Childcare vouchers provided under a salary sacrifice scheme amount to remuneration and may be discontinued during maternity leave

Peninsula Business Services Ltd v Donaldson UKEAT/0249/15

Why care

Like many other employers, PBS operated a scheme which, in return for agreeing to a lower basic salary, employees received childcare vouchers to the value of the salary sacrifice, which is subject to a limit in accordance with tax legislation. The benefit to the employees, when at work and participating in the scheme, is a saving in tax and National Insurance contributions on the amount of the vouchers.

During ordinary and additional maternity leave, an employee is entitled to the benefit of all the terms and conditions of her employment that would have applied had she not been absent, except her remuneration. Remuneration is defined as “sums payable to the employee by way of wages or salary” and does not include statutory maternity pay. HMRC issued guidance to the effect that childcare vouchers are non-cash benefits rather than “remuneration”, even if they have been provided by way of salary sacrifice and so should be maintained during maternity leave.

The case

As a condition of entry to the childcare voucher scheme employees agreed that Peninsula Business Services Ltd (PBS) could suspend provision of vouchers during maternity leave, during which time PBS paid only statutory maternity pay. Ms Donaldson wanted to join the scheme but refused to do so on these terms, believing they were discriminatory. She brought tribunal claims that as she was denied the benefit of her usual terms and conditions she had suffered an unlawful detriment, and also her less favourable treatment amounted to pregnancy and maternity discrimination.

Ms Donaldson argued that childcare vouchers were required to be provided during maternity leave, as a benefit under the Maternity and Parental Leave etc. Regulations 1999 (MPL regulations) and relied on the status of the 2014 Guidance published by HMRC entitled “Statutory Maternity Leave – salary sacrifice and non-cash benefits”. This guidance states that during any period of ordinary maternity leave contractual non-cash benefits provided under a salary sacrifice scheme in lieu of sacrificed salary “must continue to be provided”. The tribunal upheld her claim, having regard to theHMRC guidance. It also noted that women on maternity leave are entitled to non-pay benefits during maternity leave in accordance with the MPL Regulations and that it must be unlawful discrimination under the Equality Act 2010 to stop a benefit during maternity leave without the employee’s agreement. It concluded that PBS had subjected Ms Donaldson to unfavourable treatment by imposing a term that she could not be a member of the childcare voucher scheme during maternity leave as a condition of joining the scheme and that the reason for this unfavourable treatment was because she was seeking to exercise her right to ordinary or additional maternity leave. The tribunal also concluded that the Claimant had also suffered a detriment because of this unfavourable treatment.

PBS appealed to the EAT which overturned the tribunal’s decision.

Childcare vouchers

The EAT identified that the key question was whether the vouchers constituted ‘remuneration’ and it held that the childcare vouchers provided under a salary sacrifice scheme amount to remuneration for the purposes of the MPL Regulations and, therefore, do not have to be provided to an employee who is on maternity leave. The EAT thought that where the vouchers are provided by way of salary sacrifice this was a diversion of salary, which the employee has earned but which is redirected prior to it being placed within the employee’s pay packet, in order to purchase vouchers to the value of the salary utilised. It noted the experience of the lay members in considering this question had been ‘invaluable’. They pointed out that to require the continued provision of vouchers during maternity leave both produces a windfall benefit for a claimant who is in such a scheme but also imposes a cost upon the employer. The EAT noted that counsel had been unable to discover any legislative basis for the HMRC guidance’s assertion that contractual non-cash benefits provided under a salary sacrifice scheme in lieu of sacrificed salary (e.g. childcare vouchers) “must continue to be provided” throughout maternity leave. In the EAT’s view, it could not have been Parliament’s intention to require employers to continue providing vouchers at a time when there was no salary that could be sacrificed in respect of them.

The EAT also found that as this matter related to terms and conditions of employment, any claims for direct or indirect discrimination would not apply and should instead be dealt with as an equal pay issue

Discrimination

The EAT also held that a term of a salary sacrifice scheme that suspends provision of childcare vouchers during maternity leave does not amount to unfavourable treatment for the purposes of a discrimination claim. Rather than subject Ms Donaldson to unfavourable treatment by the loss of a benefit, the effect of the judgment was to compel PBS to treat such employees more favourably than any other of their employees. The EAT substituted a decision that the claim should be dismissed.

The EAT also noted that held that it had no jurisdiction to consider a complaint of indirect discrimination under the Equality Act 2010 as “pregnancy and maternity” is not a protected characteristic for this section so upheld PBS’s appeal.

What to take away

The EAT remain cautious that they may not have identified all relevant provisions in connection with this issue (as no taxation specialists gave evidence), and stated that they express conclusions to which they have come “somewhat tentatively”. Their analysis was both factual but also a policy decision; by regarding the salary sacrifice scheme factually as being one of diversion, not sacrifice, of salary it constituted remuneration and not a benefit which was not wages and salary. The EATviewed the opposite construction would grant the employee a windfall, and the consequences of such an interpretation would seriously damage the entry of employers into a scheme which would otherwise be of benefit to them and their employees. The EAT noted that the scheme is entirely voluntary on the employer’s part and the consequence that once employees became pregnant the employer would face a cost beyond that it would already face by provision of statutory maternity pay, it would have the effect of discouraging employers from offering such a scheme. “We do not think that Parliament can have intended this consequence.”

Distinction was drawn between the current situation and one where employers provide vouchers as a benefit in addition to salary. In such cases, the MPL Regulations would require that the benefit continue during maternity leave because it is not a sacrifice or diversion of salary earned.

If employers currently allow for receipt of childcare vouchers during maternity leave, then this maybe either an express contractual right or one implied through custom and practice. If as a result of this case an employer decided to review its current approach of providing childcare vouchers options for making contractual changes to employees’ terms and conditions would need to be carefully considered by an employer.

Although this case provides clarification another EAT could come to a different decision if faced with a similar case.

As for the future of childcare vouchers, the Chancellor announced in the Budget on 16 March 2016 that childcare voucher schemes will be closed to new entrants from April 2018. Existing members at that date will be able to continue for so long as the employer chooses to continue to operate the scheme.