Employees on maternity leave are not exempt from being dismissed or selected for redundancy in a genuine redundancy situation where there is no suitable alternative vacancy.
Once the dismissal takes effect, the maternity leave period automatically comes to an end. However, employers should be aware that the right to receive statutory maternity pay (SMP) survives termination of the contract. Provided the employee fulfils the conditions for payment of SMP, she will be entitled to receive SMP regardless of her departure for any reason, including resignation, misconduct and redundancy.
While the vast majority of SMP can be reclaimed by employers through the tax system, two recent tax tribunal cases highlight why employers need to bear in mind SMP entitlement when negotiating exit packages for pregnant employees and those on maternity leave.
Our employment and equalities experts consider the SMP tricky issues, including 'bonus babies', 'offsetting' and agreeing exit packages.
Entitlement to SMP
A pregnant employee with:
- 26 weeks' continuous service into the 15th week before the expected week of childbirth (EWC);
- average weekly earnings above the lower earnings level (currently £112 per week);
- is still pregnant (or recently given birth) 11 weeks before the EWC
is entitled to SMP payable for 39 weeks.
SMP is paid
- for six weeks at 90 per cent of her average weekly earnings (with no upper limit); followed by
- 33 weeks at a flat rate currently £139.58 or 90 per cent of her average weekly earnings if that is less than the flat rate.
To calculate the average weekly earnings, the relevant period is the eight weeks before the qualifying week being the 15th week before the EWC.
To calculate the average weekly earnings, employers must take account of (non-exhaustive list):
- wages or salary;
- holiday pay; and
- commission, including any unusual payments such as an annual bonus.
paid in the relevant eight week period. Some payments are excluded from the calculation such as pension contributions and payments under share incentive schemes.
If the employee is eligible for a pay rise between the start of the relevant 8 week period and the end of her statutory maternity leave (SML), the SMP must be recalculated as if the pay rise had taken place at the beginning of the relevant period.
Employer reimbursement level
Employers can usually reclaim 92% of the SMP they pay by deducting it from their next payment of NI contributions, PAYE and other payments to the Inland Revenue. Employers who qualify for Small Employers' Relief can reclaim 103%.
Many employers operate enhanced contractual maternity pay schemes. A contractual obligation to pay enhanced maternity pay for the same week in which SMP is due is offset by any SMP received, i.e. SMP is not payable in addition to contractual payment. SMP can also be offset against other contractual remuneration such as contractual notice pay and enhanced contractual redundancy pay (but not against statutory redundancy pay).
The offset rule only applies on a week-by-week basis. For example, it would be unlawful for an employer to pay enhanced contractual maternity pay for the first 26 weeks of the pay period and then pay nothing for the remaining 13 weeks of the SMP period, even if the amount paid for the first 26 weeks exceeds the total amount of SMP due for the full 39 weeks.
THE TRICKY BITS
Dismissal before maternity leave begins
A pregnant employee dismissed before she has begun maternity leave will still be entitled to receive SMP provided she meets the qualifying conditions.
The SMP pay period will start on the earlier of the following dates:
- the Sunday of the 11th week before the baby is due; or
- the day after the baby is born.
If she leaves her employment after the start of the 11th week, then the pay period starts the day following the day on which she left her employment.
Where the employer terminates the employee's employment before she qualifies for SMP and the employee can show that the sole or principal reason for dismissal was to avoid liability for SMP, the employer will still have to pay her SMP if she has been employed by the employer continuously for at least eight weeks.
In the sad circumstances of a stillbirth special rules apply. A woman who suffers a stillbirth occurring after 24 weeks' pregnancy remains entitled to SML and SMP. However, if a woman's pregnancy results in a miscarriage or stillbirth before the end of the 24th week of pregnancy she will not be entitled to SML or SMP. If the child survives only for a very brief time this constitutes a live birth. In such a case, the birth would attract SML and SMP entitlement even if the child was born (and died) before 24 weeks of pregnancy.
For the purposes of SML and SMP, it is the birth mother who is regarded as the child's mother. Provided they meet the qualifying conditions, surrogate mothers and those who give their child up for adoption are entitled to SML and SMP regardless of whether or not they continue to have contact with the child following birth.
The inclusion of annual bonus payments for the purposes of calculating "average weekly earnings" can have a significant effect on the amount of SMP an employee receives during the first six weeks of maternity leave.
The relevant regulations define 'earnings' as including "any remuneration or profit derived from a woman's employment".
The recent case of Campus Living Villages UK Ltd v HMRC and Sexton, provides a useful illustration.
The relevant dates as regards Ms Sexton were:
- employed since 1 July 2010;
- £44,077 annual bonus under employer's discretionary scheme received 15 October 2014;
- EWC 28 January 2015 (baby born 5 February);
- dismissed as redundant on 26 December 2014
The employer argued the October bonus payment should not be taken into account in calculating the first six weeks of SMP (90% of average weekly earnings). The employer also argued that the bonus payment related to the previous year and so could not be part of Ms Sexton's 'normal weekly earnings'.
The First Tier Tax Tribunal rejected the employer's arguments and held:
- the October bonus payment clearly fell within the relevant period' - being eight weeks ending with the 15th week before the EWC of 28 January.
- 'earnings' include any remuneration or profit derived from a woman's employment. Irregular or one-off payments including bonuses therefore count as earnings. Ms Sexton's contractual right to participate in the employer's bonus scheme 'derived from her employment'.
- there is no requirement that the pay in the relevant period must be 'normal' in the sense of the usual amount. The regulations make it clear that all payments, whether usual or not, are included in the earnings for the purpose of the calculation.
PILON clauses and offsetting
Can SMP be offset against a payment in lieu of notice (PILON) on termination of employment? If contractual - yes.
In Ladiverova v (1) HMRC (2) Chokdee, the First Tier Tax Tribunal confirmed that a PILON payment made pursuant to a term in the contract of employment constitutes contractual remuneration. As such, it should be set off against the employer's liability to pay SMP.
In this case, the employee was not entitled to payments of SMP in addition to the contractual PILON payments already received in respect of the weeks to which the PILON related. However, the employer was not entitled to offset the total contractual PILON paid against the total SMP due as offset only applies on a week-by-week basis - in this case £2,807.64 of the £3,068.80 PILON paid could be offset.
The decision is limited to the treatment of a contractual PILON payment. Whether or not a non-contractual PILON is subject to a similar offset will have to be decided in a future case. It is certainly arguable that a non-contractual PILON amounts to 'damages' for breach of contract and not 'contractual remuneration'; which can be offset.
Exit agreements and SMP
Can SMP be included in a settlement agreement? No.
In the Sexton case, Ms Sexton brought employment tribunal claims for unfair dismissal and pregnancy dismissal in relation to her selection for redundancy. Following conciliation by the Advisory, Conciliation and Arbitration Service (ACAS), the claim was settled in February 2015 for the agreed sum of £60,000, with the Settlement Agreement stated that the amount was:
In August 2015, HM Revenue & Customs (HMRC) issued a decision that Ms Sexton was still entitled to SMP of just over £42,000 (see bonus baby above) from the employer. The employer argued that the additional sum was not payable as SMP had already been taken into account as part of the Settlement Payment. The tax tribunal rejected the employer's arguments:
- women who meet the qualifying conditions have an absolute right to the payment of SMP. Under section 164(6) of the Social Security Contributions and Benefits Act 1992, it is not possible for a woman to contract out of that right. Any agreement which purports to exclude the right to SMP is void to that extent.
- while the Settlement Payment may have included an element in respect of maternity rights, there was no indication that any part of the payment was in respect of SMP. Also if an element for SMP was included that element would be subject to National Insurance Contributions (NICs) contrary to the wording of the agreement.
- while it was unfortunate that the ACAS officer did not advise correctly in relation to the impact of the agreement on SMP, ACAS is independent of HMRC and ACAS's acts or omissions could not affect HMRC's correct application of the law.
As most employers can reclaim 92% of the SMP they pay by deducting it from their next payment of NI contributions, PAYE and other payments to the Inland Revenue, why should employers be concerned?
- 8 per cent of SMP
may still amount to a sizable sum where a large annual bonus
payment must be factored in the SMP
In the Sexton case, the employer clearly believed that in offering £60,000, this would extinguish its SMP liability as well as injury to feelings and unfair dismissal compensation. By not appreciating the effect the October bonus payment had on SMP, the employer vastly underestimated the SMP payable.
- SMP liability cannot
be negotiated and settled under a Settlement Agreement, even under
the auspices of ACAS (COT3).
In the Sexton case, designating a portion of the settlement payment as 39 weeks of SMP in the settlement agreement would not have prevented the full amount of SMP being payable - a lower SMP payment could not be agreed . However, the employer would have at least been able to offset the allocated sum from the total SMP payable. It no doubt would have influenced its bargaining positon and sums offered in settlement of the other aspects of the claim.
- Understand the offset rules and tax implications. SMP can only be offset against contractual remuneration on a week-by-week basis. Where a qualifying employee is dismissed during the SMP pay period, it would be unusual for a contractual notice period to extend to 39 weeks. PILON payments can only be offset if contractual. Failure to operate SMP correctly could result in a penalty charge by HMRC of up to £3,000. Settling a matter under the auspices of ACAS is not a get out of jail free card as far as HMRC is concerned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.