Baby and coin.

Many employers provide childcare vouchers through a salary sacrifice scheme. Put simply the employee agrees to a variation to their contract terms, reducing their salary in order to receive the vouchers.

It has the advantage of favourable tax treatment and the laudable aim of enabling more women with young children to remain in or return to the workplace.

However, the interaction between such schemes and an employee’s rights whilst on maternity leave has caused many employers problems.

Employees on maternity leave do not have the right to continue to receive their normal pay, but do have the statutory right to receive all non-cash benefits.

The big question has been whether child care vouchers should be regarded as pay or non-cash benefits.

The view of HMRC has consistently been that childcare vouchers are non-cash benefits rather than ‘remuneration’, even if they have been provided by way of salary sacrifice.

The result has been that the employee on maternity leave who was in receipt of just SMP was still entitled to the childcare vouchers despite not sacrificing any pay. It was a windfall for the employee, but added considerable additional cost for employers who had to fund the childcare vouchers throughout the whole maternity leave period.

However a decision today[1] in the Employment Appeal Tribunal has cast doubt on the correctness of this approach and the HMRC interpretation.

The facts of the case were that the employer had offered employees the opportunity to join a salary sacrifice scheme in order to receive childcare vouchers but on condition that they agree to leave the scheme during maternity leave. The employee objected to this and brought claims that this was discriminatory on grounds pregnancy and maternity.

The Employment Appeal Tribunal has dismissed the claims. It was held that there was nothing to prevent the employer from excluding the employees during maternity leave from the scheme. It was a voluntary scheme that employers could choose whether to offer.

Importantly, it regarded that the reality of the salary sacrifice situation was that the employee agreed to divert her salary for the purpose of buying child care vouchers. As it was a diversion not ‘sacrifice’ of salary it still constituted pay rather a benefit above and beyond wages and salary. This would mean that under statute there was no continuing obligation for employers to provide childcare vouchers to an employee during maternity leave.

This is a key decision for employers representing the first appellate court guidance regarding the status of childcare vouchers during maternity leave and in practical terms it could lead to significant cost savings.

This post was edited by Chris Davies. For more information, emailblogs@gateleyplc.com.

[1] Peninsula Business Services v Donaldson


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.