The basics of SMP
01 March 2019
This article was featured in the March 2019 issue of the magazine.
Jill Smith MCIPPdip, CIPP policy manager, explains the rules on backdated pay increases during maternity leave.
It is fifteen years since we first heard the name ‘Alabaster’, and yet it still manages to send shivers down the spine of payrollers.
How does Alabaster affect payroll calculation?
‘Alabaster’ is the name given to the European Court of Justice (ECJ) case which can affect the way an employee’s average weekly earnings (AWE) for statutory maternity pay (SMP) are calculated when an employee is awarded a pay rise. The name derives from the case of Michelle Alabaster vs Barclays Bank PLC where, in 2004, the ECJ found that the SMP regulations failed to properly implement EU law, and as a result in 2005 the SMP regulations were amended so they became compliant with the EU legislation.
Impact of the Alabaster ruling on SMP calculation
Following the judgment, the employee’s SMP calculation will need to take into account any pay rise that takes effect anytime between the start of the eight-week set period for calculating AWE for SMP and the end of the woman’s statutory maternity leave (SML). This potentially leaves open a seventeen-month period and may include more than one pay increase to take into account when re-calculating the average earnings – as a result, this ruling can seem unreasonable and confusing for employers to understand and implement.
It is important that employers understand that a pay increase awarded beyond the end of the maternity leave period but backdated to a date within this period is also within the scope of this provision. Employers need to take account of pay rises that have been awarded, but have not yet started to be paid, as the rules do not distinguish between the two. Also, employers that make payments based on the national minimum wage (NMW) rates will also be required to review the average earnings calculation when the NMW rate goes up and apply the increase.
What this means for the employer
If a pay rise is processed at any time from the start of the qualifying period for calculation until the end of the period of maternity leave, the employer is obliged to recalculate the SMP due, using the new increased rate. This may affect both the 90% rate (six weeks of maternity pay) and the entitlement to the standard rate (33 weeks). It is important to note that for some low earners where 90% of AWE is lower than the standard rate of SMP (currently £145.18 per week) the changes will apply to the full 39 weeks. Every payment will be due an increase if the claim is valid.
Employers operating an occupational maternity pay scheme will need to look at its terms and assess whether the ECJ judgement has any impact as the Alabaster case only dealt with statutory entitlement to SMP.
...a seventeen-month period and may include more than one pay increase...
Earnings affected by pay rise
Guidance on GOV.UK advises that where earnings are affected by a pay increase, employers must recalculate the AWE to take account of the pay increase awarded, or that would have been awarded had the employee not been on maternity leave. This applies if the pay rise was effective from anytime between the start of the eight-week relevant period for SMP and the end of the SML.
If the pay rise is awarded after the employee’s earnings have been calculated, and that pay rise is effective from a date before the start of the relevant period and also before the maternity pay period (MPP) ends, the employer must recalculate the AWE to include the pay rise as though it was effective from the beginning of the relevant period and pay any extra SMP due. For example:
Where an employee did not qualify for SMP, but a pay rise is awarded which means that when the AWE are recalculated her earnings are now high enough for entitlement to get SMP, the employer must:
- assume that she was entitled to maternity allowance (MA)
- calculate 90% of the AWE
- deduct from this the standard rate of SMP, and
- pay the difference for just six weeks.
Employers that are shown evidence of how much MA has been received by the employee, usually by seeing a copy of the letter from the Jobcentre Plus office (or the Jobs and Benefits office in Northern Ireland), need to:
- work out the total amount of SMP she is entitled to
- deduct from that amount either the MA that was paid or any SMP already paid, and
- pay the employee the difference.
The employee should still benefit from a pay rise, even if she does not intend to return to work with the employer after her maternity leave has ended.
If more than one pay rise has been awarded during the period of maternity leave the employer will need to make separate calculations for each.
Bonuses
Employers pay bonuses for a wide variety of reasons such as rewarding company or personal performance, encouraging loyalty and incentivising future work. The treatment of bonuses for those on maternity leave is a highly complex issue so legal advice should be taken.
The general rule is that women on maternity leave must receive a bonus that relates to any period before they go on maternity leave (regardless of when it is actually paid), during the two-week compulsory leave period and the period after they return to work
Get more guidance on calculating SMP pay
I’m sure that when Mrs Alabaster took her claim for her pay rise to be included in her SMP calculation she could never expected it to have the reach and impact that it has. Even now, all these years later, the recalculation of SMP following a pay rise can be complicated.
All payroll practitioners should be aware of this requirement and have processes in place to ensure that all SMP calculations are revisited if pay rises are awarded. Payroll bureaux must consider the Alabaster ruling if they are told to implement any pay rises and ensure that their clients are compliant too.
You can find more guidance on GOV.UK, here: https://goo.gl/T3BqCy.
Example of SMP calculation based on the Alabaster ruling
Original SMP calculation
An employee’s earnings in the eight-week relevant period comprise two monthly payments: £2,161.50 + £2,161.50 = £4,323.00
AWE is calculated as £4,323.00
Therefore, for the first six weeks she would have received £448.93 being 90% of £498.81, and for the following 33 weeks she would have received £145.18 (the standard rate of SMP).
Revised SMP calculation
A 1% pay award is then applied from a date between the start of the relevant period and the end of the employee’s MPP. This has the effect of increasing earnings for each payment in the relevant period by £21.62. The AWE is recalculated as £4,366.24 (i.e. £4,323.00 + £21.623 + £21.62) × 6 ÷ 52 = £503.80.
Therefore, for the first six weeks she should have received £453.42 being 90% of £503.80 and for the following 33 weeks she would receive £145.18.
So, the employer would calculate the amount of SMP now due as follows and make payment to the employee: £453.42 - £448.93 = £4.49 × 6 = £26.94.