Employer’s £42,000 SMP Bill Despite Employee Agreeing ACAS Settlement

An employer has had to pay an employee over £42,000 in Statutory Maternity Pay, even though it had already paid her £60,000 under a settlement agreement in full and final settlement of all claims. 

Speedread

An employee who agreed a settlement of all her claims through ACAS was nonetheless entitled to receive over £42,000 SMP. An employee cannot contract out of their right to receive SMP and so the employee’s agreement to accept £60,000 in full and final settlement of all claims did not preclude her claiming SMP from her employer. The Tax Tribunal concluded that the settlement sum did not include SMP. SMP is subject to both income tax and National Insurance Contributions (NICs), but the settlement agreement only required deduction of income tax and the employer had not deducted any NICs. HMRC had also been correct to include a bonus the employee received in the reference period when calculating her SMP entitlement. 

Employers are able to recover the majority of the SMP they pay from HMRC. Employers should ensure that SMP paid under the terms of a settlement agreement is labelled as such and that they deduct both income tax and NICs from the SMP payment. This will ensure that the employee does not get “a second bite at the cherry” and that the employer is able to recover the SMP from HMRC.

Facts

In Campus Living Villages UK Ltd v The Commissioner for Her Majesty’s Revenue & Customs, Ms Sexton was employed as Head of Finance and was made redundant whilst pregnant. She issued claims for unfair dismissal and pregnancy discrimination which she settled through ACAS. Her employer paid her £60,000 in full and final settlement of all claims. 

She subsequently complained to HMRC that her employer had not paid her SMP. Employees are entitled to receive SMP if they are employed at the 15th week before the Expected Week of Childbirth, even if they subsequently resign or are dismissed. HMRC ruled that her employer should have paid her over £42,000 in SMP. The figure was so high because she had received a bonus during the eight week reference period for calculating her SMP. 

Her employer appealed to the Tax Tribunal, arguing that the bonus should not have been included in the SMP calculation, that it had paid the settlement sum in full and final settlement of all claims and that it had in any event already included SMP in the settlement sum. 

Judgment

The Tax Tribunal dismissed the appeal. 

First, HMRC had been correct to include the bonus when calculating her SMP entitlement. An employee’s normal weekly earnings for calculating SMP is not limited to their normal or usual pay but includes any earnings received in the eight week reference period. 

Second, an employee is not able to contract out of their right to receive SMP. The Tribunal considered whether the £60,000 already paid to Ms Sexton under the settlement agreement included her SMP, but concluded that it did not. Although the settlement agreement may have included an element in respect of maternity rights, it was clear from the breakdown of the payment that it did not include Ms Sexton’s entitlement to SMP. In addition, both income tax and National Insurance Contributions (NICs) have to be deducted from SMP, whereas the agreement provided that only income tax would be deducted (and the employer had not in fact deducted any NICs).

The Tax Tribunal went on to say that whilst it was unfortunate that ACAS had not advised the parties correctly, its mistakes could not affect HMRC’s correct application of the law. 

Implications

Employers are able to recover the majority of the SMP they pay from HMRC. Employers should ensure that SMP paid under the terms of a settlement agreement is labelled as such and that they deduct both income tax and NICs from the SMP payment. This will ensure that the employee does not get “a second bite at the cherry” and that the employer is able to recover the SMP from HMRC.