In order to work out an employee’s statutory maternity pay (SMP) entitlement, it is necessary to calculate her average total earnings over a specified period. However, under legislation, employers must recalculate an employee’s SMP if she is subsequently awarded a pay increase during her pregnancy or maternity leave, and must backdate the new rate of SMP to the start of the maternity pay period. A failure to do so could result in a claim under the Equality Act 2010. This XpertHR “how to” guide steers employers through the process of dealing with a pay rise that coincides with an employee’s pregnancy or maternity leave.

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How to deal with a pay rise that coincides
with an employee’s pregnancy or maternity
leave
In order to work out an employee’s statutory maternity pay (SMP) entitlement,
it is necessary to calculate her average total earnings over a specified period.
However, under legislation, employers must recalculate an employee’s SMP if
she is subsequently awarded a pay increase during her pregnancy or maternity
leave, and must backdate the new rate of SMP to the start of the maternity pay
period. A failure to do so could result in a claim under the Equality Act 2010.
This XpertHR“how to”guide steers employers through the process of dealing
with a pay rise that coincides with an employee’s pregnancy or maternity leave.
The guide covers:
Background
Determining when an employee would receive a pay increase
and the amount of the increase
Pay rises that take effect during the eight-week calculation
period
Calculating the increase in SMP entitlement
Pay rises that take effect after the end of the paid period of
maternity leave
Employees who become entitled to SMP as a result of a pay
increase
Informing the employee of the pay increase
Making the payment of additional SMP
The effect of a pay rise on contractual maternity pay
Record-keeping
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How to deal with a pay rise that coincides with an
employee’s pregnancy or maternity leave
Background
An employee who takes maternity leave may qualify for statutory maternity pay (SMP).
SMP amounts to six weeks of pay at 90% of the employee’s earnings and a further 33 weeks
at the standard rate, or 90% of average weekly pay for the whole period if that is less than
the standard rate. Therefore, to work out an employee’s SMP entitlement, it is necessary
to calculate her earnings. This is done by taking an average of her total earnings over the
eight-week period leading up to the 14th week before the week when the baby is due (the
calculation period).
In Alabaster v Woolwich plc and Secretary of State for Social Security [2004] IRLR 486 ECJ, the
European Court of Justice held that the calculation of the earnings-related element of
maternity pay should take into account a pay rise that is awarded at any time from the start
of the calculation period to the end of maternity leave. As a result of this, special provisions
are contained in the Equality Act 2010 (see The effect of a pay rise on contractual maternity
pay) and the Statutory Maternity Pay (General) Regulations 1986 (SI 1986/1960).
Under reg.21(7) of the Statutory Maternity Pay (General) Regulations 1986, employers must
recalculate an employee’s SMP if she is awarded a pay increase during the period beginning
with the calculation period and ending at the end of her maternity leave. The recalculated
SMP must be based on the employee’s normal weekly earnings after the pay rise, ie as if the
pay rise had taken place before the calculation period. The employer must backdate the new
rate of SMP to the start of the maternity pay period. A failure to do so could result in a claim
under the Equality Act 2010.
Determining when an employee would receive a pay increase and the
amount of the increase
The provisions dealt with in this guide apply when an employee either is awarded a pay
increase or would have been awarded one were it not for the fact that she is absent on
maternity leave. Employers cannot avoid these provisions by waiting until the employee
returns from maternity leave before awarding a pay rise.
The more transparent the employer’s pay system, the easier it will be to determine whether or
not an employee would have received a pay rise during maternity leave. Where the employer
employs all workers on a standard scale and applies an across-the-board cost of living
increase, there will be no room for argument. It will be clear that the employee would have
received the same increase during her maternity leave.
Even where there is no across-the-board pay increase awarded, most employers will have a
pay review date when salaries are reviewed. This is likely at least to raise the presumption that
the employee would also have had her salary reviewed and the question will then be how
much the increase would have been.
To avoid disputes over the amount of a pay increase during an employee’s maternity leave,
the employer should, where possible, make a decision about the employee’s pay at the
same time and in the same way as for other employees. It should use the same criteria for
deciding the pay increase, such as performance or achievement during the preceding year.
Where the employer normally makes a decision about pay increases following an appraisal
process, it should take care to ensure that its decision is not affected by the fact that the
employee has been pregnant or on maternity leave for part of the year. It is usually safest
for the employer to proceed on the basis that the appraisal would have been a positive
one, especially if the employee has received positive ratings in the past. Even if the
previous rating was not entirely positive, the employee could argue that her pregnancy
and absence prevented her from showing the improvement that she would otherwise
have made. Assuming that the pay rise is a relatively modest one, the employer may
consider that it is not worth risking a legal challenge by arguing that a low rating would

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have been inevitable even if the employee had not been pregnant. On balance, employers
may find it simplest to err on the side of generosity in setting the appropriate pay rise for
an employee on maternity leave.
Pay rises that take effect during the eight-week calculation period
The key factor for employers to remember in calculating an increase in SMP is that it has to be
calculated as though the pay increase took effect before the start of the calculation period.
Example one
Suppose the pay increase takes effect halfway through the eight-week calculation period. An
employee earning £300 per week, and whose pay increases by 5%, will earn an extra £15 per
week for each of the last four weeks of the calculation period.
However, although the pay increase affects only the last four weeks of the actual pay due in
the calculation period, when it comes to the calculation of SMP it is treated as applying to the
whole eight weeks. Thus, the normal weekly earnings of the employee will be taken as £315.
That will give a figure for the first six weeks of SMP of £283.50 (90% of £315).
Calculating the increase in SMP entitlement
The effect on the first six weeks of SMP
In most cases the impact of a pay rise will be felt in the calculation of the first six weeks of SMP
rather than in the longer period paid at the standard rate.
Example two
Take an employee who earns £30,000 per year, making her average weekly earnings £576.92.
Her maternity pay would consist of six weeks at 90% of that sum, which is £519.23, and the
remainder at the fixed lower rate of £136.78.
If, during her maternity leave, she receives a 3.5% pay increase, her new salary is £31,050.
That is the salary level that the employer must use to calculate her SMP. It equates to £597.12
per week and 90% of her weekly earnings would be £537.41. That amounts to an increase of
£18.18 per week and £109.08 in total.
Note that the 33 weeks at the standard rate of £136.78 would be unaffected by this increase
because for someone on this employee’s level of salary, the standard rate is a fixed sum that is
not calculated by reference to the employee’s pay.
The effect on the last 33 weeks of SMP
However, where an employee’s earnings are below or just above the standard rate of SMP, the
rate payable for the last 33 weeks of SMP may also be affected by a pay increase.
Example three
Take an employee earning £130 per week. Ninety per cent of her weekly earnings would be
£117. Because this is lower than the standard rate of SMP, she would receive this sum for the
whole of the 39 weeks of her maternity pay period, not just for the first six.
If, during her maternity leave, she receives a 3% pay rise, that would take her weekly earnings
to £133.90 (still below the standard rate). Since all of her SMP would be based on 90% of her
weekly earnings, her SMP entitlement would go up to £120.51. Over the 39 weeks, this results
in an additional sum of £136.89.
Two pay rises during the relevant period
If an annual pay rise takes place before maternity leave begins and the employee takes her
full, or close to her full, entitlement to a year’s leave, it is likely that there will be two pay rises
between the start of the calculation period and the end of the employee’s maternity leave.
Therefore, the employer may have to recalculate the employee’s entitlement to SMP twice.

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Pay rises that take effect after the end of the paid period of maternity leave
The employer will need to recalculate the employee’s maternity pay even if the pay rise takes
effect after the end of any period of maternity pay but during maternity leave.
Example four
If an employee started her maternity leave on 1 January and received SMP of six weeks’pay
at 90% of earnings followed by 33 weeks at the standard rate, she would cease receiving any
maternity pay by the end of September. However, even if the employer’s pay review date
is 1 October (and the employee is still on maternity leave on that date) the employer must
recalculate her maternity pay entitlement based on the new rate of pay. The employer must
pay her the outstanding balance.
Employees who become entitled to SMP as a result of a pay increase
Employees are not automatically entitled to SMP. To qualify, their normal weekly earnings
must at least reach the lower earnings limit for national insurance (currently £109 per week
from 6 April 2013).
The statutory provisions on pay increases during maternity leave have the effect of altering
the calculation of an employee’s normal weekly earnings. This means that a pay increase may
push the normal weekly earnings of an employee who was not previously entitled to SMP
over the lower earnings limit, with the result that she becomes retrospectively entitled.
In most cases, the employee in question would have been receiving maternity allowance from
Jobcentre Plus during the period otherwise covered by SMP. The employee is not entitled to
be paid both maternity allowance and SMP for the same period.
If an employee in receipt of maternity allowance becomes entitled to SMP as a result of a pay
rise, the employer must pay the employee the difference between the maternity allowance
that she has received and the SMP to which she is entitled (reg.21B of the Statutory Maternity
Pay (General) Regulations 1986). The employee will not be required to repay the maternity
allowance that she has received, but her entitlement to maternity allowance ceases once she
is entitled to SMP from the employer.
Example five
Take an employee on the minimum wage of £6.19 per hour (the adult rate from 1 October
2012) who works 16 hours per week. That gives a weekly wage of £99.04, which is below
the lower earnings limit, meaning that she will not qualify for SMP. Instead she is entitled to
maternity allowance of £89.14 per week (90% of her weekly earnings).
However, suppose her employer decides to adopt a policy of paying a“living wage”of £8.55 per
hour and that change takes place four weeks into her maternity leave. Sixteen hours per week at
£8.55 per hour gives weekly earnings of £136.80, which would be sufficient to qualify for SMP.
As a result of this pay increase, the employee will be entitled to SMP of £123.12 per week (90%
of her weekly earnings).
The employer must top up the maternity allowance the employee has received to the level of
the SMP to which she has become entitled. It must therefore pay her £33.98 (£123.12 - £89.14)
for each of the four weeks in which she received maternity allowance; a lump sum of £135.92.
It must pay her SMP at £123.12 for the remaining 35 weeks of the SMP period.
Informing the employee of the pay increase
When the employer has decided on the pay increase that will apply and recalculated the
employee’s maternity pay, it should write to her setting out the details of the increase as soon
as possible, ideally at the same time that it notifies other members of staff of the pay increase.
If the employee is no longer receiving pay from the employer, the letter will need to make it
clear that the new rate of pay will apply immediately on her return. If the employee is still in
receipt of contractual maternity pay, the pay rise will have an immediate effect on her future
payments.

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In either case, it is likely that the pay increase will have an impact on the maternity pay
that she has already received. The employer should explain this in the letter, with the
arrangements that it will make for paying any outstanding maternity pay to which the
employee has now become entitled.
Making the payment of additional SMP
There are no specific provisions setting out when an amount owing to the employee as
a result of a pay increase should be paid. However, the employer should be aware that
the entitlement to the extra sum is immediate; the change in the entitlement to SMP is
retrospective in the sense that it affects the basic entitlement to SMP rather than creating
a right to be paid an additional sum. Therefore, the employer owes the outstanding sum
immediately on the pay rise taking effect.
Where the pay rise takes place while the employee is still in receipt of SMP and would change
the amount that she is currently receiving, the employer should include this immediately in
the amount of SMP being paid.
Where SMP has already ceased, or the change would make no difference to the amount
(because the employee is receiving the standard rate), the employer should not wait until the
employee has returned to work before paying the amount owing. The employer should make
a special payment (taxed in the usual way) representing the whole of the additional sum due.
Ideally, it should make the payment at the same time that it informs the employee of her
entitlement to it.
Sums paid as SMP count as wages for the purposes of part II of the Employment Rights Act
1996. This means that failing to pay the SMP owing to the employee is an unlawful deduction
and the employee could bring a claim in the employment tribunal to recover the sum.
The effect of a pay rise on contractual maternity pay
Where an employee is entitled to contractual maternity pay that is over and above the
amount provided by SMP, s.74 of the Equality Act 2010 may apply. The effect of that section
is to require the employer to increase any maternity-related pay that is over and above SMP
to reflect any pay increase that the employee would have received had she not been on
maternity leave.
Unlike the provision under the Statutory Maternity Pay (General) Regulations 1986 relating
to SMP, the rule under the Equality Act 2010 relating to contractual maternity pay is not
retrospective. The increase in pay does not apply to the whole period for which the employee
is receiving maternity pay; it takes effect from the point at which the pay rise is, or would have
been, awarded.
Example six
An employee earns £40,000 per year. Her maternity pay scheme pays SMP for the first six
weeks of her maternity leave (ie 90% of her normal pay), then 50% of her normal pay for
the remaining 33 weeks of her maternity pay period. For these purposes her normal pay is
defined as her salary as at the start of her maternity leave. Her pay review date is 1 April and
this falls precisely 26 weeks into her maternity leave. The employer applies a blanket cost of
living increase to all employees of 3%, taking her salary to £41,200. Her weekly pay increases
from £769.23 to £792.31.
For the first six weeks of her maternity leave she would have received 90% of her earnings.
That amounts to £692.30 per week. When the pay increase takes effect, the amount of
SMP that she should have received increases to £713.08 per week. As the SMP must be
recalculated and paid retrospectively, the employer must pay the employee the shortfall of
£124.68.
Her contractual maternity pay will increase from the date of the pay review. Thus, for the first
20 weeks at the 50% rate her pay will be £384.62 per week (ie 50% of £769.23). After her pay
increase, it will increase to £396.15 (ie 50% of £792.31).

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Record-keeping
Employers are required to keep certain records in relation to the payment and administration
of SMP. Regulation 26 of the Statutory Maternity Pay (General) Regulations 1986 specifies
that, for three years after the end of the tax year in which the maternity pay period ends, the
employer must keep records of all maternity-related absence, the weeks in the tax year in
which SMP was paid and the amount paid in each week.
Where an employer adjusts an employee’s SMP because of a pay increase, the employer will
need to record the adjusted amount and the fact of the payment of the extra sum as part of
its overall record-keeping obligation.

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More guidance from XpertHR
“How to”guides on:
n dealing with maternity pay, salary sacrifice and childcare
vouchers
n complying with the law on keeping statutory maternity
pay records
Line manager briefings on:
n maternity rights that apply in specific situations
n basic maternity rights
Policies and documents on maternity rights, including a:
n letter informing an employee that her statutory maternity
pay has been recalculated
n maternity policy
Liveflo: see how our revolutionary online HR tool can help you
n Liveflo workflow on managing an employee’s maternity
leave and pay
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