Childcare vouchers – who makes the ‘sacrifice’ in “salary sacrifice” arrangements?

For years, employers have been advised when operating a salary sacrifice childcare voucher scheme that they should continue to provide an employee on maternity leave with the vouchers, even if it meant the employer paying for them. Well, no more it looks like, following the case of Peninsula Business Services Ltd v Donaldson.

For tax reasons, many women decide to sacrifice some of their salary in return for childcare vouchers.  Contrary to some employers’ view, salary sacrifice schemes are not a ‘perk’ in addition to regular salary; they are vouchers taken in exchange for an agreed amount of salary already ‘earned’ by the employee.

In law, women on maternity leave are entitled to non-pay benefits during ordinary and additional maternity leave. So what happens when there is no ‘salary’ to exchange for the vouchers when women go on maternity leave and are paid Statutory Maternity Pay (SMP) only? Employers are not able to reduce SMP, so they have no currency to exchange. Does the employer have to dig into its own pockets to carry on paying for the vouchers out of its hard earned coffers? Well, until the case of Peninsula Business Services Ltd v Donaldson, the answer was most likely “yes”.

In this case, Ms Donaldson refused to enter into a salary sacrifice scheme operated by Peninsula because the terms of the scheme required her to agree that during the period of maternity leave, she would either leave the scheme or agree that her entitlement to the vouchers would be suspended.  Ms Donaldson felt unable to join the scheme in these terms and so brought a claim in the Employment Tribunal for breach of the Equality Act 2010 (EqA) and breach of the Maternity and Parental Leave Regulations 1999 (MPL).

The Employment Tribunal found in favour of Ms Donaldson and held that the terms of the scheme:

• were discriminatory on the grounds of sex in breach of the EqA; and
• constituted unfavorable treatment because of asserting a statutory right to maternity leave in breach of the MPL.

Peninsula appealed to the Employment Appeal Tribunal (EAT). To the unashamed delight of most Financial Directors everywhere, the EAT overturned the Tribunal’s decision. 

In the EAT’s view, HM Revenue and Customs guidance on which the Tribunal had based its decision was ‘erroneous’.  The EAT held that 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.  To do so would mean that the employee would receive “a windfall benefit” which would impose an additional cost upon the employer. The EAT considered that allowing the Tribunal’s ruling to stand would discourage employers from using the scheme which was particularly acute where small and medium sized business are concerned.  Interestingly, the judgment made no mention of the National Insurance Contribution savings that employers receive in operating salary sacrifice schemes.

This may not be the last we have heard of this case.  Employers may wish to wait and see how further case law develops, before deciding whether to change their practices in relation to childcare vouchers and the terms and conditions on which they are offered.

What does this mean for you or your business?

If your business operates a childcare voucher scheme, and the company pays SMP, then in most cases you should not need to continue to pay for vouchers during the period of maternity leave.  But, be cautious before simply pulling the plug – you may have granted the employee the right to receive the vouchers under a maternity policy, or there may be a custom or practice of paying it which means withdrawing it without correct notice may land you in hot water.  We recommend you take specific advice if this applies to you. 

What do you need to be doing now?

Consider updating your contracts of employment and / or any company policy in relation to entitlements on maternity leave and specifically in relation to childcare vouchers.  Contact us if you would like more information. 

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.