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TUPE update | Court confirms share incentive plans CAN transfer across
Written by Lesley Rennie on 13 September 2023
During a TUPE transfer, the new employer effectively steps into the old employer’s shoes. This includes taking over employees’ employment contracts and all rights, powers, duties and liabilities arising under or in connection with those contracts.
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations), transferring employees retain any contractual benefits they were entitled to under the previous employer, such as holidays, bonuses and commission schemes, enhanced family leave schemes, and enhanced redundancy pay. But what about benefits which stem from a collateral contract such as a company share scheme? Do they also transfer across?
The case of Ponticelli Limited v Gallagher has provided clarity on this question, with the Scottish Court of Session ultimately finding that the right to partake in a share incentive plan (SIP) does transfer under TUPE, even if it doesn’t form part of the employment contract.
Here’s what you need to know.
Ponticelli Limited v Gallagher
The claimant in this case, Mr Gallagher, transferred to a new company, Ponticelli, under TUPE. Prior to the transfer, he was enrolled in a SIP in terms of which deductions from his salary were made and applied to the scheme. Participation in the SIP was voluntary and it was non-contractual. Ponticelli didn’t operate a similar scheme and opted not to put one in place after Mr Gallagher became their employee, instead offering him compensation for his loss of rights.
Unhappy that he had lost this benefit, Mr Gallagher declined that compensation and filed a claim with the Employment Tribunal, arguing that he was entitled to participate in a SIP like the one he had before. Specifically, he claimed that this right had transferred to Ponticelli as part of the TUPE transfer.
The Tribunal agreed. It noted Regulation 4(2)(a) of the TUPE Regulations, which says:
“All of the transferor’s rights, powers, duties and liabilities under or in connection with any such [employment] contract shall be transferred by virtue of this regulation to the transferee”
The operative words here, the Tribunal said, are “in connection with”. It determined that the SIP was closely connected to Mr Gallagher’s employment and was therefore caught under Regulation 4(2)(a). After all, Mr. Gallagher could only access the scheme because he was an employee, it was designed as a benefit for employees like him, and it formed part of his overall remuneration package.
Ponticelli’s subsequent appeal to the EAT was dismissed. Echoing the Tribunal’s stance, the EAT accepted that Mr Gallagher’s membership in the SIP was not explicitly part of his employment contract; however, it was nonetheless undeniably linked to his employment given he could only join the scheme as an employee, and contributions were deducted from his salary. As such, the automatic transfer principle under Regulation 4(2)(a) was engaged. As Ponticelli couldn’t operate the SIP as was, Mr Gallagher was entitled to participate in a scheme “of substantial equivalence”.
Ponticelli went on to appeal again, this time to the Scottish Court of Session – the Scottish equivalent of the Court of Appeal. Ponticelli’s main argument was that a previous case, Chapman and Elkin v CPS Computer Group, should be relied upon to reach a finding that rights under a share option scheme should not transfer under TUPE. However, the Court of Session was not convinced by this argument, taking the view that the Chapman case was limited to the interpretation of a specific rule in the particular share scheme and not the application of the automatic transfer principle to share schemes. As such, it didn’t preclude the SIP transferring in this case.
Ultimately, the Court of Session concurred with the Tribunal and EAT’s previous decisions. It concluded that Mr Gallagher’s right to participate in a SIP transferred to Ponticelli, an as it wasn’t practically possible for Ponticelli to maintain the same SIP, it was required by TUPE to provide something of substantial equivalence.
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Employer impact
The case clarifies TUPE’s scope in relation to collateral contracts and could have significant cost and practical implications for the incoming employer. It confirms that, in a TUPE situation, rights and liabilities don’t have to be contractual to transfer – they just need to be connected to the employment contract or the employment relationship.
This case specifically dealt with the issue of share schemes, but previous cases have interpreted the phrase ‘in connection with the contract’ broadly to transfer liability for personal injury claims and this wide interpretation is likely to continue to be applied by Tribunals. Potentially any right which is connected with a transferring employee’s employment could transfer under TUPE, although this will be fact specific. For instance, the Court of Session expressed a view that there would be no barrier to a non-contractual, subsidized gym membership scheme transferring if it formed part of an employee’s overall remuneration package.
The decision has relevance for all UK businesses and creates real practical problems for incoming employers. Typically, it won’t be possible to simply transfer the plan given that it relates to the transferor company’s shares in which case, the new employer needs to determine what amounts to a substantially equivalent scheme.
Of course, some companies may not want to offer employees a share plan, either because they don’t want to confer any ownership in the company, or simply because they don’t want to deal with the cost, time and administrative burden associated with it. It’s therefore incredibly important that transferee companies do their due diligence during an acquisition so that they know what they are buying and can assess whether or not to go ahead on that basis, avoiding any nasty surprises later on.
However, transferees in a service provision change won’t have the luxury of effective due diligence as they will have inherited any rights to participate in a share scheme purely because they have won a tender or client contract. Unfortunately, in this scenario, the new employer will inherit these terms, whether they like it or not and will be faced with the difficult task, and expense, of establishing a substantially equivalent scheme.
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