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How to deal with a pay rise that coincides with an employee’s pregnancy or maternity leave

In order to work out an employee’s statutory maternity pay (SMP) entitlement, it is necessary to calculate her average total earnings over a specified period. However, under legislation, employers must recalculate an employee’s SMP if she is subsequently awarded a pay increase during her pregnancy or maternity leave, and must backdate the new rate of SMP to the start of the maternity pay period. A failure to do so could result in a claim under the Equality Act 2010.

This XpertHR “how to” guide steers employers through the process of dealing with a pay rise that coincides with an employee’s pregnancy or maternity leave.

The guide covers: Background Determining when an employee would receive a pay increase and the amount of the increase

Pay rises that take effect during the eight-week calculation period

Calculating the increase in SMP entitlement Pay rises that take effect after the end of the paid period of maternity leave

Employees who become entitled to SMP as a result of a pay increase

Informing the employee of the pay increase Making the payment of additional SMP The effect of a pay rise on contractual maternity pay Record-keeping

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How to deal with a pay rise that coincides with an employee’s pregnancy or maternity leave

BackgroundAn employee who takes maternity leave may qualify for statutory maternity pay (SMP). SMP amounts to six weeks of pay at 90% of the employee’s earnings and a further 33 weeks at the standard rate, or 90% of average weekly pay for the whole period if that is less than the standard rate. Therefore, to work out an employee’s SMP entitlement, it is necessary to calculate her earnings. This is done by taking an average of her total earnings over the eight-week period leading up to the 14th week before the week when the baby is due (the calculation period).

In Alabaster v Woolwich plc and Secretary of State for Social Security [2004] IRLR 486 ECJ, the European Court of Justice held that the calculation of the earnings-related element of maternity pay should take into account a pay rise that is awarded at any time from the start of the calculation period to the end of maternity leave. As a result of this, special provisions are contained in the Equality Act 2010 (see The effect of a pay rise on contractual maternity pay) and the Statutory Maternity Pay (General) Regulations 1986 (SI 1986/1960).

Under reg.21(7) of the Statutory Maternity Pay (General) Regulations 1986, employers must recalculate an employee’s SMP if she is awarded a pay increase during the period beginning with the calculation period and ending at the end of her maternity leave. The recalculated SMP must be based on the employee’s normal weekly earnings after the pay rise, ie as if the pay rise had taken place before the calculation period. The employer must backdate the new rate of SMP to the start of the maternity pay period. A failure to do so could result in a claim under the Equality Act 2010.

Determining when an employee would receive a pay increase and the amount of the increaseThe provisions dealt with in this guide apply when an employee either is awarded a pay increase or would have been awarded one were it not for the fact that she is absent on maternity leave. Employers cannot avoid these provisions by waiting until the employee returns from maternity leave before awarding a pay rise.

The more transparent the employer’s pay system, the easier it will be to determine whether or not an employee would have received a pay rise during maternity leave. Where the employer employs all workers on a standard scale and applies an across-the-board cost of living increase, there will be no room for argument. It will be clear that the employee would have received the same increase during her maternity leave.

Even where there is no across-the-board pay increase awarded, most employers will have a pay review date when salaries are reviewed. This is likely at least to raise the presumption that the employee would also have had her salary reviewed and the question will then be how much the increase would have been.

To avoid disputes over the amount of a pay increase during an employee’s maternity leave, the employer should, where possible, make a decision about the employee’s pay at the same time and in the same way as for other employees. It should use the same criteria for deciding the pay increase, such as performance or achievement during the preceding year. Where the employer normally makes a decision about pay increases following an appraisal process, it should take care to ensure that its decision is not affected by the fact that the employee has been pregnant or on maternity leave for part of the year. It is usually safest for the employer to proceed on the basis that the appraisal would have been a positive one, especially if the employee has received positive ratings in the past. Even if the previous rating was not entirely positive, the employee could argue that her pregnancy and absence prevented her from showing the improvement that she would otherwise have made. Assuming that the pay rise is a relatively modest one, the employer may consider that it is not worth risking a legal challenge by arguing that a low rating would

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have been inevitable even if the employee had not been pregnant. On balance, employers may find it simplest to err on the side of generosity in setting the appropriate pay rise for an employee on maternity leave.

Pay rises that take effect during the eight-week calculation periodThe key factor for employers to remember in calculating an increase in SMP is that it has to be calculated as though the pay increase took effect before the start of the calculation period.

Example oneSuppose the pay increase takes effect halfway through the eight-week calculation period. An employee earning £300 per week, and whose pay increases by 5%, will earn an extra £15 per week for each of the last four weeks of the calculation period.

However, although the pay increase affects only the last four weeks of the actual pay due in the calculation period, when it comes to the calculation of SMP it is treated as applying to the whole eight weeks. Thus, the normal weekly earnings of the employee will be taken as £315. That will give a figure for the first six weeks of SMP of £283.50 (90% of £315).

Calculating the increase in SMP entitlement

The effect on the first six weeks of SMPIn most cases the impact of a pay rise will be felt in the calculation of the first six weeks of SMP rather than in the longer period paid at the standard rate.

Example twoTake an employee who earns £30,000 per year, making her average weekly earnings £576.92. Her maternity pay would consist of six weeks at 90% of that sum, which is £519.23, and the remainder at the fixed lower rate of £136.78.

If, during her maternity leave, she receives a 3.5% pay increase, her new salary is £31,050. That is the salary level that the employer must use to calculate her SMP. It equates to £597.12 per week and 90% of her weekly earnings would be £537.41. That amounts to an increase of £18.18 per week and £109.08 in total.

Note that the 33 weeks at the standard rate of £136.78 would be unaffected by this increase because for someone on this employee’s level of salary, the standard rate is a fixed sum that is not calculated by reference to the employee’s pay.

The effect on the last 33 weeks of SMPHowever, where an employee’s earnings are below or just above the standard rate of SMP, the rate payable for the last 33 weeks of SMP may also be affected by a pay increase.

Example threeTake an employee earning £130 per week. Ninety per cent of her weekly earnings would be £117. Because this is lower than the standard rate of SMP, she would receive this sum for the whole of the 39 weeks of her maternity pay period, not just for the first six.

If, during her maternity leave, she receives a 3% pay rise, that would take her weekly earnings to £133.90 (still below the standard rate). Since all of her SMP would be based on 90% of her weekly earnings, her SMP entitlement would go up to £120.51. Over the 39 weeks, this results in an additional sum of £136.89.

Two pay rises during the relevant periodIf an annual pay rise takes place before maternity leave begins and the employee takes her full, or close to her full, entitlement to a year’s leave, it is likely that there will be two pay rises between the start of the calculation period and the end of the employee’s maternity leave. Therefore, the employer may have to recalculate the employee’s entitlement to SMP twice.

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Pay rises that take effect after the end of the paid period of maternity leaveThe employer will need to recalculate the employee’s maternity pay even if the pay rise takes effect after the end of any period of maternity pay but during maternity leave.

Example fourIf an employee started her maternity leave on 1 January and received SMP of six weeks’ pay at 90% of earnings followed by 33 weeks at the standard rate, she would cease receiving any maternity pay by the end of September. However, even if the employer’s pay review date is 1 October (and the employee is still on maternity leave on that date) the employer must recalculate her maternity pay entitlement based on the new rate of pay. The employer must pay her the outstanding balance.

Employees who become entitled to SMP as a result of a pay increaseEmployees are not automatically entitled to SMP. To qualify, their normal weekly earnings must at least reach the lower earnings limit for national insurance (currently £109 per week from 6 April 2013).

The statutory provisions on pay increases during maternity leave have the effect of altering the calculation of an employee’s normal weekly earnings. This means that a pay increase may push the normal weekly earnings of an employee who was not previously entitled to SMP over the lower earnings limit, with the result that she becomes retrospectively entitled.

In most cases, the employee in question would have been receiving maternity allowance from Jobcentre Plus during the period otherwise covered by SMP. The employee is not entitled to be paid both maternity allowance and SMP for the same period.

If an employee in receipt of maternity allowance becomes entitled to SMP as a result of a pay rise, the employer must pay the employee the difference between the maternity allowance that she has received and the SMP to which she is entitled (reg.21B of the Statutory Maternity Pay (General) Regulations 1986). The employee will not be required to repay the maternity allowance that she has received, but her entitlement to maternity allowance ceases once she is entitled to SMP from the employer.

Example fiveTake an employee on the minimum wage of £6.19 per hour (the adult rate from 1 October 2012) who works 16 hours per week. That gives a weekly wage of £99.04, which is below the lower earnings limit, meaning that she will not qualify for SMP. Instead she is entitled to maternity allowance of £89.14 per week (90% of her weekly earnings).

However, suppose her employer decides to adopt a policy of paying a “living wage” of £8.55 per hour and that change takes place four weeks into her maternity leave. Sixteen hours per week at £8.55 per hour gives weekly earnings of £136.80, which would be sufficient to qualify for SMP.

As a result of this pay increase, the employee will be entitled to SMP of £123.12 per week (90% of her weekly earnings).

The employer must top up the maternity allowance the employee has received to the level of the SMP to which she has become entitled. It must therefore pay her £33.98 (£123.12 - £89.14) for each of the four weeks in which she received maternity allowance; a lump sum of £135.92. It must pay her SMP at £123.12 for the remaining 35 weeks of the SMP period.

Informing the employee of the pay increaseWhen the employer has decided on the pay increase that will apply and recalculated the employee’s maternity pay, it should write to her setting out the details of the increase as soon as possible, ideally at the same time that it notifies other members of staff of the pay increase. If the employee is no longer receiving pay from the employer, the letter will need to make it clear that the new rate of pay will apply immediately on her return. If the employee is still in receipt of contractual maternity pay, the pay rise will have an immediate effect on her future payments.

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In either case, it is likely that the pay increase will have an impact on the maternity pay that she has already received. The employer should explain this in the letter, with the arrangements that it will make for paying any outstanding maternity pay to which the employee has now become entitled.

Making the payment of additional SMPThere are no specific provisions setting out when an amount owing to the employee as a result of a pay increase should be paid. However, the employer should be aware that the entitlement to the extra sum is immediate; the change in the entitlement to SMP is retrospective in the sense that it affects the basic entitlement to SMP rather than creating a right to be paid an additional sum. Therefore, the employer owes the outstanding sum immediately on the pay rise taking effect.

Where the pay rise takes place while the employee is still in receipt of SMP and would change the amount that she is currently receiving, the employer should include this immediately in the amount of SMP being paid.

Where SMP has already ceased, or the change would make no difference to the amount (because the employee is receiving the standard rate), the employer should not wait until the employee has returned to work before paying the amount owing. The employer should make a special payment (taxed in the usual way) representing the whole of the additional sum due. Ideally, it should make the payment at the same time that it informs the employee of her entitlement to it.

Sums paid as SMP count as wages for the purposes of part II of the Employment Rights Act 1996. This means that failing to pay the SMP owing to the employee is an unlawful deduction and the employee could bring a claim in the employment tribunal to recover the sum.

The effect of a pay rise on contractual maternity payWhere an employee is entitled to contractual maternity pay that is over and above the amount provided by SMP, s.74 of the Equality Act 2010 may apply. The effect of that section is to require the employer to increase any maternity-related pay that is over and above SMP to reflect any pay increase that the employee would have received had she not been on maternity leave.

Unlike the provision under the Statutory Maternity Pay (General) Regulations 1986 relating to SMP, the rule under the Equality Act 2010 relating to contractual maternity pay is not retrospective. The increase in pay does not apply to the whole period for which the employee is receiving maternity pay; it takes effect from the point at which the pay rise is, or would have been, awarded.

Example sixAn employee earns £40,000 per year. Her maternity pay scheme pays SMP for the first six weeks of her maternity leave (ie 90% of her normal pay), then 50% of her normal pay for the remaining 33 weeks of her maternity pay period. For these purposes her normal pay is defined as her salary as at the start of her maternity leave. Her pay review date is 1 April and this falls precisely 26 weeks into her maternity leave. The employer applies a blanket cost of living increase to all employees of 3%, taking her salary to £41,200. Her weekly pay increases from £769.23 to £792.31.

For the first six weeks of her maternity leave she would have received 90% of her earnings. That amounts to £692.30 per week. When the pay increase takes effect, the amount of SMP that she should have received increases to £713.08 per week. As the SMP must be recalculated and paid retrospectively, the employer must pay the employee the shortfall of £124.68.

Her contractual maternity pay will increase from the date of the pay review. Thus, for the first 20 weeks at the 50% rate her pay will be £384.62 per week (ie 50% of £769.23). After her pay increase, it will increase to £396.15 (ie 50% of £792.31).

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Record-keepingEmployers are required to keep certain records in relation to the payment and administration of SMP. Regulation 26 of the Statutory Maternity Pay (General) Regulations 1986 specifies that, for three years after the end of the tax year in which the maternity pay period ends, the employer must keep records of all maternity-related absence, the weeks in the tax year in which SMP was paid and the amount paid in each week.

Where an employer adjusts an employee’s SMP because of a pay increase, the employer will need to record the adjusted amount and the fact of the payment of the extra sum as part of its overall record-keeping obligation.

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More guidance from XpertHR

“How to” guides on:

n dealing with maternity pay, salary sacrifice and childcare vouchers

n complying with the law on keeping statutory maternity pay records

Line manager briefings on:

n maternity rights that apply in specific situations

n basic maternity rights

Policies and documents on maternity rights, including a:

n letter informing an employee that her statutory maternity pay has been recalculated

n maternity policy

Liveflo: see how our revolutionary online HR tool can help you

n Liveflo workflow on managing an employee’s maternity leave and pay

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