Employment Update - August 2015

03 August 2015

Our employment & equalities experts bring you the latest developments that may affect your business - what they are, and what you can do about them.



This month's update covers:

Childcare voucher schemes are no child's play

Are childcare vouchers "remuneration" or "non-cash benefit"?

Many employers operate childcare voucher schemes as a benefit to their employees, usually by way of a salary sacrifice arrangement. Whether the childcare vouchers are classed as "remuneration" or a "non-cash benefit" has important implications for employees on maternity leave.

During maternity leave, the employee is entitled to all the usual benefits of her employment, except her remuneration, which is replaced by statutory maternity pay (SMP) or the employer's own maternity pay scheme. This means that while "remuneration" is not payable during maternity leave, all "non-cash benefits" will continue.

Her Majesty's Revenue and Customs (HMRC) guidance classes childcare vouchers administered under a salary sacrifice arrangement as "non-cash benefits". This classification has a cost implication for employers. During periods of maternity leave when the employee is not receiving her salary, it will not be possible for her to make that salary sacrifice. Nonetheless, the employer must continue to provide the vouchers during maternity leave, the employer funding them instead.

The lack of any judicial guidance on the "remuneration" or "non-cash benefit" debate has made this a 'grey' area for years. Recently, an Employment Tribunal has considered the issue and has confirmed the HMRC guidance that childcare vouchers are a "non-cash benefit". As such, a provision requiring a pregnant woman to opt out of the scheme when on maternity leave amounted to unlawful maternity and sex discrimination.

The argument for 'non-cash benefit' & HMRC guidance

The fact that childcare vouchers are non-transferable, cannot be converted into cash by the employee and are payable to childcare providers rather than the employee, suggests that they cannot be considered "remuneration" and are non-cash benefits.

In 2008 HMRC issued guidance stating childcare vouchers were non-cash benefits rather than "remuneration", even if they have been provided by way of salary sacrifice. The guidance points out that, while an employee may sacrifice their salary in order to receive the vouchers, there is "no legal connection" between the two.

The impact on SMP is twofold:

  1. The value of the childcare vouchers should not be included when calculating SMP (as the salary sacrifice scheme changes an employment contract – the employee becomes entitled to a lower salary plus childcare vouchers instead of their previous salary); and
  2. The employee is entitled to the childcare vouchers during her maternity leave without sacrificing any of her SMP.

Cost implications for employers

For employers operating a childcare voucher scheme, this means additional costs as the employer will have to fund the childcare vouchers during the whole of maternity leave with only a small saving in SMP to offset that cost.

This added cost has led some employers to add contractual provisions in to schemes to limit entitlement to childcare vouchers during maternity leave: a practice which has always carried a risk of being held to be unlawful maternity and indirect sex discrimination.

Some scheme providers have questioned the HMRC interpretation, for which there has not been any judicial guidance until recently.

Employment Tribunal upholds discrimination complaint

We now have the first reported Employment Tribunal (ET) judgment on the treatment of childcare vouchers during maternity leave, Donaldson v Peninsula Business Services. The Manchester ET has held that it was discriminatory for an employer to impose as a joining requirement that employees agree to cease to be a member of the childcare voucher scheme while on maternity leave.

In this case, the employer's childcare vouchers scheme requires employees when joining to agree to suspend their membership of the scheme during various types of leave. These include maternity and paternity leave, and long term sick leave. Mrs Donaldson sought to join the childcare vouchers scheme while she was pregnant. However, she was refused entry to the scheme because she would not agree to the suspension clause.

The ET agreed with the HMRC guidance that childcare vouchers are a "non-cash benefit" that must continue to be provided during maternity leave. The imposition of a requirement that Mrs Donaldson agree to suspend membership during maternity leave amounted to unlawful pregnancy and maternity discrimination.

In relation to indirect sex discrimination, it was common ground that the provision, criterion or practice (PCP) was the exclusion from the childcare vouchers scheme of individuals on particular types of leave, including women on maternity leave and individuals on sick leave.

The ET concluded that the PCP particularly disadvantages women. While others, such as men on paternity leave, would be disadvantaged, women are more likely to have lengthy absences on maternity leave. Accordingly, the ET also found the requirement amounted to unlawful indirect sex discrimination which the employer failed to objectively justify.

Mrs Donaldson was awarded £1,861 for financial loss and £3,500 for injury to feelings. An appeal by the employer is currently pending before the Employment Appeal Tribunal.

What does this mean for employers?

On the one hand, childcare voucher scheme provisions requiring employees to opt out of the scheme when on maternity leave will most likely amount to maternity and sex discrimination.

On the other hand, schemes allowing truly voluntary opt out are permissible. Some women may prefer to opt out of the scheme in the run up to and during maternity leave where the scheme permits them to revert to their 'old' (pre-salary sacrifice) salary as the salary sacrifice can adversely affect the amount received as SMP under the employer's enhanced contractual schemes based on percentages of normal salary.

Future developments

In the 2013 Budget, the government announced that employer-supported childcare voucher schemes would be closed to new participants and a new tax free government childcare scheme would be introduced from Autumn 2015.

However, the original launch date has been delayed following an unsuccessful legal challenge before the Supreme Court by several existing employer scheme providers to the legality of the government's use of an existing outsourcing contract to deliver the new government scheme.

On 1 July 2015, the government announced that it is to proceed with its tax-free childcare scheme and that the launch date is now "early 2017". Exact rollout details for the scheme are to be confirmed "in due course".

The current employer-supported childcare vouchers system will remain open to new entrants until the new scheme launches. Individuals who wish to remain within the old system will be able to do so while their employer continues to operate it. However, after the new scheme launches, employers cannot offer vouchers to new employees on a tax-exempt basis.


The increasing scope for 'associative' discrimination claims

Following the 2008 decision of the Court of Justice of the European Union (CJEU), Coleman v Attridge Law, the concept of so-called 'associative' discrimination was established.

In Coleman it was held that it is not necessary for an employee to be disabled to bring a direct disability discrimination claim: the claim can be based on someone else's disability, in that case Mrs Coleman's son.

While Coleman only considered direct disability discrimination, the explanatory note to the Equality Act 2010 makes it clear that direct discrimination claims based on association or perception are allowed in respect of all protected characteristics (apart from marriage and civil partnership). In other words, treatment can be 'because of' a protected characteristic where it is because the claimant is perceived to have that characteristic or because of the characteristic of another person, such as someone with whom the claimant associates.

Indirect associative race discrimination?

Recently in CHEZ Razpredelenie Bulgaria AD v Komisia za Zashtita ot Diskriminatsia, the CJEU has held that an individual may claim indirect discrimination under the EU Race Equality Directive on the basis of association with a group that is disadvantaged by a provision, criterion or practice (PCP), even if he or she is not of the same ethnic or racial group.

This means an indirect discrimination claim may be brought by a person not possessing the protected characteristic of race. It is enough that the person suffers alongside those of a certain ethnic origin, provided the treatment stems from a measure based on ethnic origin.

The case before the CJEU concerned a Bulgarian electricity company's practice in districts inhabited predominantly by Roma people of placing electricity meters at a height of approximately 6m, thereby making them inaccessible for normal visual checks, while elsewhere the same electricity meters are installed at a height of approximately 1.70m and so clearly visible to consumers. The reasons cited for this practice are tampering with electricity meters and illegal electricity extraction, which the company believed were especially common in 'Roma districts'. The claimant who was not of Roma ethnicity, but ran a shop in a predominantly Roma area, complained she was discriminated against by the placing of the meters.

Although the decision relates to the supply of goods and services, it has far-reaching implications for discrimination in an employment context. While it is well established that direct discrimination by association is prohibited by EU law this is the first suggestion from the CJEU that 'associative' indirect discrimination is also covered.

Under UK law section 19 of the Equality Act requires an individual to establish that the PCP creates a group disadvantage based on a protected characteristic that they themselves possess. By contrast, the CJEU interpreted the Directive as requiring the individual to simply identify a group disadvantage. If a person not possessing the relevant characteristic is "suffering alongside" the protected group as a result of the PCP ('collateral damage'), then they may bring a claim for indirect discrimination.

Reasonable adjustments?

Since the Coleman case, the tribunals and courts have been asked to consider whether employers have a duty to make reasonable adjustments for non-disabled employees associated with a disabled person.

Last year in Hainsworth v Ministry of Defence, the Court of Appeal confirmed that an employer had no duty under the Equality Act 2010 to make reasonable adjustments for a non-disabled employee whose daughter has Down's syndrome. The focus of the reasonable adjustments duty is for employers to make provision for disabled employees, job applicants and trainees, not for a non-disabled employee who is in some way associated with a disabled person

Earlier this month the Supreme Court heard arguments over whether it should consider allowing a further appeal in this case. We await the decision of the court as to whether the question has already been well and truly answered or whether the issue will face one last courtroom battle.


Trade Union Reform - the industrial battle lines are drawn!

On 15 July the Government introduced into Parliament the Trade Union Bill trailed in the Queen's Speech to "reform trade unions and protect public services against strikes".

A needed "modernisation of our outdated industrial relations laws to better reflect today's workforce and current workplace practices" (CBI) or "a slippery slope towards worse rights for all" (TUC) and a " brutal assault on the most basic of human rights" (RMT)?

So, what does this really mean? Our employment & equalities experts outline the proposed changes, possible consequences and the next steps here.


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