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Statutory maternity pay and settlement agreements

06 December 2016

An employee was still entitled to statutory maternity pay despite signing a “full and final” settlement agreement.

An employee was still entitled to statutory maternity pay despite signing a “full and final” settlement agreement.


The claimant was employed by Campus Living Villages (the Employer) as its Head of Finance. During the claimant’s pregnancy she was made redundant although because she was still employed by the employer within 7 weeks of her expected date of childbirth, she was still entitled to receive Statutory Maternity Pay (SMP) from them. This was notwithstanding that she would not be one of their employees during her maternity leave. The claimant brought claims for unfair dismissal and pregnancy discrimination against her employer.

Following ACAS conciliation, these claims were settled in a COT3 agreement for £60,000 which included £20,000 for injury to feelings. The agreement was stated to be in “full and final settlement of all her claims”.

Claim to HMRC

The claimant claimed over £42,000 for not receiving the SMP she was entitled to from the employer. This claim was made to HMRC as the arbiters of SMP. The amount claimed was so large due to a £44,000 discretionary bonus that had been paid to the claimant under the employer’s incentive scheme. This bonus was paid during the relevant eight week reference period for the purposes of calculating the claimant’s “normal weekly earnings” for the purposes of SMP, which is payable at 90% of normal earnings for the first 6 weeks of maternity leave.

HMRC upheld this complaint stating that the claimant should be paid SMP separately as it had not been included in the settlement agreement.

The employer appealed to the Tax Tribunal.

Appeal to the Tax Tribunal

Could a bonus be considered as earnings?

The Tax Tribunal had to decide whether a bonus could be considered as ‘earnings’ when calculating SMP. If it could, it would be taken into account when working out what the SMP would be, and would accordingly inflate the amount payable.

HMRC had already presumed that this bonus would be included and the Tax Tribunal confirmed this. If a bonus falls within the reference period for calculating SMP (normally the 8 weeks immediately preceding the 14th week before the week that childbirth is expected), then it will count. Therefore irregular or one-off payments do count towards the employee’s earnings for SMP purposes.

Does signing a settlement agreement exclude the ability to claim SMP?

The Tax Tribunal then had to decide whether the claimant could recover SMP after signing a COT3 agreement. The Tribunal confirmed that an employee has an absolute right to receive SMP which cannot be contracted out of. A factor that was taken into account here was that all payments within the COT3 agreement would not attract National Insurance, whereas SMP is subject to both tax and National Insurance. This aided the Tribunal in reaching its conclusion that SMP had not been paid under the COT3 agreement.

Does ACAS signing off the agreement have an impact?

The Tax Tribunal held that it was ‘unfortunate’ that the parties had not been advised correctly by the ACAS officer but held that this could not affect HMRC’s correct application of the law.

Comment and learning points

This is a harsh decision for the employer and ACAS officer and definitely an issue to consider when concluding a COT3 for those on maternity or paternity leave.

  • Make sure that SMP is expressly labelled in any settlement agreement and that this includes that it is subject to National Insurance.
  • Be aware that any discretionary bonuses will be included as part of an employee’s normal pay when calculating SMP.
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