Employment Appeal Tribunal ruling on childcare vouchers is at odds with the approach taken by most employers.

The Employment Appeal Tribunal (EAT) has thrown a spanner in the works for employees who receive childcare vouchers while they are on maternity leave (Peninsula Business Services v Donaldson).

The EAT has decided that childcare vouchers provided to employees through a salary sacrifice arrangement should be classified as ‘remuneration’, meaning that employers do not have to continue to provide them to an employee on maternity leave.

This ruling is at odds with the previously understood position and the approach taken by most employers, and those who want to rely on it to change their current approach should proceed with caution.


Employees on maternity leave are entitled to retain all the usual terms of their contract of employment, save for those relating to remuneration which are replaced with statutory maternity pay (SMP) or the employer’s enhanced maternity pay scheme. All benefits which are not remuneration must be continued during maternity leave.

Childcare vouchers provided through a salary sacrifice arrangement have until now been treated as a non-cash benefit. They are a voucher to be given to a third party who in return provides a service (childcare) to the employee. They cannot be cashed in or used for any other purpose.

From a tax perspective, childcare vouchers are benefits in kind rather than earnings, so HMRC guidance confirms that employers should continue to provide them to employees who are on maternity leave as a benefit. Where childcare vouchers are provided as part of a salary sacrifice scheme, this provides tax and national insurance contributions (NICs) savings as compared to employees simply paying for childcare from their net salary.

This type of arrangement caused quite a storm when it was first introduced. Employers complained that, for employees who received SMP only, the employer would have to fund the childcare voucher scheme as there was no normal salary to ‘deduct’ in order to fund it.

This was actually based on a fundamental misunderstanding of how salary sacrifice works (considered further below), but most employers got over it – particularly when larger employers understood that the savings in employers’ NICs made through operating a salary sacrifice scheme were more than sufficient to fund the childcare vouchers of an employee who was in receipt of SMP only.

The Peninsula case

Peninsula operated a salary sacrifice scheme which provided childcare vouchers. Its policy, however, said that childcare vouchers would be suspended while an employee was on maternity leave and in receipt of SMP – an approach not in line with either the HMRC guidance or the general approach taken by most employers in light of that guidance. The claimant, Ms Donaldson, who was pregnant at the time and wanted to benefit from the childcare voucher scheme, brought a claim complaining that the policy was discriminatory. The Employment Tribunal agreed.

On appeal, and in a decision which says that the HMRC guidance was not determinative, the EAT ruled that childcare vouchers should be classified as remuneration. This meant that Peninsula was not required to continue to provide the benefit of childcare vouchers to employees on maternity leave.

The EAT’s reasoning was that the salary sacrifice arrangement was simply a diversion of an employee’s salary to purchase childcare vouchers in a tax-efficient way. The voucher is therefore effectively remuneration converted into childcare vouchers through the salary sacrifice arrangement.

Implications of the ruling

Perhaps surprisingly, the EAT’s judgment acknowledges that it might not have considered all of the relevant law in reaching its conclusions and the decision should therefore be treated with caution in any future litigation. This is somewhat unhelpful, particularly as employment tribunals are now bound to follow this decision.

Ms Donaldson was not represented and did not appear at the EAT hearing. This may have been unfortunate because the EAT gave particular weight to submissions made by counsel for Peninsula, who appears to have been the source of the idea in the judgment that salary sacrifice is a ‘diversion’ of salary. If those submissions had been countered, the EAT might well have reached a different conclusion.

The decision also relied on comments made by lay members of the panel about their experiences of salary sacrifice arrangements, which do not appear to have helped the EAT’s understanding of how childcare voucher schemes generally work in practice. For example, it is unlikely that many employers would choose to operate a childcare voucher scheme without requiring employees actually to sacrifice salary to participate in it, because this would miss out on the potential NIC savings – but the lay members appear to have suggested otherwise.

Ultimately, there appears to be a fundamental misunderstanding of how salary sacrifice works. The judgment ignores the fact that salary sacrifice involves a contractual reduction to the employee’s salary in return for the employer providing a benefit. It is not correct to say that salary has just been ‘diverted’ and should be treated as remuneration. At the point the employee ‘sacrifices’ their salary there is no remuneration to divert.

All that remains is the employer’s contractual obligation to provide the employee with a benefit. This is a non-cash benefit – so a benefit that cannot be regarded as remuneration and should continue to be provided during maternity leave. This is actually no different from the situation where an employer provides childcare vouchers other than under a salary sacrifice scheme, where the EAT accepted that the vouchers must continue to be provided.

Where an employee has sacrificed salary in return for childcare vouchers, her SMP and contractual maternity pay will be calculated on the basis of her reduced salary. The judgment simply does not consider that employees will have the first six weeks of SMP calculated on the basis of 90% of the reduced salary, or they may even have reduced their salary through salary sacrifice to a level that means they are not eligible for SMP at all.

In addition, an employee will be entitled to a lower level of enhanced company maternity pay than she would have received if she had not sacrificed salary. Following this decision, such employees will still have maternity pay calculated on the basis of their reduced salary but will no longer be entitled to childcare vouchers during maternity leave – the very reason they reduced their salary in the first place.

What next?

It would be risky for employers to rely on this authority as the basis for any decision to stop providing any childcare vouchers to employees on maternity leave. This is particularly so for employees who are currently on maternity leave and receiving vouchers, who have an expectation that this will continue.

The decision may be appealed to the Court of Appeal, or another challenge before the EAT may result in a different conclusion – particularly as the EAT itself admitted that its conclusion should be treated with caution. Depending on how contracts and policies are drafted, employees may also have a contractual right to receive childcare vouchers during maternity leave which would still be enforceable.

Finally, it is worth noting that the government plans to implement a tax-free childcare system from 2017. This may well change the position yet again.

James Walters, a managing associate at Lewis Silkin, contributed to this article