Pay Rises and Statutory Maternity Pay (SMP)
Legislative changes introduced in 2005 significantly altered how backdated pay awards are treated when calculating average weekly earnings for Statutory Maternity Pay (SMP). These changes are commonly referred to as the Alabaster ruling, following a decision by the European Court of Justice.
Despite being in place for many years, these rules remain complex and are not always widely understood. As a result, employers may inadvertently overlook their obligations. For example, employees on maternity leave who receive a pay increase - such as an uplift to the National Minimum Wage after 1 April - may be entitled to a recalculation of their maternity pay.
When Does a Pay Rise Affect SMP?
The timeframe during which a pay rise can impact SMP is broader than many expect. Any increase in pay occurring between the start of the eight-week calculation period and the end of maternity leave must be taken into account. In practice, this creates a compliance window that can extend beyond a full year.
Although the Alabaster ruling applies to statutory payments - including the initial six weeks of SMP paid at 90% of average weekly earnings - there is no requirement to backdate pension contributions or enhanced (contractual) maternity pay. In some cases, particularly where employers offer generous enhanced maternity schemes, the recalculation may result in little or no net adjustment.
However, employers should note that pay increases may still affect pension contributions or enhanced maternity pay from the date the increase takes effect. It is essential to review employee contracts carefully and seek professional advice where necessary.
Calculating Adjustments Under the Alabaster Rule
When recalculating SMP, it is important to recognise that average weekly earnings (AWE) may include more than just basic salary. Bonuses, commission, and other payments can all influence the calculation.
The key principle is to determine the difference between the employee’s old and new rate of pay and incorporate this adjustment into the original qualifying period. This produces a revised AWE, which is then used to recalculate SMP - typically affecting the first six weeks paid at 90%.
Example
Original monthly salary: £2,000
Increased monthly salary: £2,100
Initial AWE: £510
A common mistake would be to calculate AWE based solely on the new salary, which would incorrectly produce £484.
Instead:
Annual increase: £1,200
Weekly increase: £1,200 ÷ 52 = £23.08
Revised AWE: £510 + £23.08 = £533.08
SMP should then be recalculated using this revised AWE, with any payments already made offset against the new entitlement.
Maternity Allowance Considerations
Maternity Allowance (MA) is also affected by this legislation, although it is administered by the Department for Work and Pensions rather than employers. In rare cases, a backdated pay increase could move an employee into eligibility for SMP where they were previously only entitled to MA.
In such circumstances, employers would calculate the correct SMP entitlement and deduct any MA already received. As employees cannot receive both payments simultaneously for the same employment, appropriate documentation and coordination would be required.
Summary
Backdated pay awards and their impact on SMP are undoubtedly complex, but they should not be ignored. While this overview focuses on salaried employees, calculations for hourly paid workers - particularly those with variable hours or overtime - can be even more intricate.
Although the rules may appear cumbersome, compliance is essential. With careful calculation and, where appropriate, professional guidance, employers can ensure they meet their legal obligations accurately and effectively.