Childcare vouchers – benefit or "remuneration"? And the implications for maternity leave

It’s always a tricky question to work out what are benefits that continue during maternity leave and what counts as “remuneration”. Childcare vouchers and car allowances are the two issues that come up most regularly. (Car allowances are still in the murky category where there is divided opinion on whether they are pay or a benefit).
The EAT in the recent case of Peninsula Business Services Ltd (PBS) v Donaldson has given clarity on this issue which is going to be helpful for employers. It’s worth looking at the facts of this case briefly. In order for Ms Donaldson to join the childcare voucher scheme, she had to agree that the salary sacrifice arrangement (a tax efficient scheme requiring her to divert part of her salary to pay for childcare vouchers) would be suspended in certain circumstances where her pay was not of sufficient level to buy the vouchers, including maternity leave, sick leave or other unpaid leave. Of course, during maternity leave, an employee is not being paid her usual salary, so common sense would dictate that, if she isn’t earning enough of a salary that can be diverted, then she should not be entitled to childcare vouchers. Ms Donaldson refused to agree to the terms of Peninsula’s scheme, believing that this was discrimination. Back in June last year the Employment Tribunal agreed with Ms Donaldson.
Peninsula appealed to the EAT who ruled in favour of Peninsula. They took a long hard look at the HMRC Guidance which had been relied on by the Tribunal, going back to looking closely at the tax and employment laws that sit behind the Guidance.   The key question was therefore whether or not the childcare vouchers count as “remuneration”. Yes they do was their answer. It could not have been the intention of Parliament to require employers to provide vouchers at a time when there was no salary to be sacrificed. This would mean a cost to the employer and a windfall for the employee.
What does this mean for employers?
Be careful though and check your scheme:

  • If you offer vouchers as part of a salary sacrifice scheme, you are essentially asking the employees to divert part of their salary, which they would otherwise receive, to buy vouchers. This counts as remuneration then and you do not need to continue that entitlement during maternity leave or during any other form of unpaid or sick leave where the level of salary is not enough to pay for the vouchers.
  • However, if you offer the vouchers as an additional benefit, then you do have to carry on supplying them.