What is the Alabaster ruling?
If an employee receives a pay rise at any time between the start of the relevant period and the end of her statutory maternity leave, their SMP must be recalculated taking into account the pay rise. The legislation is otherwise known as backdated pay awards during SMP or the Alabaster ruling, and was based on a European Court of Justice decision from 2004, affecting legislation from April 2005.
Important dates
The relevant period is the eight-week period before the qualifying week.
The qualifying week is fifteen weeks before the expected week of confinement (EWC).
The EWC is the Sunday on or before the baby's due date.
Therefore the start of the relevant period is at least 23 weeks before the EWC.
The end of the statutory maternity leave is 52 weeks after the maternity leave starts, i.e., including the unpaid weeks of maternity leave.
How to calculate the additional pay
Check the employee's relevant period. As explained above, this is the eight-week period that falls before the qualifying week.
Gather the employee's payslips that fall in the relevant period.
Tip: If you were using PayFit during this period, you can access the employee's documents from their employee record, on the Documents tab, open the Payslips folder, then open the relevant month.
Recalculate the employee's gross pay using the increased salary.
To calculate the new average weekly earnings, multiply the 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 Step 4, by 52 weeks to determine the weekly pay.
Calculate 90% of the weekly pay.
Calculate the difference between the new weekly pay, and the employee's original pay rate.
Multiply the difference calculated in Step 7 by the number of weeks that were paid at the lower average weekly earnings.
Tip: The employee receives 90% of their average weekly earnings for the first 6 weeks, then the following 33 weeks is calculated at the statutory rate, or 90% of their average weekly earnings, whichever is lower. This means the alabaster ruling may impact the 33-week pay period too.
Don't forget you only need to calculate the difference for 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 this month.
Example calculation
The employee starts maternity leave on 1 April 2023, the baby was due on 6 April 2023 and the employee receives a pay rise on 1 June to £30,000.
The EWC is Sunday 2 April 2023 (the Sunday on or before the due date).
The Qualifying week starts on 25 December.
The relevant period is the eight weeks that fall before 25 December, 30 October to 25 December.
The employee has already been paid 8 weeks of maternity pay between April and May.
Calculate the old rate
The old rate is calculated as follows;
On 31st October, the employee is paid a salary of £2000 and a bonus payment of £500. On 30th November, the employee is paid a salary of £2000 only.
The earnings in the relevant period were £2000 + £2000 + £500 = £4500.
The average annual earnings were calculated as £4500 x 6 = £27,000.
The average weekly earnings were calculated by dividing the annual value by 52, £519.2307 (note that this value is rounded to four decimal places).
The statutory rate is 90% of the average weekly earnings, £467.30.
Calculate the new rate
The new rate is calculated as follows;
On 31st October, the employee is paid a salary of £2500 and a bonus payment of £500. On 30th November, the employee is paid a salary of £2500 only.
The earnings in the relevant period are £2500 + £2500 + £500 = £5500.
The average annual earnings are calculated as £5500 x 6 = £33,000.
The average weekly earnings are calculated by dividing the annual value by 52, £634.6153 (ote that this value is rounded to four decimal places).
The statutory rate is 90% of the average weekly earnings, £571.15.
Therefore the difference between the old and new rate is £571.15-£467.30=103.85.
In this scenario, the increase only affects the first six weeks of SMP so the difference is £103.85 x 6 weeks = £623.10.
How to enter the adjustment
If you need to adjust the average earnings to recalculate the remaining SMP weeks, you should action this first. To do this;
From the employee's record, click the Leaves tab.
Under the Parental leave section, from the Parental leave type drop-down, select Maternity Leave.
Click Customise maternity pay settings.
Next to Average monthly earnings during the relevant period, enter the monthly earnings.
Click Save. This will re-calculate the remaining SMP using the new average monthly earnings.
To add the underpayment calculated in the previous section;
From the Payslip breakdown tab, click Statutory Maternity Pay (SMP).
Add together the underpayment calculated earlier, and the Total SMP this month.
Click the Leaves tab.
Under the Parental leave section, from the Parental leave type drop-down, select Maternity Leave.
Click Customise maternity pay settings.
In the Overwrite the employee's SMP field, enter the value calculated in Step 2.
Click Save.
The Payslip breakdown tab should now show the new value you entered, correcting the employee's statutory maternity pay based on the alabaster ruling.
As the value has been correctly entered as SMP, the additional amount that you're able to reclaim from HMRC will show on your Employer payment record report from the Company reports section.