News Updates

Childcare vouchers during maternity leave

Monday 4th April 2016

In the recent case of Peninsula Business Services Ltd v Donaldson, the EAT held that it was not discriminatory for an employer to suspend childcare vouchers (“CCVs”) during maternity leave where they are funded through a salary sacrifice arrangement.  However, where CCVs are an additional benefit on top of salary, an employer must continue to provide them.

Ms Donaldson was pregnant and wanted to join her employer’s CCV scheme, which was operated via a salary sacrifice. This results in tax and national insurance savings. As a condition of enrolment, PBS required employees to agree that they would not receive the CCVs for the duration of any maternity leave when only statutory maternity pay was payable and consequently there was no salary to ‘sacrifice’. Ms Donaldson considered this condition to be discriminatory and brought a number of claims under the Equality Act 2010.

The ET upheld Ms Donaldson’s claims of direct and indirect discrimination. However, the EAT substituted a decision that the claims should be dismissed. It held that the ET had no jurisdiction to consider a claim for indirect discrimination because pregnancy and maternity did not appear as a protected characteristic for the purpose of the relevant section of the EqA 2010. Counsel for PBS argued that the issue to be determined concerned Ms Donaldson’s terms and conditions of employment, not detrimental acts. Therefore, the claim should have been brought under the equal pay provisions of the EqA 2010, referring to the ‘sex equality’ and ‘maternity equality’ clauses. The EAT agreed.

The EAT also expressed doubt about the legal basis of the direct discrimination claim, but since the same point was not argued, proceeded to consider the claim.

An employee on maternity leave is entitled to her terms and conditions of employment (including all benefits), save for remuneration. The ET considered that the provision of CCVs by PBS constituted a benefit, which resulted in the finding that there had been unlawful discrimination. The ET relied heavily on HMRC guidance, which stated that during any period of ordinary maternity leave, contractual non-cash benefits provided under a salary sacrifice scheme must continue.

The EAT disagreed and concluded that part of an employee’s salary is in fact ‘diverted’, rather than ‘sacrificed’ under such a scheme. PBS redirects salary before it reaches the employee for the purpose of purchasing the CCVs on their behalf. In addition, the employee’s full basic salary, and not the reduced salary, is used for the purposes of other entitlement calculations, such as pension contributions. Therefore, the EAT concluded that CCVs were in fact remuneration and do not need to be provided during maternity leave. The EAT considered that to continue providing the CCVs under a salary sacrifice scheme would result in a windfall for the employee and place undue financial burden on the employer, which might discourage participation in a voluntary scheme. Further, the EAT could not find any legislative basis for HMRC’s guidance.

The EAT noted that some employers provide CCVs as a benefit in addition to salary and in such situations the employee would be entitled to continue receiving them throughout maternity leave, regardless of whether they are needed for childcare during that specific period. However, this was not the case in the PBS CCV scheme.

Notwithstanding the doubts expressed by the EAT regarding the legal basis for the claim and its concern that it had not necessarily been directed to all relevant legislation, the decision does provide some welcome clarification for employers. However, from 2017 these arrangements will be phased out for new participants with the introduction of Tax-Free Childcare.

All information in this update is intended for general guidance only and is not intended to be comprehensive, or to provide legal advice.