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Childcare vouchers – no longer child’s play

The position taken by HMRC that an employer must continue to provide childcare vouchers as part of a salary sacrifice scheme during an employee’s maternity leave has been challenged by the Employment Appeal Tribunal (EAT) in the recent case of Peninsula Business Services v Donaldson.

The Maternity and Parental Leave Regulations 1999 (MPLR) state that whilst she is on maternity leave an employee is entitled to all the usual benefits of her employment, including non-pay benefits.  However, the employee is not entitled to receive remuneration which (in most cases) is replaced by Statutory Maternity Pay. Childcare vouchers have historically been viewed as a ‘benefit’ rather than ‘remuneration’. This resulted in employers being obligated to continue to pay childcare vouchers to employees on maternity leave despite the fact that they were not earning any salary from which to make the appropriate ‘sacrifice’ to fund them.

Ironically, this obligation was (in practice) not well known, which lead to many employees missing out on the benefit and many employers being caught out as they were unaware of their obligations.

So against this backdrop, the important question to be decided by the EAT in the Donaldson case was whether childcare vouchers received via a salary sacrifice scheme were ‘non-pay’ benefits, as suggested by HMRC, or in fact part of an employee’s remuneration.

Peninsula Business Services v Donaldson

The employer ran a scheme that allowed employees to sacrifice a proportion of their salary in return for childcare vouchers. A condition of entry to the scheme was that the employee agreed to suspend their membership during maternity leave. Mrs Donaldson refused to join the scheme as she did not agree with the employer’s condition of entry, namely that she would lose her entitlement to childcare vouchers during maternity leave. Mrs Donaldson brought a claim in the Employment Tribunal (ET) arguing that the employer’s scheme amounted to pregnancy and maternity discrimination. This is where an employer treats a woman less favourably because of her pregnancy.

The ET upheld Mrs Donaldson’s claim under section 18 of the Equality Act 2010 and confirmed the guidance given by HMRC that childcare vouchers are non-pay benefits. This decision was subsequently appealed by the employer.


The EAT allowed the appeal on the grounds that the guidance given by the HMRC had no legislative basis to oblige the employer to fund childcare vouchers when the employee was on maternity leave.

Reversing decision of the ET, the EAT upheld the appeal on the grounds that childcare vouchers derived from a salary sacrifice scheme should actually be regarded as part of an employee’s remuneration rather than non-pay benefits. As a result, employees on maternity leave have no entitlement to receive childcare vouchers as they have no salary with which to sacrifice. This must be contrasted with vouchers that are provided by the employer in addition to salary, which would amount to non-pay benefits and should continue during maternity leave.

Now what?

The judgment of the EAT will be greeted enthusiastically by employers as in practice it means that (subject to the case being appealed) employers can stop subsidising childcare vouchers whilst an employee is on maternity leave, except in cases whereby the vouchers are paid as an additional benefit. Employers should however review their maternity policy and take appropriate legal advice before implementing any changes to their current system.

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Paul Kelly

Partner and Head of Employment
Employment Law
0113 227 9249
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Paul Kelly Blacks Solicitors LLP