In the 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 transferee / new employer under TUPE even though the employee’s right to participate in it arose outside of the contract of employment. The transferee employer was therefore obliged to provide a substantially equivalent share incentive scheme after the transfer.
Whilst this is a Scottish case, the decision is binding on the employment tribunals throughout the UK.
TUPE and Share Schemes
If the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply then, as we know, the contracts of employment of all in-scope employees automatically transfer from the old employer (the transferor) to the new employer (the transferee) by operation of law.
Regulation 4(2)(a) TUPE provides that this includes all the transferor employer’s rights, powers, duties and liabilities under or in connection with the contract of employment.
In the context of a share scheme, the transferor can’t be required to provide a benefit that it doesn’t control. Therefore, the employee is treated as a leaver under the transferor’s scheme, and the transferee employer must provide a scheme of substantial equivalence for the employee to participate in post-transfer.
Mr Gallagher was employed by Total Exploration and Production UK Ltd. He joined Total’s Share Incentive Plan (SIP). There was no obligation on him to do so; participation was entirely voluntary. He signed up to a Partnership Share Agreement with the employer and the plan trustees. There was no mention of the SIP in his contract of employment.
Monthly deductions were made from his salary, and he was allocated shares. Total issued additional “matching shares” for each share purchased through salary deduction. So, this was a meaningful financial benefit.
Mr Gallagher’s employment then transferred to Ponticelli under TUPE. Ponticelli told Mr Gallagher that it wouldn’t be providing a SIP and offered him a one-off compensatory payment of £1,855.
Mr Gallagher was not impressed with this. He rejected the payment and commenced employment tribunal proceedings seeking a finding that Ponticelli had to provide him with a replacement scheme.
The employment tribunal and Employment Appeal Tribunal found in Mr Gallagher’s favour, on the basis that he had only been eligible to participate in the SIP because he had been an employee of Total; therefore, it arose “in connection with” his contract of employment and Ponticelli had to provide a SIP. Ponticelli appealed to the Court of Session. The appeal did not succeed.
The Court of Session agreed that the SIP arose “in connection with” the contract of employment.
As a result, Mr Gallagher’s written statement of particulars were found to include an obligation that he be provided with “a Share Incentive Scheme of substantial equivalence to that provided to him prior to” the transfer. Ponticelli now has to work out what that is.
What does this mean for my business?
It is always tempting for a transferee to overlook benefits that are not expressly referred to in the contract of employment, and to treat them as not in scope to transfer. In fact, there as a time when the prevailing view was that only contractual terms and benefits transferred under TUPE.
However, over the years, case law has developed to give a broad meaning to the term “in connection with” the contract of employment. This case is a salient reminder of how far that change has come.
As a result, transferees need to carry out proper due diligence to identify the rights and liabilities that will transfer to them. If there is an obligation to provide a substantially equivalent share or incentive scheme, then it will make life easier to agree the terms of any such scheme during the pre-transfer consultation process.
However, this case does not mean that a transferee has to continue to provide every benefit in every circumstance. If a non-contractual benefit does transfer to the transferee, then it remains a non-contractual benefit and can in principle be discontinued by the transferee, just as it could have been discontinued by the transferor (subject always to it not having obtained contractual status as a result of custom and practice and the new employer following a reasonable process in effecting that change).