In 2005, the European Court of Justice (ECJ) ruled that an employee in receipt of a pay rise effective at any point from their eight-week reference period up until the end of their maternity leave must have their SMP recalculated.
The window of time from the start of the eight-week reference period up until the end of maternity leave spans 75 weeks and as a result, this ruling can seem unreasoned and confusing for employers to understand.
Practically speaking, we are finding that a lot of new clients have been non-compliant when it comes to the Alabaster ruling.
The effect on SMP
If an employer applies a pay increase (this includes NMW uplifts) during the ‘alabaster window’, then the 6 weeks of maternity pay at 90% of average weekly earnings (AWE) needs to be recalculated and the difference paid to the employee.
If the employee was only in receipt of basic pay during the eight-week reference period, this is as simple as applying the % pay increase to the 90% calculation and multiplying this by 6 weeks. However, if the payment contains other niable earnings, the re-calculation must be looked at in greater detail.
In the case of low earners where the 90% of AWE is lower than the SMP entitlement of £145.18, the recalculation will apply to the full 39 weeks.
The effect on OMP
If an employer offers an Occupational Maternity Pay scheme, they will have to look at the basis of their policy to determine if the Alabaster ruling applies here.
If the employer calculates their OMP using average earnings in the same way that SMP is calculated, this is likely to fall within the Alabaster ruling. On the other hand, if the employer calculates their OMP as a percentage of the rate of pay that they would have received had they been at work, the Alabaster ruling will not apply.
Some good news
Employers can reclaim 92% (or 103% if a small employer) of the additional SMP payment paid to employees as a result of the Alabaster ruling.