT said that the employer’s approach in this case was not unlawful and the employee’s claims were dismissed.
How should employers respond to this decision? Is it time to rush out and put a stop to the provision of childcare vouchers via salary sacrifice during maternity leave? After all, for some employers this could involve a considerable cost-saving. Possibly, but there are a number of reasons why employers might wish to take a step back and adopt a more considered approach to this issue, not least whether any financial savings to be made will be outweighed by the goodwill that will be lost if they are removed.
Yes, we do now have EAT authority which says that discontinuing childcare vouchers via salary sacrifice is not unlawful, but this decision turned largely on the EAT’s understanding of how a salary sacrifice scheme operates and even it acknowledged that it was not confident it had been referred to all the relevant legislative provisions. It said it expressed the conclusions which it had come to “tentatively” and you don’t often see Judges being so cautious. As the employee in this case was unrepresented and did not appear in person, the EAT had to rely on the evidence provided by the employer’s barristers and the experience of the lay members, none of whom were tax experts. The EAT’s findings may therefore be subject to challenge in the future.
The EAT said that it could not have been Parliament’s intention to require employers to continue providing vouchers “at a time when there was no salary that could be sacrificed in respect of them”. From speaking to my tax colleagues, this would appear to be a misunderstanding of the nature of salary sacrifice. It is misleading to think of salary sacrifice as an ongoing deduction from salary. The EAT treated the scheme as one of “diversion” of salary rather than “sacrifice”. This is actually what has to be avoided for a salary sacrifice scheme to work on a tax level – if it is simply a diversion of salary then HMRC will treat that salary as taxable even if it is effectively applied towards paying for a benefit.
In any event the benefit of this decision might be short lived, as the Government is introducing a new tax-free childcare voucher scheme in “early 2017” which will not involve any form of salary sacrifice.
This decision only affects childcare vouchers provided via a salary sacrifice scheme – if such vouchers are provided as a benefit in addition to salary they will need to continue to be provided during maternity leave, as with other benefits.