In this case, the First Tier Tax Tribunal decided that a bonus should be included in calculation of SMP, and that SMP claims had not been settled by a COT3 agreement.
The facts
Ms Sexton was Head of Finance at Campus Living Villages, and was made redundant when she was pregnant, about four weeks before her due date (or "EWC"). She claimed pregnancy discrimination and unfair dismissal. Following ACAS conciliation, she and Campus Living Villages entered into a COT3.
Under the COT3, Ms Sexton was paid £60,000 "as compensation in full and final settlement of…all and any claims she has or may have relating to her contract of employment …and its termination". £30,000 of this was paid tax free, with income tax, but no national insurance contributions were deducted from the rest.
As Ms Sexton was still employed by Campus Living Villages within 11 weeks of her EWC, she was entitled to receive statutory maternity pay (SMP). Campus Living Villages thought that she had waived her rights to SMP under the COT3.
However, Ms Sexton complained to HMRC (which decides SMP claims) that she had not received her SMP. She claimed that her SMP calculation should take a discretionary bonus payment of £44,077, into account. On this basis, Ms Sexton claimed that she was entitled to £42,000 SMP.
HMRC agreed with Ms Sexton. Campus Living Villages appealed to the First Tier Tax Tribunal, on the basis that:
- The discretionary bonus related to her earnings for the previous year, so could not be part of Ms Sexton's "normal weekly earnings";
- Ms Sexton's right to SMP was taken into account in the compensation payment made under the COT3, so she had already received her SMP, and had no further entitlement;
- Ms Sexton had waived all claims arising from her employment, including any further claim to SMP;
- As ACAS had assisted with the settlement and wording of the COT3, culpability lay with them.
The First Tier Tax Tribunal dismissed the appeal. It held that:
- HMRC had correctly included the bonus in the SMP calculation. Ms Sexton's bonus was paid in the "relevant period" (in her case, the eight weeks immediately preceding the 14th week before the EWC). To calculate SMP, the employer takes the earnings in the relevant period (i.e. including the bonus) and calculates the weekly equivalent of that amount. All payments, whether usual or not, should be included in the calculation. The COT3 did not exclude her entitlement to SMP.
- If a woman satisfies the conditions for receiving SMP, she has an absolute right to the payment, and any agreement which purports to exclude this right is void.
- It was clear from the breakdown of the compensation payment that it did not include SMP. Additionally, national insurance contributions are required to be made on payments on SMP and this had not been done.
- It was unfortunate that ACAS did not advise correctly, but the acts and omissions of ACAS cannot affect HMRC's correct application of the law.
The Tribunal also pointed out that Campus Living Villages would be entitled to reclaim most of the SMP from the government.
What does this mean for employers?
Employers must take bonus payments made within the relevant period into account when calculating SMP. This is not a change in law.
Settlement agreements should label any SMP made under the agreement and ensure that the payment towards SMP is subject to deductions for tax and national insurance contributions.
Campus Living Villages UK Ltd and Commissioner for HMRC and Joanne A Sexton
