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.
Alabaster & SMP
In order to get to understand Alabaster, we recommend that you know a little about the case precedent behind it.
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:
The important thing here is to remember 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
- Luncheon vouchers exceeding 15p per day
- Home allowances exceeding £2 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 6 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.
Unfortunately, a pay increase is not specifically defined in legislation.
How can I ensure accurate calculations in light of the Alabaster ruling?
SD Worx’s Payroll Systems are equipped to help you and your team accurately pay the increases which impact Statutory Maternity Pay as a result of the Alabaster ruling and includes the ability to automatically apply the new payment rate to periods of statutory maternity already paid and any remaining period to be paid.
For more information on our payroll systems, get in touch and one of our expert consultants will be happy to help.