How is the Alabaster ruling on maternity leave important for UK employers?

The Alabaster ruling mandates that Statutory Maternity Pay (SMP) be recalculated if an employee receives a pay rise between the start of the relevant period and the end of statutory maternity leave.

Based on a 2004 European Court of Justice decision, this guide covers the essential timelines, calculation steps, and how automated payroll software can simplify the process for employers.

What is the Alabaster ruling, and when does it apply?

The Alabaster ruling, also known as ‘backdated pay during SMP’, came about after a case between an employee of the same surname and Barclays Bank PLC. Ms Alabaster, the woman at the centre of the case, started her maternity leave in January 1996, having been awarded a pay increase in December of the previous year. However, this rise was not accounted for in her maternity pay calculation. Ms Alabaster was able to successfully argue that even though Barclays had paid her in accordance with the terms of SMP, this was in breach of the Equal Pay Act, and European Law. 

The European Court of Justice found that the SMP regulations, as they were at the time, failed to properly comply with EU Law. Therefore in 2005, UK SMP regulations were amended, and the Alabaster rule passed into UK Law.

The rule applies whenever a pay increase is processed at any time from the start of the relevant period and the end of statutory maternity leave. But how do you know when these are? Read on to find out.

What are the crucial time periods to be aware of for Alabaster calculations?

Ensuring Alabaster payment compliance is all about knowing what maternity pay-related terminology means, and gathering the correct information regarding when it refers to. 

Some key phrases and time periods to be aware of:

• Relevant Period (RP) - the 8-week window before the qualifying week

• Qualifying Week (QW) - 15 weeks before the expected week of confinement (EWC)

• Expected Week of Confinement (EWC) - the week starting on the Sunday before the baby’s due date, also known as the ‘Expected Week of Childbirth’ (again EWC).

This means that the start of the relevant period is at least 23 weeks before the EWC. It should also be noted that the end of statutory maternity leave is 52 weeks after maternity leave starts.

How is the additional pay owed to the employee calculated?

Firstly, you should check the employee’s relevant period. As explained above, this is the 8-week period that falls before the qualifying week. Gather together all of the employee’s payslips that fall in the relevant period.

Next, recalculate the employee’s gross pay using the increased salary. To calculate the new average weekly earnings, multiply the normal number of payslips used to equal a full year’s earnings. For example, if using two monthly payslips, multiply by 6 to get 12 months earnings.

Divide the value from the previous step by 52 weeks to determine the weekly pay.

Then, calculate 90% of this weekly pay, and work out the difference between the new weekly pay and the employee’s original pay rate. This is important because the employee should receive 90% of their average weekly earnings for the first 6 weeks, and then, during the following 33 weeks, will receive pay calculated at the statutory rate, or 90% of their average weekly earnings, whichever is lower. 

You should then multiply the difference calculated in the previous step by the number of weeks that the individual was paid at the lower average weekly earnings.

Don’t forget you only need to calculate the difference for the weeks that have been paid. If the employee is still receiving SMP, the remaining weeks will be calculated at the correct rate.

You now have the difference to pay to the employee that month, which must be processed through the payroll run.

How payroll software helps make fiddly SMP and Alabaster calculations easier?

As part of automating statutory benefits for all employees, including maternity, paternity and shared parental leave calculations, payroll software can be used to simplify Alabaster calculations too. Maternity pay settings can be customised to ensure that both the average monthly earnings during the relevant period can be specified manually, and the default SMP amount adjusted to reflect the Alabaster rule.

The remaining SMP due is re-calculated automatically, and, as the value will have been entered in the software as SMP, you’ll be able to reclaim the additional amount from HMRC through your RTI submission. And this will handily show on your Employer Payment Record in your reports dashboard, so that you won’t forget to claim this back.

Better yet, any new legislative changes, including SMP rates, are coded into modern platforms before the start of every new tax year, so resulting calculations and payments will always be correct.

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