Statutory Maternity Pay not included in Settlement Agreement

Statutory Maternity Pay not included in Settlement Agreement (Campus Living Villages UK v HMRC & Sexton)

A recent case heard in the First-tier Tax Tribunal (FTT) has held that a payment made under a settlement agreement does not remove a company’s obligation to pay Statutory Maternity Pay (SMP).

The Facts of the Case

Ms Sexton worked as the Head of Finance for Campus Living Villages until 26 December 2014. The reason given for her termination of employment was redundancy but she was pregnant at the time. Ms Sexton then launched a claim against Campus Living Villages for unfair dismissal and pregnancy discrimination. Through negotiation, with ACAS as acting as mediator, the claim was compromised in February 2015 with no admission of liability on either side. During negotiations, Ms Sexton provided a calculation of her claim which included a sum 'in respect of maternity pay entitlement'. According to the FTT however, this seemed to be 'calculated on the basis of the salary to which she would have been entitled over the period of maternity leave, rather than a SMP calculation'. Ultimately, the amount to be paid to Ms Sexton in settlement of her claim was agreed at £60,000.

The settlement was contained in a COT3 form which stated 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…For the avoidance of doubt, the settlement in this agreement includes, but is not limited to any claim under [statutes concerned with equality legislation]…'

However, in August 2015, HMRC issued a decision that Ms Sexton was entitled to SMP of just over £40,000. This decision was appealed by Campus Living Villages on three grounds:

1. That a discretionary bonus of £44,000 paid to Ms Sexton in October 2014 should not have been incorporated into HMRC’s SMP calculation.

2. That SMP was implicitly taken into account in the Settlement Payment.

3. That because the Settlement Agreement was developed under the guidance of an ACAS officer, it was not possible for certain provisions to be ineffective because otherwise they would not have been approved and advised by them.

Decision of the FTT

Campus Living Village’s appeal was dismissed.

Inclusion of SMP in Settlement Payment

s.164 of the Social Security Contributions and Benefits Act 1992, states that a woman has an absolute right to the payment of SMP. The FTT therefore reiterated that it is not possible for a woman to contract out of this right, with SSCBA 1992, s. 164(6) providing that any agreement which purports to exclude the right to SMP is void to that extent. The FTT regarded the breakdown of the payment that Ms Sexton received and decided that it did not include her entitlement to SMP. The FTT also crucially found that no NICs had been deducted by Campus Living Villages, as would have been required to be made on any payment of SMP (s6 SSCBA 1992), and that the Settlement Agreement itself expressly stated that the parties believed NICs were not payable. The FTT therefore decided that the Settlement Agreement could not exclude Ms Sexton’s entitlement to SMP and was void to the extent it purported to do so.

SMP and Bonus Payment

In its judgement, the FTT helpfully outlined the legislative provisions which govern SMP. They clearly stated that the first six weeks of maternity pay is to be paid at the 'earnings related rate'. That term is defined in s 166(2) of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992) as 'a weekly rate equivalent to 90% of a woman’s normal weekly earnings for the period of 8 weeks immediately preceding the 14th week before the expected week of confinement'. Ms Sexton’s due date (the expected date of confinement for the purposes of SMP) was 28 January 2015, which therefore meant that the 15 October 2014, which was when she received her discretionary bonus, fell within the relevant period. The next question which was considered by the FTT was whether a bonus could count as ‘earnings’. Earnings is defined by Reg 20 of the Statutory Maternity Pay (General) Regulations 1986, SI 1986/1960, as 'any remuneration or profit derived from a woman’s employment'. The FTT determined Ms Sexton’s bonus counted as 'earnings' as it was derived from her employment and there was an explicit provision for it in her contract of employment. It was therefore concluded that HMRC’s inclusion of the discretionary bonus in the calculation of SMP was correct.

Involvement of ACAS

The FTT agreed with HMRC that ACAS is independent and its acts or omissions could not affect HMRC’s correct application of the law. However, the FTT did note that it was 'unfortunate' that the ACAS conciliation officer did not advise the parties correctly in relation to the impact of the COT3 on SMP.

So what does this mean for employers?

• If an employer wishes to discharge its obligations to pay SMP, they must expressly include the payment of SMP in the Settlement Agreement, thus reiterating the importance of being express and clear as to the computation and detail of a settlement payment in the Settlement Agreement

• ACAS’s involvement in a Settlement Agreement matter does not alter HMRC’s interpretation of the law.

• Irregular or one-off payments, including bonuses, must be included in the calculation of SMP.

• Even if paid under a Settlement Agreement, SMP is subject to National Insurance Contributions.

To find out more and to receive a free information pack on our service, simply e-mail us at sao@hcrlaw.com

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