In 2005, the European Court of Justice issued a landmark decision in the case of Alabaster which changed the way in which employers are required to calculate maternity pay. Over time though it seems that these rules may have been forgotten.
Background Alabaster v Woolwich plc and another
Mrs Alabaster spent 10 years fighting for an additional £204.53 on the basis that her then employer, Woolwich plc, had given her a pay rise just before the start of her maternity leave but had not applied this pay rise to the calculation of her statutory maternity pay. Her claim went all the way to the European Court of Justice (ECJ) and its subsequent ruling resulted in a change to UK law (via the Statutory Maternity Pay (General) (Amendment) Regulations 2005) in relation to how SMP must be calculated. Thirteen years on, however, many employers are still not aware of the correct rules regarding the calculation of maternity pay.
How does this case affect SMP?
The amount of SMP that an employee on maternity leave is entitled to be paid is based on her average weekly earnings over an 8-week reference period, which ends with the qualifying week (the 15th week before the baby is due).
Following Alabaster, where a pay rise is awarded to an employee at any point from the start of this 8 week reference period, up to the end of her maternity leave, SMP must be re-calculated to include the pay rise awarded from the start of the 8-week reference period and a top up payment must be made.
What about contractual (or enhanced) maternity pay?
The ECJ's judgment in Alabaster implied that it would only affect maternity pay which was calculated "on the basis of the pay [the employee] earned before her maternity leave began".
Enhanced maternity pay policies tend to fall into two categories:
Type 1: those which calculate enhanced maternity pay in the same way as SMP (by assessing the employee's average earnings prior to the start of maternity leave) and pay the employee a percentage of those average earnings for [x] weeks/months during maternity leave; and
Type 2: those which pay the employee a percentage of the rate of pay that they would have received had they been at work at that time for [x] weeks/months during their maternity leave.
A type 1 policy is likely to fall within the Alabaster ruling. This means that if the employee is awarded a pay rise at any point from the beginning of the eight-week reference period up until the end of the maternity leave period, the entire amount of her enhanced maternity pay would also have to be re-calculated on the basis of the higher rate of pay and a top up payment made.
A type 2 policy will fall outside of the Alabaster ruling and no re-calculation of enhanced maternity pay will be necessary following a pay rise (however please note that you will still have to re-calculate SMP).
Our policy is caught by Alabaster, can we change it?
Employers can amend policies which are non-contractual at any time. However, before doing so, check whether there is a risk that your policy has become contractual via custom and practice.
If your policy is contractual, you will need to seek the employees' consent to change it.
We have been paying enhanced maternity pay incorrectly, what should we do?
If you have a type 1 policy, which is non-contractual, consider changing this policy going forwards. It is advisable for any enhanced maternity pay policy seeking to fall within the type 2 category to specifically state that 'pay rises will only apply to enhanced maternity pay from the date that the pay rise is awarded'.
For any employees currently on maternity leave, if a pay rise has been awarded, recalculate their SMP (and any enhanced pay if your enhanced pay policy is a type 1 policy) and make a top up payment to that employee.
Employees who have been paid incorrectly in the past have a number of avenues open to claim arrears owed, including claims for an unlawful deduction of wages, maternity discrimination and/or equal pay. Therefore, having the correct processes in place from the outset will ensure that these claims can be avoided.