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Cutting through the Alabaster ruling complexities

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Sarah Smith more than scrapes the surface in discussing the Alabaster ruling and the process that must be followed when salary increases are awarded during periods of maternity leave.

26th Jun 2024
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Admittedly the Alabaster ruling is not most payroll professionals favourite subject, but at least it’s easier to calculate than holiday pay. It means employers need to be mindful when a staff member on maternity leave receives a pay rise at any point from the beginning of the “relevant period” of eight weeks for calculating statutory maternity pay (SMP) to the end of statutory leave.

In the Alabaster case an employee of Barclays bank (Woolwich plc), Michelle Alabaster, started her maternity leave in January 1996. She was later awarded a pay rise effective from 1 December 1995. Alabaster decided not to return to work after her maternity leave, leaving Barclays in August 1996.

In January 1997, Alabaster took Barclays to an employment tribunal on the grounds that the salary increase was not reflected in her maternity pay, which was a breach of the Equal Pay Act and European law, even though Barclays had compliantly worked out her SMP in line with the SMP regulations.

In 2004, the European Court of Justice concluded that these regulations didn’t implement EU law, and the Statutory Maternity Pay (General) Regulations 1986 were later changed to ensure compliance (added in reg. 21(7)) in 2005.

SMP qualification requirements

Only employees can qualify for SMP and they must: be on the payroll in the 15th week before the week childbirth is expected; provide the sufficient notice; provide proof of their pregnancy; have been continuously employed by the organisation for a minimum of 26 weeks up to any day in the qualifying week and receive at least the lower earnings limit (LEL), now £123, per week in the “relevant period”.

The gov.uk guide Maternity, adoption and paternity calculator for employers can help with calculations. 

What to do when Alabaster applies 

You may think that the pay increase is from now, for example 1 June, but the employee started maternity leave in February, surely this wouldn’t apply? But it would. You will need to recalculate the SMP but base the eight-week calculation on the new rate of pay the employee is entitled to as if they were receiving the increased amount in the relevant period.

The employee will need to be paid the difference between the SMP already paid and the new SMP rate. Usually, the only payment needed will be the rate difference during the first six weeks.

If an employee was not entitled to SMP at the time of going on maternity leave, the recalculation will still need to be carried out. The situation may arise that the employee may now be eligible for SMP. In this case SMP should be paid minus the amount of maternity allowance (MA) they received.

Other considerations 

The Alabaster case only impacts the individual’s rate of SMP and has no bearing on salary sacrifice schemes or pensions contributions. Remember, money must be deducted before any payment is made for salary sacrifice purposes, and as Alabaster is a retrospective calculation you can’t amend a salary sacrifice deduction in this case. Therefore, Alabaster only applies to an employee’s SMP rate. 

If your organisation or a client company pays occupational or enhanced maternity pay, an important consideration is whether you need to offset any additional SMP paid under the Alabaster ruling against the enhanced amount. Noting this in staff handbooks or company policies is highly recommended to avoid confusion.

Useful links for calculating SMP

The Alabaster ruling is arguably one of the most bizarre cases and whether you agree with the principle behind it or not, it’s not actually daunting to calculate when you break it down. Hopefully this article has answered all the relevant questions and provided you with the information you need to process your next Alabaster calculation with confidence. 

Replies (2)

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By FactChecker
26th Jun 2024 13:03

Decent summary of what is (usually) a very simple concept and calculation ... indeed if you're lucky, or simply have one of the more advanced Payroll software packages, the adjustment may well be done for you.
But that's only in the relatively straightforward cases where a series of *existing* SMP payments are affected by a pay rise.

However, although less common but more likely to affect SME businesses, it's considerably less easy to sort out if the EE *wasn't* entitled to SMP at the time of going on maternity leave - partly because you now need figures not already held on the payroll (e.g. any MA received by the EE), but mostly because it won't occur to a person who only does occasional payrolling.

As Sarah says, "the recalculation will still need to be carried out (in order to ascertain whether) the employee will now be eligible for SMP"; and, as not stated albeit hopefully obvious to most here, if EE now eligible then the SMP is retrospectively due for the whole period.

This is not a criticism, but I feel that aspect should have been given greater visibility/focus.

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By Rgab1947
27th Jun 2024 09:58

Am I glad I do not employ people anymore.

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