Our news item of 3 December 2004 covered the likely impact of the decision of the European Court of Justice in the case M J Alabaster v Woolwich plc and the Secretary of State for Social Security. A woman's SMP payments will have to be recalculated to take into consideration any pay rises prior to and during her maternity leave.

We raised with the Inland Revenue the matter of how a woman's average weekly earnings (AWE) should be recalculated. If her earnings during the relevant eight week period include payments that are not related to her rate of pay, e.g. commissions, round sum allowances, SSP etc., it would create a complicated calculation to apply the pay rise to some but not all of her earnings. It would be easier to apply the pay rise to all of the earnings but that would result in a higher arrears payment than would be due if it were applied only to the earnings based on her rate of pay.

In the context of the current rules for recalculating SMP in the event of backdated pay rises, the Inland Revenue's current guidance in the E15 and E16 Supplements does not explain how to perform the recalculation where some elements of the earnings are not subject to the pay rise. The only current guidance is in the Notes for Software Developers:

"The most straightforward way to work out the revised AWE is to apply the percentage pay rise to the original AWE figure or, if it is a flat rate rise, then convert it to weekly and add it to the original AWE figure."

We asked the Inland Revenue to comment on this issue and received the following response:

"In looking at the effect of 'Alabaster' on AWEs during the set period, it was agreed by DWP Policy that, for ease of applying the change, it would be acceptable if employers took the simplest approach to calculating the arrears due if they wished to do so.

So if an employer applies the straightforward method of calculating the percentage pay rise, as suggested in the Notes for Software Developers, to the original AWE figure, or of adding a flat rate rise, I can confirm that the method is acceptable.

There are some women who are paid by other means in addition to their salary/wages and other contractual pay. But these women are likely to be the minority of all those women who actually get SMP. The extra amounts involved in calculating by this method rather than by the splitting off of the other types of payment from the contractual element/s and calculating only on the contractual portion when recalculating the revised amount payable will be fairly minimal overall. More importantly, the women will be assured of getting the full benefit of the pay rise involved and therefore the employer will be sure of properly complying with the ECJ."

There are, therefore, two acceptable methods of calculation:

• the exact method, where the effect of a pay rise is applied only to those elements of earnings in the relevant period that are based on the rate of pay, and
  
  
• the simplified method, where the effect of the pay rise is applied in full to the AWE, even if some elements are not based on the rate of pay.

It is possible that, where a significant proportion of a woman's earnings are not based on the rate of pay, e.g. where commission is paid on top of a low base, the simplified method could create a considerably higher arrears payment than the exact method would. However, as most or all of the arrears payment can be recovered by the employer, the overall cost to the employer of using the simplified method is likely to be low. To take an extreme example:

Example

A woman's earnings in the relevant period are £;8,000, comprising £;2,000 base salary, plus £;6,000 commission. Her AWE are £;923.0769. Her SMP for the first six weeks amounts to £;4984.62.

She later has a 5% increase, requiring a recalculation of her SMP.

Using the exact method, her AWE increase to £;934.6154 and the SMP due for the six weeks increases by £;62.34 to £;5046.96. The employer can recover 92% of £;62.34, leaving an actual additional cost of £;4.98.

Using the simplified method, her AWE increase to £;969.2308 and the SMP due for the six weeks increases by £;249.24 to £;5233.86. The employer can recover 92% of £;249.24, leaving an actual additional cost of £;19.93.

The additional cost incurred by the employer, therefore, if the simplified method is used instead of the exact method, is £;14.95 - and that in a fairly extreme case. In comparison, the government has to bear an additional £;171.95.

It should not be forgotten that there could be two pay rises that force such a recalculation as this for the same employee.

Most employers, as a result of this concession, are likely to use the simplified method and thereby avoid what may, in some cases, be fairly complex calculations. The cost of the time spent in working out the arrears using the exact method is likely to be more than the extra cost incurred using the simplified method.

Discuss this news item in the PayPerShop Forum

...back to 31 December 2004