As payroll professionals, one of our key responsibilities is to stay abreast of legal rulings that impact how we calculate and manage employee benefits, particularly in areas as sensitive and important as maternity leave.

For you, however, trying to stay ahead of recent changes in regulations while simultaneously running your business can be challenging.

You might be unaware that a ruling – the Alabaster Judgement – significantly altered the landscape of Statutory Maternity Pay (SMP) calculations in the UK.

Below, we will explore what this judgement means for employers and how it impacts SMP calculations.

The essence of the Alabaster Judgement

The Alabaster Judgement stemmed from a case involving Mrs. Michelle Alabaster, who, during her maternity leave in 1996, received a pay increase that was not initially reflected in her SMP.

The European Court of Justice ruled that any pay rise awarded from the start of the reference pay period to the end of maternity leave must be included in SMP calculations.

This judgement establishes that if an employee on maternity leave receives a pay rise, their SMP must be recalculated to include this new rate.

Practical implications of the case for payroll

• Recalculation of SMP: If an employee on maternity leave gets a salary increase, the payroll department must recalculate the first 6 weeks of SMP, which is paid at 90 per cent of average earnings, using the new rate and pay the difference.
• Extended time frame: This ruling potentially opens a seventeen-month window for consideration, possibly encompassing more than one pay increase.
• Complexity and compliance: Many payroll professionals find this ruling challenging due to its complexity and the meticulous recalculations it requires. However, understanding and complying with it is crucial to ensure fair treatment of employees on maternity leave.

To understand the practical application of the case it is important to understand that Michelle Alabaster was entitled to a pay rise effective from December 1995, after her relevant earnings period but before her maternity leave started.

Initially, she would have had to wait until returning from maternity leave to benefit from this pay rise.

However, the ECJ’s judgement mandated that this pay rise be factored into her SMP calculation, leading to a revised higher SMP amount.

A closer look at recalculation

Consider an employee whose average earnings were £150 per week before a pay rise, leading to an SMP of £135 per week (90 per cent) for the first 6 weeks.

If a pay rise increases her average earnings to £180 per week, her revised SMP would be £162 per week.

Even if this amount is lower than the current statutory maternity rate, the employer is required to pay the difference between £162 and £135 for the entire 39 weeks of the maternity leave period.

In essence, the Alabaster Judgement underscores the importance of accurate and fair calculations in maternity pay.

For employers and payroll professionals, it’s essential to understand these nuances and ensure compliance.

By diligently applying these principles, you not only adhere to legal standards but also support your employees during crucial phases of their lives, reinforcing a culture of fairness and equality in the workplace.

To learn more about payroll and maternity leave responsibilities, please contact one of our team.