Claire Rankin, legal director at Burges Salmon, looks at the impact of family leave on other benefits
Many employers operate their workplace pension schemes on a salary sacrifice basis to reduce their payroll administration and national insurance liability. The employer and employee agree to vary the employment contract to reduce salary in return for the amount of the reduction being paid to the scheme as an extra employer pension contribution. The employee does not pay member contributions to the pension scheme.
This works well when salary is paid as normal, but questions can arise during family leave when salary is reduced or replaced by statutory pay or ceases altogether pending a return to work.
Must employers continue salary sacrifice during family leave?
Specific legal provisions dealing with pension contributions mean that their treatment during family leave differs from other benefits acquired by salary sacrifice (such as childcare vouchers).
The general principle during maternity, paternity, adoption and shared parental leave is that terms and conditions of employment must continue as normal save for 'remuneration', defined as 'wages or salary'. Although an employer pension contribution in exchange for salary is by definition neither, section 75 of the Equality Act 2010 and schedule 5 of the Social Security Act 1989 set out how employer sponsored pension schemes should comply with the equal treatment principle during such leave.
Debate remains over the interrelation and scope of these provisions, but the generally accepted view is that employer pension contributions must be continued as normal (based on the employee's normal 'at work' pay) during any period of ordinary maternity leave (whether paid or unpaid) ('OML') and any paid additional maternity leave, and during any period of paid paternity, adoption or shared parental leave. Thus, the employer must continue both its standard and extra employer contributions in full during such leave, including when the employee is not receiving full pay. For defined benefit occupational pension schemes, this also means that the employee's pension and death benefits should continue to accrue as normal.
Paid absence for family reasons should also be treated as a period of normal work, but in this case the employer can base pension benefits and contributions on actual pay. It should be possible therefore to base the standard and extra employer contributions on actual pay.
Contractual claims are a possibility, so if it is intended to limit contributions under the above legal principles the terms of the salary sacrifice or flexible benefit scheme (and resulting contractual variation) and the applicable leave policies should be reviewed for consistency. One option is to include a term that the sacrifice reduces or ends automatically in line with pay, subject to the laws governing maternity and other forms of family leave.
Can statutory pay or other entitlements be sacrificed?
Where there is no or insufficient salary to exchange for the extra employer contribution, statutory pay cannot be sacrificed, but any contractual pay can be. If the employee has other entitlements which do not fall within the exception for 'remuneration', the employer must continue them as normal during OML and paid leave and cannot sacrifice them in lieu of salary. If there is a shortfall, the employer must meet the full cost of the extra employer contribution itself.
It is worth remembering that the sacrifice also means that the employee's statutory entitlements are lower (although the employer may have chosen to assess company entitlements by reference to the employee's notional 'pre-sacrifice' salary).
Can employers apply an automatic opt out from salary sacrifice?
It is risky to automatically opt out employees on maternity leave from salary sacrifice for pension contributions, and to require them to contribute based on their actual pay instead.
An employee might wish to opt out of salary sacrifice to increase her statutory pay entitlements. However, an automatic opt out for a reason connected with pregnancy, giving birth or maternity leave is likely to constitute unlawful discrimination. It may also breach the employee's contract of employment.
Similarly, treating employees who take other forms of family leave less favourably than those on maternity leave could give rise to unlawful indirect discrimination.
Can employers limit the sacrifice?
Employers can restrict the opportunity for employees to substantially increase their sacrifice prior to a period of leave so as to benefit from extra employer contributions. For example, the sacrifice terms could apply an overall cap to the amount of pay it is possible to sacrifice, and limit the opportunity to increase it to the annual renewal date. In addition, if employees can vary or end their sacrifice when a lifestyle event occurs (which includes a new baby or adoption), this opportunity could be limited to reducing or ending the sacrifice.
Claire Rankin is a Legal Director specialising in pensions law at Burges Salmon LLP.