PAYROLL INSIGHT
The basics of SMP
Jill SmithMCIPPdip, CIPP policymanager, explains the rules on backdated pay increases duringmaternity leave
I t is fifteen years since we first heard the name ‘Alabaster’, and yet it still manages to send shivers down the spine of payrollers. ‘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. 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. ...a seventeen- month period and may include more than one pay 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. 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 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). 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. Revised calculation A 1% pay award is then applied Example Original calculation
| Professional in Payroll, Pensions and Reward | March 2019 | Issue 48 18
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