11 June 2024

Samantha O’Sullivan ChMCIPPdip, CIPP policy and advisory lead, reviews the Alabaster ruling and highlights everything you need to know about it


Employers need to be aware of the Alabaster ruling when employees are on maternity leave and have been awarded a pay increase. This could be anytime between the start of the eight-week ‘relevant period’ for calculating statutory maternity pay (SMP) and the end of the individual’s statutory maternity leave.

The CIPP’s Advisory Service receives regular questions around this ruling and what pay must be considered. In this article, I will cover the history of the Alabaster case, give a whistlestop tour of how to calculate SMP and provide a working example of how to recalculate it using the ruling.

Rest assured, if you can calculate SMP, you can carry out an Alabaster recalculation!

 

Case law overview

Mrs Michelle Alabaster was employed by Barclays Bank (Woolwich Plc) between 1987 and 1996, taking a period of maternity leave from January 1996. Alabaster received a pay increase which took effect from 1 December 1995. She went on maternity leave on 8 January 1996 and chose not to return to Barclays, ending her employment on 23 August 1996.

Alabaster took her employer to an employment tribunal in January 1997 on the grounds that it failed to reflect the salary increase in her maternity pay. This was a breach of the Equal Pay Act and European law, although Barclays had compliantly calculated her SMP based on the SMP regulations.

Fast forward to 2004, where the European Court of Justice found that the SMP regulations didn’t implement European Union (EU) law, and consequently, The Statutory Maternity Pay (General) Regulations 1986 were amended. (Regulation 21 (7) was added in 2005, and can be found here: https://ow.ly/O9RL50RPhSF).

And here we are today.

 

Who gets SMP?

To qualify for SMP, the individual must be an employee and:

  • be on the payroll in the ‘qualifying week’ – the 15th week before the expected week of childbirth
  • give the sufficient notice
  • give an employer proof they’re pregnant
  • have been continuously employed by the employer for at least 26 weeks up to any day in the qualifying week
  • earn at least the lower earnings limit (LEL) which is currently £123 a week in the eight-week ‘relevant period’.

 

How to calculate SMP

In truth, most payroll professionals will simply enter the expected week of childbirth (EWC) into their software and get a weekly / monthly breakdown of what the employee will receive. But to fully understand how to compliantly recalculate SMP in the cases where Alabaster applies, you need to know how to manually calculate this statutory payment.

1. By using the SMP tables produced by the CIPP as part of your membership benefits, determine the qualifying week based on the employee’s EWC (see https://ow.ly/FxEz50RPj8C).

2. Determine how much gross pay the employee has received in the eight-week relevant period (the eight weeks of pay prior to the qualifying week).

3. Obtain the employee’s average weekly earnings (AWE). Please follow the steps as laid out in the Statutory Payments Manual page SMP170300, as methods will depend on the employee’s pay frequency (see https://ow.ly/GMOC50RPjjQ).

4. If the AWE totals the LEL or above, the employee will qualify for SMP.

5. If the AWE is less than the LEL, the employee will not qualify for SMP, so will need to be given an SMP1 form completed by the employer to give reason as to why they don’t qualify.

If the employee is entitled to receive SMP, they will get:

l 90% of their AWE for the first six weeks

l the current amount of SMP or 90% of their AWE, whichever is the lowest, for up to 33 weeks.

You can use the GOV.UK ‘Maternity, adoption and paternity calculator for employers’ to assist with your calculations (see https://ow.ly/zFUM50RPjuu).

 

So, what to do when Alabaster applies?

So, an employee has been awarded a 3% pay increase, but they’re on maternity leave.

You’ll need to recalculate the employee’s SMP considering the pay increase and pay the difference in SMP.

If you’re thinking, “The pay increase is from now; let’s say 1 July, but my employee went on maternity leave in April, surely this doesn’t apply?” It does. The Alabaster ruling means any employee who receives a pay increase anytime between the start of the eight-week ‘relevant period’ for calculating SMP and the end of the mother’s statutory maternity leave will need their AWE recalculating and any difference in pay to be awarded to them.

You will need to follow steps one to three above but base the eight-week calculation on the new rate of pay the employee is entitled to, as if they were in receipt of the 3% increase in the eight-week relevant period.

The difference between the SMP already paid and the new rate of SMP will need to be paid to the employee. In most cases, it will only be the difference between the rates during the first six weeks which need to be paid.

However, there may be instances where an employee previously didn’t qualify for SMP, but the pay increase now means they do. In that instance, the SMP will need to be backdated in the software and paid to the employee in the next available pay period. If the individual was in receipt of maternity allowance, any claimed allowance must be deducted from the due SMP and the remaining balance paid to the employee.

When paying the difference, ensure it’s paid as SMP through your software so that employers are still be able to reclaim the 92% via the employer payment summary, or 103% if they’re classed as a small employer.

 

Example

An employee who’s paid monthly received two gross payments of £3,000 in the relevant period, meaning their AWE was £692.31. The first six weeks were paid at 90% of AWE, so £623.08 per week.

Taking a 3% pay rise into account, the employee would have received two gross payments of £3,090 in their relevant period, meaning their AWE should have been £713.08. The first six weeks were paid at 90% of AWE, which totalled £641.77 per week.

Therefore, the difference you would need to pay to the employee in the next available pay run is the difference between £623.08 and £641.77 for the first six weeks of SMP, which equals £18.69 per week. This totals £112.14 for the six-week period.

 

What else you need to know

The Alabaster ruling only affects the rate of SMP the employee receives. Therefore, it doesn’t impact anything such as their pension contributions or salary sacrifice arrangements. Keep in mind that for a salary sacrifice arrangement to be successful, the money must be foregone before it is due. So, you cannot amend a salary sacrifice deduction in this instance on Alabaster, which is a retrospective calculation / entitlement. This means Alabaster focusses solely on the rate of SMP an employee is due.

If you / your client pays any occupational / enhanced maternity pay, you will need to consider if you offset any additional SMP paid under the Alabaster ruling against the enhanced maternity pay. This should be specifically noted in company policies or staff handbooks to avoid any doubt.

I know the word Alabaster usually sends shivers down the spines of payroll professionals, but I used to love processing the back pay from Alabaster calculations when working in operational payroll. So much so, it was just given to me as standard every annual pay increase season, as no one else wanted to touch it!

I hope this article has clarified any concerns and given you the knowledge that it isn’t as daunting as it seems. If you love manual calculations (like I do), you can start adding the Alabaster workings to your ‘to-do’s’! 


 

This article featured in the July - August 2024 issue of Professional.