TUPE: Do rights under share schemes transfer?

The recent case of Ponticelli Limited v Gallagher has widened the scope of what will and will not transfer to an incoming employer on a TUPE transfer, to include rights under a share scheme notwithstanding that such rights were separate from and independent to the employee's contract of employment.

What is TUPE?

TUPE (that is the Transfer of Undertakings (Protection of Employment) Regulations 2006) is a notoriously complex piece of legislation, which applies where there is either a transfer of a business (in whole or in part) which retains its identity after the transfer (i.e. a business transfer) or where there is a transfer of services from one provider to another (i.e. a service provision change). In such circumstances TUPE operates to safeguard the rights of employees impacted by the transfer (automatically transferring their employment from one employer to another with their terms of employment and continuity of service intact).

The legislation specifically provides that only the rights, powers, duties and liabilities of the current employer which arise under or in connection with the employees' contracts of employment will transfer to the new employer. However, in the recent case of Ponticelli Limited v Gallagher, the Scottish Court of Session has confirmed that the right to participate in a share incentive plan transferred to the new employer, notwithstanding that the employee’s right to participate in the scheme arose outside of their contract of employment.

The background

Mr Gallagher, who was employed by Total Exploration & Production UK Limited ("TEP"), had a right to participate in TEP's share incentive plan ("SIP"); however, this right was not set out in his contract of employment (nor was there any mention of the SIP in his contract) and his participation in the scheme was entirely voluntary. Mr Gallagher opted to join the scheme and entered into a separate Partnership Share Agreement with TEP and the SIP trustees accordingly.

TEP was then acquired by Ponticelli such that Mr Gallagher's membership of the SIP ceased and the associated shares were transferred to him. Ponticelli informed Mr Gallagher that they would not be providing a SIP post-transfer and offered a separate one-off payment to him of £1,855 (equivalent to two years' SIP contributions), to compensate him for the loss of this benefit.

Mr Gallagher brought a claim arguing that he had an entitlement to become a member of a SIP and that such entitlement transferred to Ponticelli pursuant to TUPE, requiring Ponticelli to put in place a SIP of substantial equivalence.

Ponticelli appealed the decision of both the employment tribunal and employment appeal tribunal (who had both accepted Mr Gallagher's argument that the entitlement transferred), stating that regulation 4(2)1(a) of TUPE did not apply as the entitlement did not arise either under or in connection with Mr Gallagher's contract of employment, but rather under a separate and discrete contract.

The Supreme Court's finding

The Court of Session dismissed Ponticelli's appeal holding that Regulation 4 of TUPE was wide enough to cover various entitlements and obligations not contained within or ‘under’ the contract of employment where, it could be shown that the rights and obligations formed an integral part of an employee's financial package. In this case, Mr Gallagher contributed to the SIP by way of salary deduction: for each share he purchased TEP issued two matching shares and further shares could be awarded to him as part of TEP's bonus scheme. Accordingly, participation in the SIP was of meaningful financial benefit to Mr Gallagher and he would be financially disadvantaged because of the transfer of his employment if he could not participate in a similar scheme with Ponticelli.

The Court noted that allowing Ponticelli's restrictive interpretation of TUPE would enable employers to avoid the implications of TUPE by setting out additional benefits in contracts separate to the employment contract, which would defeat the protective intentions of the legislation. Whilst Mr Gallagher's right to participate in the SIP therefore did not arise 'under' his contract of employment, it clearly arose 'in connection with' his employment and, as such, the right transferred. Ponticelli is therefore now required to put place a SIP which is of substantial equivalence to the TEP SIP.

Practical implications

This is a Scottish decision and therefore is not technically binding on English tribunals, however it will be of persuasive value, and it is very likely a similar decision would therefore be reached in the English system.

The case highlights the importance of thorough due diligence in circumstances where you are likely to be on the receiving end of transferring employees under TUPE (i.e. where you are purchasing a business or taking over the provision of a service from an incumbent service provider).

It is important to ensure that full details are provided by the current employer of the terms and conditions of the transferring employees, including all benefits and entitlements which are not expressly 'contractual' and those which arise under contracts separate to the employment contract.

Getting as much information as early as possible will be beneficial, so that all options can be considered and explored – whether that be considering the terms of a substantially equivalent plan post transfer; seeking to buy out the employees' entitlement under the existing scheme and/or whether there is any existing contractual right to vary, amend or withdraw the scheme. The approach to such entitlements will likely constitute a 'measure' for the purposes of TUPE such that they should be clearly detailed (in writing) to the existing employer and form the basis of a full and genuine consultation with the transferring employees ahead of the transfer.

Should you have any questions in respect of the above and/or require any assistance with a TUPE transfer, please do not hesitate to contact us.