Maternity Rights - A Guide

The legislative changes affecting women due to give birth on or after 5th October 2008 have blurred the distinction between Ordinary Maternity Leave (OML) and Additional Maternity Leave (AML) and have put the spotlight on what pay and benefits must be provided to employees on maternity leave.

To help employers understand the recent changes and what they must now provide, the Employment team at CMS Cameron McKenna has created a guide to Maternity Rights covering the following key issues:

1. Statutory Maternity Leave
2. Statutory Maternity Pay
3. The meaning of "Remuneration"
4. Pension Entitlements
5. Salary Sacrifice Schemes
6. Holiday Accrual
7. Pay Rises
8. Bonuses
9. Sick pay
10. Seniority on return to work
11. Job on return to work

Postscript - European Commission proposals (October 2008)

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The legislative changes affecting women due to give birth on or after 5th October 2008 have blurred the distinction between Ordinary Maternity Leave (OML) and Additional Maternity Leave (AML) and have put the spotlight on what pay and benefits must be provided to employees on maternity leave.

To help employers understand the recent changes and what they must now provide, the Employment team at CMS Cameron McKenna has created a guide to Maternity Rights covering the following key issues:

1. Statutory Maternity Leave
2. Statutory Maternity Pay
3. The meaning of "Remuneration"
4. Pension Entitlements
5. Salary Sacrifice Schemes
6. Holiday Accrual
7. Pay Rises
8. Bonuses
9. Sick pay
10. Seniority on return to work
11. Job on return to work

Postscript - European Commission proposals (October 2008)

1. Statutory Maternity Leave

Background

Maternity leave is divided into two distinct periods: Ordinary Maternity Leave (OML) and Additional Maternity Leave (AML). All pregnant employees who comply with certain notification conditions qualify for 26 weeks' OML, regardless of length of service. Any employee whose expected week of childbirth (EWC) has fallen on or after 1 April 2007 has also qualified for 26 weeks' AML. Employees with an EWC before that date only qualified for AML if they had completed 26 weeks' continuous employment with their employer by the end of the 15^th week before their EWC.

Until the most recent legislative changes, which only affect women with an EWC on or after 5 October 2008, an employee had significantly fewer statutory rights during AML than during OML. During OML, an employee was entitled to benefit from the terms and conditions of her employment that would have applied to her had she been working, except for any terms providing for her "remuneration". During AML, however, an employee was only entitled to:

• the implied obligation to preserve mutual trust and confidence;
• disciplinary and grievance procedures;
• the terms and conditions of her employment that related to notice of termination; and
• any terms relating to contractual redundancy.

In EOC v Secretary of State for Trade and Industry [2007] IRLR 327, the High Court held that preventing an employee on AML from benefiting from the same terms and conditions that applied to her whilst on OML was contrary to European Sex Discrimination laws. Accordingly, the Sex Discrimination Act 1975 (Amendment) Regulations 2008 and the Maternity and Parental Leave etc. and Paternity and Adoption Leave (Amendment) Regulations 2008 were brought into force, providing that women with an EWC on or after 5 October 2008 would benefit from the same terms and conditions as those available to them during OML.

Current Position

An employee with an EWC on or after 5 October 2008 is now legally entitled to all terms and conditions of her employment (except terms providing for her remuneration) for a maximum of 52 weeks' maternity leave. Terms and conditions for these purposes include matters "connected with" an employee's employment, whether or not they arise under her contract of employment (s.71(5) Employment Rights Act 1996 (ERA)). Therefore, an employee will continue to be entitled to benefits such as the accrual of annual leave and health club membership during the entirety of her maternity leave. Determining which terms and conditions of employment continue during maternity leave and which do not is a complex and uncertain area, revolving around the term "remuneration" that is found in s.71(5)(b) ERA and defined in Reg.9(3) of the Maternity and Parental Leave etc. Regulations 1999 (MPL Regulations) as "only sums payable to an employee by way of wages or salary."

Historically, women could not accrue continuous employment during AML for the purpose of calculating any contractual entitlement based on length of service (although they could for the purpose of calculating statutory entitlements, such as a statutory redundancy payment). Women with an EWC on or after 6 April 2003 were subsequently able to accrue continuous employment during AML for the purpose of calculating contractual entitlement, but were not, unlike women returning from OML, entitled to the same seniority, pension and similar rights as they would have been if they had not been absent. Amendments to the MPL Regulations now provide that a woman with an EWC on or after 5 October 2008, who returns to work after AML, is entitled to all but one of the same rights as a woman who returns after taking only OML. The harmonisation of women's rights on return to work after periods of OML/AML has not extended to the right to return to the same job, which still only applies to those returning from OML.

2. Statutory Maternity Pay

Whereas all employees now qualify for 52 weeks' maternity leave (providing they comply with minimal notification conditions), an employee must satisfy different qualifying criteria before being entitled to statutory maternity pay (SMP) during her maternity leave. An employee must:

• have been in continuous employment for at least 26 weeks at the end of the 15^th week before her EWC and be still employed during that week;
• give her employer at least 28 days' notice (or as much as reasonably practicable) of the date she intends her SMP to start;
• supply a certificate confirming the date of her EWC;
  still be pregnant 11 weeks before the start of her EWC or have already given birth;
• have stopped working; and
• her normal weekly earnings must not be less than the Lower Earnings Limit for National Insurance purposes.

Providing an employee meets the above conditions, she will be entitled to SMP for a maximum of 39 weeks. For the first six weeks, she will be paid at the "earnings-related rate" (90% of the employee's "normal weekly earnings"); and for the remaining 33 weeks, she will be paid at the "prescribed rate" (set by the government for each tax year, currently £117.18 per week) or the "earnings-related rate", whichever is lower.

3. The meaning of "Remuneration"

Reg.9 of the MPL Regulations defines remuneration as "only sums payable to an employee by way of wages or salary." This definition is highly significant, because an employer must continue to provide any benefits that are deemed to fall outside this definition for the duration of statutory maternity leave. The variety of benefits that employers must continue to provide is considerable. They include mobile phones, company cars provided to employee for non-business use, medical, dental and travel insurance, non-cash non-transferable vouchers and the accrual of annual leave. Employers need not continue to provide "cash benefits" during maternity leave, which are treated as remuneration. These include cash allowances (e.g. housing allowance and fuel allowance) and vouchers that have a transferable cash value, such as luncheon vouchers.

The following are areas of particular debate in relation to what pay and benefits an employer should provide during maternity leave.

4. Pension Entitlements

Although the issue of pension entitlements whilst on maternity leave continues to be the subject of much debate, it seems that as a basic rule of thumb, while a woman is receiving any contractual or statutory maternity pay, she should continue to accrue pension benefits as normal.

This basic rule is derived from the Social Security Act 1989 (SSA). An employee on maternity leave is entitled to pension benefits under the SSA if she is receiving maternity pay (statutory or enhanced). Paragraph 5 of Schedule 5 SSA provides that the employer of a woman on paid maternity leave is obliged to maintain her pension benefits to the same extent as if she had still been working. If the pension scheme is contributory, e.g. the employer matches contributions up to a certain percentage of salary, the employee need only contribute a percentage of her maternity pay; however, her employer must contribute the same percentage but based on the salary the employee would have earned, had she been working. If the woman is entitled to receive neither SMP nor enhanced maternity pay, effectively taking unpaid maternity leave, the provisions of the SSA do not apply; the employer is under no obligation to maintain pension benefits.

In relation to the impact of recent legislation on this basic rule of thumb, the Department of Business, Enterprise and Regulatory Reform (BERR) has said that "The [MPL Regulations], amended as a consequence of the SDA amendments, imposes no additional requirements on employers during additional maternity leave other than those already imposed by Schedule 5 to the [SSA] and will therefore not extend pension contributions through unpaid AML."

5. Salary Sacrifice Schemes

A salary-sacrifice scheme is an agreement between the employer and employee whereby the employee gives up the right to some of their cash pay and the employer provides a non-cash benefit (e.g. childcare vouchers). BERR advises that "even though the employee may agree to reduce the amount of cash wages in order to receive [the non-cash benefit], there is no legal connection between the two."

There is much debate as to whether employers should continue to provide the non-cash benefit during maternity leave or, because it is the result of a salary-sacrifice scheme, does it instead fall within the definition of "remuneration". BERR is quite clear in its guidance that contractual non-cash benefits must continue to be provided during maternity leave, regardless of any salary sacrifice arrangement: "Having considered the case law in this area, we concluded that childcare vouchers were not remuneration. Therefore, this is a contractual benefit that must continue during OML and ... AML."

The entitlement to non-cash benefits continues to apply during maternity leave, regardless of whether or not the employee is receiving any salary that could be sacrificed. In any case, although lawful deductions (such as PAYE and occupational pension contributions) can be made from SMP, SMP cannot be sacrificed under any circumstances. The Employment Lawyers Association questions the test applied by HMRC in deciding whether benefits, such as childcare vouchers, are "sums payable to an employee by way of wages or salary." In their opinion, HMRC has placed too much emphasis on the cash nature and transferable value of the benefit. These are not the only factors to be considered when determining whether a benefit constitutes sums payable by way of wages or salary. Arguably, childcare vouchers, for example, could be sums payable by way of wages or salary, without actually being wages or salary.

The current position appears to put the employee in an advantageous position. However, being party to a salary sacrifice scheme has a negative effect on the amount of maternity pay received. SMP entitlement is calculated on gross earnings that are subject to Class 1 National Insurance Contributions (NICs) during a defined period of eight weeks (constituting the employee's average weekly earnings (AWE)). Childcare vouchers, by means of example, are currently exempt from tax and NICs up to the value of £55 per week. Any excess vouchers are chargeable to tax and Class 1 NICs and would calculate towards the employee's AWE; however, any vouchers up to £55 per week would not be included in the calculation. This would result in a lower entitlement to SMP or could lower a woman's AWE below the Lower Earnings Limit and consequently exclude her from qualifying for entitlement to SMP at all.

6. Holiday Accrual

Most contracts of employment provide for the accrual of annual leave and, since all contractual terms now subsist during OML and AML, annual leave will continue to accrue during these periods. The difficult issue is when a woman can take her accrued annual leave. The ECJ held in Merino Gomez v Continental Industries del Caucho SA (Case C-342/01) that a woman is entitled to take the paid holiday that she has accrued during a period other than her maternity leave. In the ECJ's view, maternity leave is intended to protect a woman's health during and after pregnancy and her relationship with her child in the period immediately after birth. Given the different purposes of maternity leave and annual leave, a woman must be able to take annual leave during a period that is not a period of maternity leave (i.e. she cannot take two types of leave simultaneously, effectively sacrificing one type). In Federatie Nederlandse Vakbeweging [2006] ECR I 3423, the ECJ suggested that the aggregation of several periods of leave at the end of a leave year may make carrying forward all or part of annual leave into the following year inevitable.

Women are often better off financially while on annual leave (on full pay) than while on maternity leave (on maternity pay or unpaid) and may, indeed, want to take annual leave while they are simultaneously on maternity leave: effectively waiving the right to take holiday in return for financial benefit. However, following the opinion given by the Advocate General in Stringer and others v Her Majesty's Revenue and Customs (C-520/06), it is suggested that such a waiver would be incompatible with European Community law, since it would frustrate the aim of article 7 of the European Working Time Directive and breach article 7(2), which expressly provides that the minimum period of paid annual leave may not be replaced by pay in lieu.

These ECJ decisions potentially conflict with Reg. 13(9)(a) of the Working Time Regulations 1998, which does not permit employees to carry over statutory annual leave that they are unable to take in the relevant leave year. However, given the ECJ's stance, it is suggested good practice to allow an employee to take annual leave on return from maternity leave, to compensate for any annual leave she has been unable to take due to being on maternity leave. Alternatively, an employee may wish to use up her holiday entitlement for the leave year in which her maternity leave commences, before starting her maternity leave. This is not, however, a fail-safe plan, as the woman could give birth at any time. It is not possible to take annual leave and maternity leave at the same time; so if an employee gives birth whilst on annual leave, her annual leave will stop and her maternity leave will commence, leaving the employee with unused holiday entitlement.

7. Pay Rises

For the purpose of calculating entitlement to SMP, the ECJ held in Alabaster v Woolrich plc C-147/02 [2004] IRLR 486 (ECJ) that a pay rise which is, or would have been, awarded after the start of the eight week reference period, but before the end of statutory maternity leave (a maximum of 52 weeks), must be taken into account when calculating SMP, as if the pay rise had taken effect at the start of the reference period. This means that, even if the pay rise was awarded in the 52nd week of maternity leave (i.e. after the woman's 39 weeks' entitlement to SMP had expired), she would still be entitled to SMP at the revised rate from the very first day of her leave and a top-up payment would have to be made.

Whereas the ECJ's judgement leaves the position in respect of entitlement to SMP in no doubt, the position as regards entitlement to enhanced maternity pay is less clear. Arguably, the Alabaster principle would apply to a contractual scheme that calculates enhanced maternity pay purely on what the employee was paid before the start of her maternity leave. In this case, any pay rise would need to be included in any elements of pay taken into account when calculating SMP entitlement, and any increase in such entitlement backdated from the start of her maternity leave. Nevertheless, Alabaster only dealt with statutory entitlement to SMP ("income guaranteed by national law"). It is possible that a contractual scheme could explicitly state that pay rises during maternity leave will be applied to maternity pay from the date the pay rise takes effect and no backdating would apply; circumventing the Alabaster principle in so doing.

8. Bonuses

For an employee on maternity leave to be entitled to a bonus, the bonus must fall outside the definition of "remuneration" (i.e. "sums payable by way of wages or salary"). Even discretionary bonuses may fall within the definition of "remuneration", and therefore not be payable during maternity leave, if they are, in practice, paid on a regular basis to all eligible employees through the normal payroll (see Hoyland v Asda [2006] SCIH 21 XA43/05, 5 April 2006). A bonus would still be payable during maternity leave, if it was, in effect, a retroactive payment for work undertaken by the employee prior to her maternity leave. Following the decision in Lewen v Denda [2000] IRLR 67, employers are allowed to make a pro-rata reduction to a bonus to take account of any time the employee has been away from work on maternity leave (although they are not permitted to make such a reduction in respect Compulsory Maternity Leave).

It is arguable that an employer need not pay a bonus to an employee on maternity leave if the only condition of the bonus is that the employee is in "active service" at time of payment (e.g. a bonus paid as incentive for future work or loyalty to the firm). However, s.1(2)(e)(iii) Equal Pay Act provides that a bonus must be paid to an employee when it would ordinarily have been paid, but for the employee having taken statutory maternity leave, in so far as it relates to, amongst other things, time after she returns to work following maternity leave. This could, therefore, entitle an employee to a bonus paid as an incentive for future work.

9. Sick Pay

The recent judgement in Sutcliffe v Department of Work and Pensions [2008] All ER (D) 171 (Feb) held that sick pay forms part of an employee's "remuneration" for the purposes of maternity leave, and is, therefore, excluded from the benefits available to employees during maternity leave.

10. Seniority on Return to Work

The "seniority" of an employee returning from maternity leave is now to be treated as if she had not been absent. Case law provides little guidance on the meaning of "seniority". If relating simply to service, any calculation of service-related benefits would now take into account the entire period of maternity leave (for example, where extra holidays are awarded according to length of service). The issue is more complicated if "seniority" is to relate to experience; for example, if periods of maternity leave should count towards an employee's experience, if experience is based on length of time (for example, the pay and charge-out rate of a solicitor). Arguably, a solicitor who has taken, say, three periods of 12-months' maternity leave over the course of five years would not be as "experienced" as a solicitor who has been continuously working for those five years, and, accordingly, a client should not be charged the same rate for both. BERR offered little guidance on this point.

11. Job on Return to Work

An employee who takes only OML, is entitled to the "job in which she was employed before her absence" and the terms of her employment must be "not less favourable than those which would have been applied if she had not been absent" (Regs. 18-18A MPL Regulations). The job must be within "the normal range of variability which the [employee] could reasonably have expected" (Blundell v Governing Body of St. Andrew's Roman Catholic Primary School and another [2007] IRLR 652). Even small employers must comply with this requirement.

An employee who decides to take AML in addition to OML is entitled to fewer rights on return to work. Employers have the option of offering a woman a suitable alternative job if it is "not reasonably practicable for the employer to permit her to return to [the same] job", but her terms and conditions of employment must not be less favourable than those which would have been applied if she had not been absent (Reg.18-18A MPL Regulations). However, following the Labour Party's National Policy Forum in July 2008, the government is reportedly considering extending the rights of employees returning to work after AML to the mirror the rights afforded to women returning after OML.

Significant Periods of Maternity Leave

Given that there now remains only one difference between the rights of employees during OML and AML (entitlement to return to the same job), and this difference is itself likely to be eradicated, it is proposed that less emphasis should now be placed on the original distinction between OML and AML. This has become more evident since entitlement to SMP was extended from 26 weeks to 39 weeks (i.e. no longer in line with OML). The following are considered more significant periods of maternity leave that should now instead be distinguished.

Two weeks' Compulsory Maternity Leave

Cannot be taken into account when making pro-rata calculations in respect of bonuses.

39 weeks' Statutory Maternity Pay

An employer must maintain an employee's pension benefits during any period of paid maternity leave.

52 weeks' Statutory Maternity Leave

Two weeks' of which will constitute Compulsory Maternity Leave. Employee to benefit from the terms and conditions of her employment that would have applied to her had she been working, except for any terms providing for her "remuneration."

Nevertheless, regardless of the statutory position, the dichotomy of OML and AML is unlikely to disappear overnight, given that so many employers give enhanced contractual maternity rights during the first 26 weeks of maternity leave, corresponding to the period of OML, and fewer enhanced rights during the subsequent 26 weeks, corresponding to the period of AML.

Postscript: European Commission Proposals

The European Commission's recently published proposals to amend the Pregnant Workers Directive (92/85/EEC) will have minimal impact in the UK. The maternity provisions in the UK are already more generous than most of those proposed by the European Commission. It is only in minor areas that changes may be made; for example, the period of compulsory leave may be increased from two to six weeks, to be taken immediately after childbirth.

The European Commission's proposal to repeal and replace the Equal Treatment of Self Employed Workers Directive (86/613/EEC) may be more significant, as it provides equivalent access to maternity leave for self-employed women as for employees. However, this is only on a request basis. Other aspects, such as the provision of replacement services during a self-employed worker's maternity leave, require greater clarification before effective implementation.

These proposals now need to be discussed and agreed by the European Parliament and Member States, so any UK legislative change is unlikely to happen for some time.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 29/10/2008.