How pay rises must be taken into account when Statutory Maternity Pay (SMP) is worked out - SMP and the “Alabaster” ECJ judgement
1. What is “Alabaster”
“Alabaster” is shorthand for the name of the case referred to the European Court of Justice (ECJ). The full name of the case is “M.K. Alabaster-v- Barclays Bank PLC (formally Woolwich PLC) and the Secretary of State for Social Security.
2. What is the case about?
The case concerned an employer who paid SMP in accordance with the legislation. The employer awarded a pay rise that began before the woman started her maternity leave, but after the end of the set period used to work out her SMP. The set period is 8 weeks. We base how much SMP will be paid on the amount of earnings paid to the employee in this period. This meant that the pay rise was not reflected in the SMP she received, because the pay rise had not been backdated to effect earnings paid in the set period. The woman argued that nonetheless her SMP should be increased to reflect the pay rise.
3. What did the Court decide?
The Court found that “…any pay rise awarded between the beginning of the period covered by the reference pay [ie, the relevant period for calculating SMP] and the end of the maternity leave must be included in the elements of pay taken into account in calculating the amount of such pay. This requirement is not limited to cases where the pay rise is backdated to the period covered by the reference pay.”
4. What does this mean for SMP payments?
SMP is paid at 90% of the woman’s average earnings for the first 6 weeks for most women. For some lower earners the 90% rate is paid for 26 weeks. Up to 5 April 2005 if a woman received a pay rise, that was backdated to increase earnings already paid in the set period, then the employer had to re-calculate the amount of SMP to be paid. Just as if the pay rise had been given on the date it was due.
As a result of the ECJ’s decision the legislation has been changed from 6 April 2005.
From 6 April 2005 if an employer awards a pay rise, that is effective from anytime between the start of the set period and the end of the employees maternity leave then the employer must re-calculate SMP due. ‘Maternity leave’ means either ordinary maternity leave or additional maternity leave. It also applies if the employer awards a pay rise before 6 April 2005, but hasn’t paid the increase by then.
5. How does this work
If, for example an employer awarded a 3% pay rise taking effect during a woman’s maternity leave, that 3% pay rise would have to be applied to the earnings used to work out the SMP payable. This could result in a new rate of SMP being due where SMP is already in payment. In both of the following examples the woman is due a pay increase on 1 July each year and is entitled to SMP:
Example A
| Pay increase due | Maternity leave period | Start of set period |
| 1 July 2005 | 1 February 2005 – 31 January 2006 | 1 November 2004 |
The employer must re-calculate SMP to take account of the pay rise due from 1 July 2005 because the effective date of the pay rise fell in the period 1 November 2004 to 31 January 2006.
Example B
| Pay increase due | Maternity leave period | Start of set period |
| 1 July 2005 and 1 July 2006 | 1 August 2005 – 30 July 2006 | 1 May 2005 |
The employer must re-calculate SMP to take account of the pay rise due from 1 July 2005, and because the woman is still on maternity leave on 1 July 2006, the employer must re-calculate her SMP for the second time.
If in this example the woman decides to return to work early and end her maternity leave on 30 April 2006, then it is only the 1 July 2005 pay rise that will affect her SMP.
6. The length of time from the start of the set period to the end of maternity leave could be as long as 17 months, and maybe even more in some cases. In that time there could be more than one pay rise awarded, will an employer have to re-calculate SMP each time?
Yes, any pay rise that is effective from a date in between the start of the set period to the end of the maternity leave must be reflected in the SMP paid.
7. Some women will not have got SMP based on their original earnings because their earnings were too low. The pay rise means that they now qualify for SMP for the first time but they have got Maternity Allowance instead. What should employers and women do?
Where a woman qualifies for SMP only because of a subsequent pay rise, employers may assume that a woman has received Maternity Allowance (MA) at the standard rate, unless they are informed otherwise. Employers should then pay the difference between MA already paid and the SMP that is due. Women who have received MA at less than the standard rate, or who did not qualify for Maternity Allowance at all, must get a letter from their Jobcentre Plus office to show this. They need to give that letter to their employer so the employer knows how much SMP to pay them.
8. What does the end of maternity leave mean?
For the statutory scheme the end of maternity leave means the end of any period of ordinary maternity leave and any additional maternity leave.
9. Does the judgment affect employers occupational maternity pay schemes as well?
It will be for employers to consider, looking at the terms and conditions of their particular schemes, whether the ECJ judgment has any impact and, if so, whether any changes are necessary.
10. If a woman has received SMP in the past and thinks she might be entitled to some arrears, can she ask her employer to look again at her SMP?
The amending legislation is not retrospective and therefore there is no general requirement on employers to re-calculate SMP. However employers are advised to consider a specific claim for arrears of SMP that may be due as a result of pay rises awarded in the past as follows:
For former employees: a claim must have been made within 6 months of their leaving employment.
For current employees: where an employee believes that a pay increase should have been taken into account she can make a claim for arrears to be paid. This claim should be made within 6 years of SMP being paid and she can then ask her employer to re-calculate the SMP.
However, employers only need to keep SMP records for 3 years after the end of the tax year to which they refer. So, if a woman makes a claim in respect of a period where her employer lacks the necessary records, we believe it is reasonable for the woman to provide sufficient evidence to substantiate her claim in order to allow her employer to re-calculate any SMP due.
Also, if the six-year point falls within a woman’s Maternity Pay Period, then we believe the woman may be entitled to a recalculation, provided she can substantiate her claim. But in these cases she will only be entitled to receive any enhanced payments for those weeks within the Maternity Pay Period that fall within the six years from the date of her claim.
11. Does the judgement mean that pay decreases can be taken into account, if for example, the workforce agree to a pay reduction if the employer is in financial difficulties.
No. The ECJ’s decision refers only to pay increases and our legal advice is that the implications of the decision do not extend to pay reductions.
12. What is meant by a pay rise or a pay increase?
This is not defined in legislation. It is for the woman and her employer to apply a common sense approach and, if there is disagreement, the employee has the option of using the established disputes procedure from Her Majesty’s Revenue and Customs (HMRC). It is the percentage increase the individual woman would have received which is relevant to her SMP calculation. Any increase must be applied to all the pay elements which would have attracted such an increase and which are used in the average weekly earnings calculation to arrive at the new earnings figure.
13. What happens if contractual maternity leave is longer than statutory maternity leave?
The amending regulations define “statutory maternity leave” as meaning ordinary or additional maternity leave under sections 71 and 73 of Employment Rights Act 1996. See question 9.
14. If pay rises are announced in advance (3 year pay deals for example), and some of which are statutory (for example National Minimum Wage), may employers anticipate this and work out SMP taking these into account?
Yes, it makes sense to anticipate the pay rise because it would be more efficient. However, as with paying SMP in a lump sum, this may result in an overpayment of SMP if the employee returns to work early, before the anticipated pay rise came into effect. The employer would also have to make restitution to HMRC of any over- recovery of SMP paid out.
15. What approach is required for woman with aggregated earnings, as is common in the NHS, and there is a rise in only one employment?
The SMP (National Health Service Employees) Regulations 1991 entitle some employees to elect to have their contracts treated as one for SMP purposes if this would be beneficial to them for SMP purposes. For example, earnings from Contract A and from Contract B which have been paid in the set period would be added together to determine what SMP should be paid. If the employer with Contract A awards a pay rise, then it is only earnings in the set period derived from Contract A which should be increased to work out the new SMP due.new SMP due.
16. If a woman returns early from maternity leave, after extra SMP has been paid but the rise is now effective after her return, does she have to repay SMP?
SMP is included in the definition of “wages” in the Employment Rights Act 1996. Therefore employers have the right to recover overpaid SMP in the same way as they can recover any overpayment of wages or salary. Employers would also have to make restitution to HMRC of any over recovery of SMP paid out.
17. For most women SMP is earnings related for the first 6 weeks, will a pay rise affect the other weeks when standard rate is paid?
No woman can receive more than the standard rate of SMP for the weeks when standard rate is due.
18. Will employers have to keep SMP records for longer or keep any extra records?
A pay award up to 17 months after the start of the relevant period could affect the calculation of SMP. However, employers are currently required to keep records for 3 years after the end of the tax year in which the maternity pay period ended. Employers should in that case have the records available even for a late pay award so there should be no change to the record keeping requirements. When a payment is made employers should record it in the same way as any other late payment.
19. Can employers get back any extra SMP they pay out?
Yes. The new rules operate from 6 April 2005 so any arrears of SMP paid on or after this date are recoverable. An employer can recover the additional amount of SMP paid out at the reimbursement rate appropriate to the tax year in which the arrears are paid. For example, looking at 6 April 2004 when the Small Employers’ Relief Threshold increased to £45,000, any SMP payments made on or after that date would be assessed for reimbursement using the £45,000 threshold.
20. I want to check the regulations on this, what are they?
Sections 164 to 171 of the Social Security Contributions and Benefits Act 1992 and the Statutory Maternity Pay (General) Regulations 1986 (main regulations) set out the rules for SMP. The Statutory Maternity Pay (General)(Amendment) Regulations 2005 (SI 2005/729) amended the main regulations to make this change.
21. I am an employer and need help with this, where can I go?
HMRC are responsible for the administration of SMP and for guidance to employers. Detailed guidance on SMP and some information about effect of pay rises on SMP is in the 2005 edition of the E15 (Supplement) Employer’s Help Book “Pay and time off work for parents available through the HMRC website. For detailed help phone the HMRC Employers’ Helpline on 0845 7 143 143.