Employees on maternity leave are not exempt from being dismissed or selected for redundancy in a genuine redundancy situation where there is no suitable alternative vacancy.

Once the dismissal takes effect, the maternity leave period automatically comes to an end. However, employers should be aware that the right to receive statutory maternity pay (SMP) survives termination of the contract. Provided the employee fulfils the conditions for payment of SMP, she will be entitled to receive SMP regardless of her departure for any reason, including resignation, misconduct and redundancy.

While the vast majority of SMP can be reclaimed by employers through the tax system, there are some particular points that employer's need to bear in mind when negotiating exit packages for pregnant employees and those on maternity leave.

Our employment and equalities experts consider the SMP tricky issues including 'bonus babies', 'offsetting' and 'exit packages'.

The Basics:

Entitlement to SMP

A pregnant employee with:

  • 26 weeks' continuous service into the 15th week before the expected week of childbirth (EWC);
  • average weekly earnings above the lower earnings level (currently £118 per week);
  • is still pregnant (or recently given birth) 11 weeks before the EWC; and
  • has given correct notice and provided a certificate from a midwife or doctor confirming the EWC

is entitled to Statutory Maternity Pay payable for 39 weeks.

Calculating SMP

SMP is paid:

  • for six weeks at 90 per cent of her average weekly earnings (with no upper limit); followed by
  • 33 weeks at a flat rate currently £148.68 or 90 per cent of her average weekly earnings if that is less than the flat rate.

To calculate the average weekly earnings, the relevant period is usually the eight weeks before the qualifying week which is the 15th week before the baby is due.

To calculate the average weekly earnings, employers must take account of any of the following paid in the relevant eight week period (non-exhaustive list):

  1. wages or salary;
  2. overtime;
  3. holiday pay; and
  4. commission, including any unusual payments such as an annual bonus.

Some payments are excluded from the calculation such as pension contributions and payments under share incentive schemes.

If the employee is eligible for a pay rise between the start of the relevant eight week period and the end of her statutory maternity leave (SML), the SMP must be recalculated as if the pay rise had taken place at the beginning of the relevant period.

Employer reimbursement level

Employers can usually reclaim 92% of the SMP they pay by deducting it from their next payment of National Insurance Contributions (NICs), PAYE and other payments to the Inland Revenue. Employers who qualify for Small Employers' Relief can reclaim 103%.

Offsetting SMP

Many employers operate enhanced contractual maternity pay schemes. A contractual obligation to pay enhanced maternity pay for the same week in which SMP is due is offset by any SMP received, i.e. SMP is not payable in addition to contractual payment. SMP can also be offset against other contractual remuneration such as contractual notice pay and enhanced contractual redundancy pay (but not against statutory redundancy pay).

The offset rule only applies on a week-by-week basis. The employer cannot offset contractual remuneration paid in the first part of the maternity pay period against SMP due in the remaining part of the pay period. Under Schedule 13 to the Social Security Contributions and Benefits Act 1992 (SSCBA 1992) 'any contractual remuneration paid to a woman by an employer of hers in respect of a week in the maternity pay period shall go towards discharging any liability of that employer to pay [SMP] to her in respect of that week'. In other words, contractual pay can be offset against SMP but only on a week-by-week basis.

Payment of SMP

It is intended that SMP should be paid in the same way and at the same time as the woman's normal wages would be paid. SMP is a weekly rate but the employer does not have to pay it weekly. If the woman's wage is normally paid monthly, the employer can pay SMP monthly with an adjusting payment for any odd days.

However, there is nothing in the legislation to prevent an employer from making payment of the employee's entire prospective entitlement to SMP by way of a lump sum - see Settlement agreements & SMP points to note below.

The tricky bits

Pregnant employees who have not yet commenced maternity leave

SMP is not payable until the employee has ceased work. In most cases this will simply be by reason of being on maternity leave. For a pregnant employee dismissed before she has begun maternity leave, provided she meets the qualifying conditions (26 weeks' continuous service in 15th week before etc.), she will be entitled to receive SMP.

The SMP pay period will start on the earlier of the following dates:

  • the Sunday of the 11th week before the baby is due; or
  • the day after the baby is born.

If she leaves her employment after the start of the 11th week, then the pay period starts the day following the day on which she left her employment.

Where the employer terminates the employee's employment before she qualifies for SMP and the employee can show that the sole or principal reason for dismissal was to avoid liability for SMP, the employer will still have to pay her SMP if she has been employed by the employer continuously for at least eight weeks.

Special cases

In the sad circumstances of a stillbirth or death of the infant special rules apply. A woman who suffers a stillbirth occurring after 24 weeks' pregnancy remains entitled to SML and SMP. However, if a woman's pregnancy results in a miscarriage or stillbirth before the end of the 24th week of pregnancy she will not be entitled to SML or SMP (although she may be entitled to statutory sick pay if she satisfies the qualifying conditions). If the child survives only for a very brief time this constitutes a live birth. In such a case, the birth would attract SML and SMP entitlement even if the child was born (and died) before 24 weeks of pregnancy.

For the purposes of SML and SMP, it is the birth mother who is regarded as the child's mother. Provided they meet the qualifying conditions, surrogate mothers and those who give their child up for adoption are entitled to SML and SMP regardless of whether or not they continue to have contact with the child following birth.

Bonus Babies

The inclusion of annual bonus payments for the purposes of calculating "average weekly earnings" can have a significant effect on the amount of SMP an employee receives during the first six weeks of maternity leave.

The relevant regulations define 'earnings' as including "any remuneration or profit derived from a woman's employment".

The case of Campus Living Villages UK Ltd v HMRC and Sexton, provides a useful illustration.

The relevant dates as regards Ms Sexton were:

  • employed since 1 July 2010;
  • £44,077 annual bonus under employer's discretionary scheme received 15 October 2014;
  • EWC 28 January 2015 (baby born 5 February); and
  • dismissed as redundant 26 December 2014

The employer argued the October bonus payment should not be taken into account in calculating the first six weeks of SMP (90% of average weekly earnings). The employer argued that the bonus payment related to the previous year and so could not be part of Ms Sexton's 'normal weekly earnings'.

The First Tier Tax Tribunal rejected the employer's arguments and held:

  • the 15th October bonus payment clearly fell within the relevant period - being 8 weeks ending with the 15th week before the EWC of 28 January;
  • 'earnings' include any remuneration or profit derived from a woman's employment. Irregular or one-off payments including bonuses therefore count as earnings. Ms Sexton's contract of employment provided for her participation in the employer's bonus scheme and therefore derived from her employment; and
  • there is no requirement that the pay in the relevant period must be 'normal' in the sense of the usual amount. The regulations make it clear that all payments, whether usual or not are included in the earnings for the purpose of the calculation.

PILON clauses and offsetting

Can SMP be offset against a payment in lieu of notice (PILON) on termination of employment? If contractual - yes.

In Ladiverova v (1) HMRC (2) Chokdee [2016], the First Tier Tax Tribunal confirmed that a PILON payment made pursuant to a term in the contract of employment constitutes contractual remuneration. As such, it should be set off against the employer's liability to pay SMP.

In this case, the employee was not entitled to payments of SMP in addition to the contractual PILON payments already received in respect of the seven weeks to which the PILON related. The employer was not entitled to offset the total contractual PILON paid against the total SMP due as offset only applies on a week-by-week basis - in this case £2,807.64 of the £3,068.80 PILON paid could be off set (seven weeks of SMP).

The decision is limited to the treatment of a contractual PILON payment. Whether or not a non-contractual PILON is subject to a similar offset will have to be decided in a future case. It is certainly arguable that a non-contractual PILON amounts to 'damages' in respect of a breach of the terms of the contract and not 'contractual remuneration'; as such it cannot be offset.

Exit agreements and SMP

Can SMP be included in a settlement agreement? No.

In Campus Living Villages UK Ltd v HMRC and Sexton [2016], Ms Sexton had started employment tribunal claims for unfair dismissal and pregnancy dismissal in relation to her selection for redundancy. Following conciliation by the Advisory, Conciliation and Arbitration Service (ACAS), the claim was settled in February 2015 for the agreed sum of £60,000, with the Settlement Agreement (COT3) stating that the amount was:

'compensation in full and final settlement of…all and any claims she has or may have relating to her contract of employment…and its termination…Included in this Settlement Payment is a sum of £20,000 as compensation for injury to feelings…For the avoidance of doubt, the settlement in this agreement includes, but is not limited to any claim under [statutes concerned with equality legislation…The parties believe that the Settlement Payment is not subject to National Insurance'.

In August 2015, HMRC issued a decision that Ms Sexton was still entitled to SMP of just over £42,000 (see bonus baby above) from the employer. The employer argued that the additional sum was not payable as SMP had already been taken into account as part of the Settlement Payment. The tax tribunal rejected the employer's arguments:

Women who meet the qualifying conditions have an absolute right to the payment of SMP. Under section 164(6) of the Social Security Contributions and Benefits Act 1992, it is not possible for a woman to contract out of that right. Any agreement which purports to exclude the right to SMP is void to that extent.

While the Settlement Payment may have included an element in respect of maternity rights, there was no indication that any part of the payment was in respect of SMP. Also if an element for SMP was included that element would be subject to NICs contrary to the wording of the agreement.

While it was unfortunate that the ACAS officer did not advise correctly in relation to the impact of the agreement on SMP, ACAS is independent of HMRC and ACAS's acts or omissions could not affect HMRC's correct application of the law.

In NVCS Ltd v (1) Commissioners for HMRC (2) Dare [2019] the First Tier Tax Tribunal reiterated that it is not possible to enter into a binding agreement in 'full and final settlement' of a claim for SMP even under the auspices of ACAS unless the employer has actually paid the employee her entitlement to SMP.

In the case of Mrs Dare, the tax tribunal once again confirmed that a term of any agreement that purports to settle 'all claims' cannot compromise a claim to SMP - any agreement purporting to exclude or limit an employee's entitlement to SMP is void under the SSCBA 1992. The tax tribunal went on to consider if the £10,000 settlement paid to Mrs Dare under the Acas negotiated COT3 settlement agreement included her entitlement to SMP. The tax tribunal answered - no. The payment of SMP was not included in the £10,000 compensation as there was no express reference to SMP in the agreement.

Settlement agreements & SMP points to note

When negotiating a settlement agreement it is important to ensure either:

  • The agreement provides for the employer to continue to pay SMP weekly or monthly for the duration of the SMP period (or until the employee commences new employment or otherwise ceases to be entitled to SMP); or
  • The agreement clearly sets out the total remaining SMP entitlement and expressly provides for this to be paid as a lump sum on termination.

In choosing which option to take remember:

  • The burden will be on the employer to show that it has paid SMP in full; and
  • The SMP payments (or lump sum) should be subject to deductions for income tax and NICs in the usual way.

If making a lump sum payment:

  • the employer and employee may end up paying slightly more national insurance than if SMP is paid on the normal pay day (because one large payment is being made);
  • the employer runs the risk of having overpaid if something changes during the SMP period to disqualify the employee from receiving it, for example, commencing employment with a new employer after giving birth; or
  • if an employer has already recovered the lump sum from HMRC and the woman subsequently becomes disentitled to it, the employer will be required to repay to HMRC the amount wrongly recovered. Provision should be made for the former employee to notifiy the former employer if she ends her SMP period early.

Lessons for employers

As most employers can reclaim 92% of the SMP they pay by deducting it from their next payment of NI contributions, PAYE and other payments to the Inland Revenue, why should employers be concerned?

  1. 8% of SMP may still amount to a sizable sum where a large annual bonus payment must be factored in the SMP calculation. In the Sexton case, the employer clearly believed that in offering £60,000 by way of settlement, this would extinguish its SMP liability as well as injury to feelings and unfair dismissal compensation. By not appreciating the effect the October bonus payment had on SMP, the employer vastly underestimated the SMP payable.
  2. SMP liability cannot be negotiated and settled under a Settlement Agreement, even under the auspices of ACAS (COT3). In the Sexton case, designating a portion of the settlement payment as 39 weeks of SMP in the settlement agreement would not have prevented the full amount of SMP being payable - a lower SMP payment could not be agreed . However, it no doubt would have influenced its bargaining positon and sums offered in settlement for the other aspects of the claim.
  3. Understand the offset rules and tax implications. SMP can only be offset against contractual remuneration on a week-by-week basis. What this means for contractual PILONs is that you can only offset a contractual PILON for the weeks the PILON represents. So if you have a six week notice period, only six weeks of SMP can be offset against the PILON.
  4. Failure to operate SMP correctly could result in a penalty charge by HMRC of up to £3,000.