STATUTORY MATERNITY PAY AND PAY RISES
Regulations came into force on 6 April 2005 to make it clear that a woman on maternity leave must be given the benefit of any pay rise that she would have been awarded had she been at work. However, while the principle seems straightforward, as we explain below, its impact is greater than employers may expect.
A woman is entitled to receive Statutory Maternity Pay (“SMP”) while on maternity leave if:
(i) she has been continuously employed with the same employer for at least 26 weeks by the 15th week before her Expected Week of Confinement (“EWC”);
(ii) her before tax weekly earnings are over £79;
(iii) she has given her employer appropriate notice; and
(iv) her baby is due within 11 weeks.
Once the woman qualifies to receive SMP, she can expect to receive:
- 90% of her normal weekly earnings for the first 6 weeks of her maternity leave; and
- a flat rate of £106 for the next 20 weeks of maternity leave.
During the first 6 weeks of maternity leave, a woman will receive 90% of her “normal weekly earnings”. Those earnings are calculated by reference to the 8 weeks immediately preceding the 14th week before the EWC – ie weeks 18 to 25 of pregnancy. This is called the “Relevant Period”.
Two European Court of Justice decisions have considered the way in which pay rises should impact on the calculation of normal weekly earnings. The first, Gillespie v The Northern & Social Services Board, resulted in UK legislation being amended to provide that any pay rise taking effect during the Relevant Period must be factored into that calculation. However, as reported in Employment Alert No. 17, Mrs Alabaster challenged whether that change went far enough.
In Mrs Alabaster’s case, the ECJ confirmed what had, in fact, already been found in Gillespie - that a pay rise awarded between the beginning of the Relevant Period and the end of maternity leave must be included in the calculation of “normal weekly earnings”.
The Statutory Maternity Pay (General) (Amendment) Regulations 2005 came into force on 6 April 2005 to give effect to that finding.
What do the Regulations say?
If a woman is awarded a pay increase (or would have been if she had not been absent on maternity leave) and the increase applies to the whole or any part of the period between the beginning of the Relevant Period and the end of her statutory maternity leave, then her “normal weekly earnings” must be calculated as if that increase had applied in each week of the Relevant Period.
What does this mean for employers?
- The key point which the Government has not made very clear is that “normal weekly earnings” must be recalculated if there is, or would have been, a pay rise at any stage of statutory maternity leave.
This means that if an employee plans to be on maternity leave for, say, 10 months and she is, or would have been, given a pay rise effective in month 9, then her employer must go back and recalculate her “normal weekly earnings”. As a result of that recalculation, it is likely that the employer will have to pay the employee a sum to reflect the difference between the original calculation and the new calculation. We have confirmed that this is the correct approach with the DTI and ACAS.
This recalculation will not impact on the employee’s entitlement to flat rate statutory maternity pay as no woman can receive more than that standard rate of SMP.
If a woman takes advantage of her full statutory maternity leave entitlement, the length of time between the beginning of the Relevant Period and the end of maternity leave could be as long as 18 months. In this time the employer may award more than one pay rise. This will, unfortunately, mean that the employer has to recalculate “normal weekly earnings” a number of times.
In order to calculate “normal weekly earnings” (if the employee is paid monthly), the employer will look at how much the employee earned, gross, during the Relevant Period. All earnings taken into account for National Insurance contributions should be included, for example, sick pay, overtime, bonus payments and holiday pay. The employer will add together all the pay received by the employee in the Relevant Period, divide that by 2 (to give a month’s pay), multiple by that 12 (to give a year’s pay) and then divide that by 52 (to give the employee’s average weekly earnings). The employee is entitled to receive 90% of that sum.
If a pay rise is awarded during maternity leave, the same calculation will be done, but including the value of the pay rise for the whole of the Relevant Period. The employee will receive the difference between 90% of the original calculation of normal weekly earnings and 90% of the new calculation.
The employer may not, however, demand a repayment from the employee in the event of a pay cut.
- Employers should be mindful of how the Regulations may impact on their contractual maternity Policies and may wish to consider making minor amendments to those Policies as described below.
There are two main ways of describing enhanced maternity pay entitlement.
First, the employer may provide for a woman to receive her full basic salary for, say, the first 6 weeks (or longer) of her maternity leave instead of 90% of her normal weekly earnings. Second, the employer may extend the woman’s entitlement to receive 90% of her normal weekly earnings from 6 weeks to, say, 12 weeks.
Employers who offer enhanced maternity pay in the first way may think that, as they have already offered an enhancement, they do not want to pay the woman any more if she is awarded a pay rise. Those employers may wish to include a sentence in their Policy which provides that the enhanced maternity pay paid by the Company includes, in whole or in part, any additional sum the woman may be entitled to receive at any time during her maternity leave in respect of a pay rise. However, depending on the size of the pay rise in question, the Company’s enhancement may not satisfy the whole amount, in which case the employer may have to make a partial payment.
If an employer offers enhancement in the second way, it will be keen to ensure that, if normal weekly earnings have to be recalculated, that recalculation will only be reflected for 6 weeks and not for the enhanced 12 weeks. To achieve this, the employer could include a sentence in the maternity Policy providing that if the woman’s “normal weekly earnings” are recalculated at any time during the maternity leave period as a result of a pay rise, that will only be reflected in respect of a 6 week period.
The introduction of the Regulations will cost employers – but their impact on contractual arrangements may be limited by making quite minor changes to maternity policies.