Employment Law Cases
TUPE: transfer of share incentive plan
The right to participate in a share incentive plan transferred to a new employer under TUPE, even though the employee’s entitlement to participate in the plan arose under an agreement separate from and not referred to in his contract of employment.
Employees covered by TUPE will transfer from the outgoing employer (the transferor) to the new employer (the transferee). Regulation 4(2)(a) provides that on a TUPE transfer, ‘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’ (emphasis added).
Mr Gallagher’s employment transferred to Ponticelli under a TUPE transfer in May 2020. In his previous employment, Mr Gallagher had been a member of a share incentive plan (SIP). Ponticelli refused to provide an equivalent scheme when Mr Gallagher’s employment transferred. He brought a tribunal claim, asserting he was entitled to be a member of a SIP equivalent of his former employer’s plan. He argued that his right to participate in an equivalent SIP had transferred to Ponticelli as part of the TUPE transfer. The tribunal upheld Mr Gallagher’s claims. He was only able to participate in the SIP because he was an employee of the company. It was a benefit for employees such as Mr Gallagher and was part of his overall financial ‘package’. Therefore it was ‘caught’ by the wording of reg. 4(2)(a). Ponticelli appealed to the EAT.
The appeal was dismissed.
Ponticelli argued that the rights and obligations in the SIP didn’t arise either ‘under’ Mr Gallagher’s contract or ‘in connection with’ his contract – and that therefore reg. 4(2)(a) didn’t apply. Mr Gallagher accepted that the SIP didn’t arise under his contract but maintained that it did arise in connection with it.
The EAT was faced with Court of Appeal authority from 1987, dealing with a similar issue, which held that a stock option scheme in that case did not transfer under TUPE. The EAT resolved this conflict by noting that the 1987 case had only considered whether the obligations arose ‘under’ the employment contract, not whether they arose ‘in connection with’ that contract. The case was clearly distinguishable from Mr Gallagher’s - whilst his membership of the SIP did not arise ‘under’ the contract of employment, it plainly arose ‘in connection with’ his employment contract. He could only join the SIP because he was an employee, his subscriptions were deducted from his salary and the SIP formed part of his overall package of financial benefits associated with his employment. Therefore, the automatic transfer principle was engaged. Mr Gallagher was entitled to participate in a SIP of substantial equivalence.
This decision confirms that TUPE can cover share scheme benefits even where the contractual documentation containing the right to participate is separate from the contract of employment. In practical terms, employers should ensure that prior to a TUPE transfer they establish whether a SIP plan is in place and explore the details of this during the due diligence process. They will then be able to determine the extent of their post-transfer obligations, addressing any issues before the transfer takes place.
As well as presenting the transferee with a significant cost burden, the obligation to provide a share scheme of substantial equivalence may cause practical difficulties, particularly if the transferee is not a listed company, cannot offer shares or does not operate a share scheme for existing employees.