Judgement on childcare voucher schemes

Can an employer discontinue childcare vouchers during maternity leave? Yes, said the Employment Appeal Tribunal (EAT) in the case of Peninsula Business Services v Donaldson.  

The EAT decided there was no obligation on an employer to continue childcare vouchers (arising from a salary sacrifice scheme) during maternity leave.

Peninsula’s childcare voucher scheme required vouchers to be suspended during maternity leave. The Employee refused to agree to the suspension terms and brought a claim in the employment tribunal, claiming sex and maternity discrimination.   Under the Equality Act 2010 women on maternity leave are not entitled to their normal pay but are entitled to continue receiving non-pay benefits, such as a company car that is also used by the employee personally.

The EAT case needed to determine whether a childcare voucher (issued under a salary sacrifice scheme) amounted to pay or a non-pay benefit. The EAT noted the term ‘salary sacrifice’ was somewhat of a misnomer. The EAT concluded such schemes are intended to direct salary which would otherwise have gone into the employee’s pay-packet into the hands of the voucher provider.

The EAT decided childcare vouchers are in reality ‘salary diversion’ and as such, amount to remuneration/pay (as opposed to a non-pay benefit).  This was the case even though, for personal tax purposes, childcare vouchers are treated as a non-cash benefit. The benefit to the employee of a childcare voucher scheme was a saving of tax and national insurance.  But during maternity leave there was no such saving of tax because the employee was not entitled to normal remuneration anyway.

This case offers welcome clarification for employers. For any employer previously bearing the cost of childcare vouchers it represents an opportunity to save money going forward. This decision only applies to salary sacrifice child care vouchers and not vouchers offered in addition to salary/wages.

The EAT observed that to determine the case the other way would have resulted in a windfall for employees on maternity leave, and a cost to employers. It would also have potentially deterred employers from participating in such schemes. Such an impact would be counter production and likely diminish the take up by employers of childcare voucher schemes.

Employers should review and update relevant employment terms and policies in light of this case. For more information contact Christine Hart on 01204 527777.