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We have an answer to the question about pension contributions for employees who are not entitled to any paid maternity leave.   The contradictory legislation for adoption leave is not even mentioned and we still disagree with BERR’s interpretation of the term “remuneration”.

A detailed article in last week’s newsletter highlighted three issues that had been put to the Department for Business, Enterprise and Regulatory Reform (BERR) in connection with the new maternity and adoption leave rules that apply to employees who are expecting a baby on or after 5 October, or a child to be placed for adoption after that date.

A written response to our preliminary questions was received from a BERR official on 3 September.  For clarity, the following explanation of the points made by BERR uses the same terminology as was used in last week’s article.

1. The provisions of Schedule 5 of the Social Security Act 1989 do apply to employees who have no entitlement to any employer payments during leave (i.e. no SMP or occupational maternity pay).  As a result, the Schedule 5 restriction paragraph, which limits the period for which an employer is required to pay pension contributions during additional maternity leave to the period for which payment is made, applies to such employees.  There was no payment so there is no entitlement to pension contributions.  They are entitled to full employer pension contributions during ordinary maternity leave but none at all during additional maternity leave.Although not referred to in the response, the same situation applies with regard to pensionable service rights.  If there are no payments made during additional maternity leave, the period of additional leave does not count towards pensionable service.
2. No reference is made at all to the omission of the Schedule 5 restriction paragraph from Regulation 19 of the Adoption Regulations.  It seems that the omission, and its implications, have not yet been noticed by BERR.  The response incorrectly states that the Schedule 5 restriction paragraph included in Regulation 27 has the effect of limiting pension contributions to periods of paid adoption leave.  Regulation 27, however, is about continuity of pensionable service on return from adoption leave.  It is Regulation 19 that applies to pension contributions.The BERR response also states: “However, consideration is being given to clarifying the law by a further amendment to regulation 9.”  The reference here is to Regulation 9 of the Maternity Regulations, which does include the Schedule 5 restriction paragraph.  There is no indication of what exactly BERR believes needs to be clarified in Regulation 9.
3. BERR is adamant that cash allowances, whether for car, housing or any other purpose, are “remuneration” and there is, therefore, no entitlement to continued payment during maternity or adoption leave.  Two reasons are given:
   1. Although car and housing allowances are provided as an alternative to non-pay benefits, the employee has the freedom to choose how the allowances are spent.  They may not necessarily be used for their intended purpose.
   2. Cash allowances are included in the “earnings” used to calculate the average earnings that govern the level of SMP payments during the first six weeks of the maternity pay period.  If the cash allowance is paid during maternity leave, the employee effectively receives it twice during the first six weeks of payment.

   With regard to point 1, it is true that a cash allowance may be used for other purposes.  That, however, is beside the point.  The definition of “remuneration” in section 6 of the Sex Discrimination Act 1975 limits “remuneration” to money payments by way of wages or salary  which are not benefits regulated by the employment contract.  How an employee chooses to spend an allowance that is provided as a benefit regulated by the contract is not a part of the definition.

   There are two problems with argument 2.

   • First, there is only a “double payment” during the first six weeks of maternity leave.  For the remaining 33 weeks of the maternity pay period and for the full 39 weeks of the adoption pay period, only the standard rate of SMP or SAP, or less, is paid, at a rate that is always below the employee’s basic rate of pay.
   • Second, the “double payment” problem is not caused by our interpretation of the definition of “remuneration” but by the definition of “earnings” in social security law, i.e. in Regulation 20 of the Statutory Maternity Pay (General) Regulations 1986 and Regulation 39 of the Statutory Paternity Pay and Statutory Adoption Pay (General) Regulations 2002.

   Although certain payments are excluded from the “earnings” used to calculate (1) entitlement to SMP and SAP, and (2) the SMP rate for the first six weeks (as listed in Schedule 3 of the Social Security (Contributions) Regulations 2001), cash allowances paid in lieu of benefits in kind are not among them.  Anecdotally, employers are more aggrieved by the inclusion of cash allowances and bonuses in the calculation of SMP for the first six weeks, and for 92% of those inflated payments to be funded subsequently by the state, than they are for contractual allowances to continue to be paid during maternity or adoption leave.

   It would be more appropriate for the definition of “earnings” to be adjusted than for a forced interpretation of “remuneration” to be applied, simply to avoid “double payments” of SMP for six weeks.
   We now have the situation that BERR is relying on the tax law concepts of “cash benefits” and “non-cash benefits” (as explained in HMRC’s maternity leave guidance) and on the social security law definition of “earnings” to justify its interpretation of “remuneration”!

The first of the three issues raised with BERR is resolved, as explained above.  The Schedule 5 restriction on employer pension contributions and on pensionable service applies equally to employees who receive no paid maternity leave, with the result that there is no entitlement to employer pension contributions or continuity of pensionable service during additional maternity leave.

The other two issues are unresolved.  We will provide further information as it becomes available.

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The UK Payroll News is sponsored by HRD & Payroll Solutions

Written by Ian Congreave -

Filed under: Maternity/Paternity/Adoption Pay & Leave on September 14th, 2008

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Statutory Payments - October 2008 changes to maternity and adoption leave rights

Editorial for Newsletter #304