Rights under a share incentive plan transfer under TUPE

The Court of Session has delivered a potentially important decision in the Ponticelli Ltd v Gallagher case.

Mr Gallagher’s employment transferred under the Transfer of Employment (Protection of Employment) Regulations 2006 (“TUPE”) to Ponticelli Limited. Before the transfer, he had been part of a Share Incentive Plan (SIP). Such schemes are not uncommon, especially in large employers, providing a way of rewarding employees that can be more tax-efficient than a cash bonus.

In Mr Gallagher’s case, as is common with Share Incentive Plans, the SIP did not form part of his contract of employment and was the subject of a separate Partnership Share Agreement between him, his employer and the trustees of the SIP. This is a common approach adopted by employers and it has generally been understood by them that by keeping SIPs separate to the contract of employment:

• Employees cannot claim for SIP losses when seeking compensation for unfair dismissal.
• Rights under a SIP should not transfer under TUPE.

When Mr Gallagher’s employment was the subject of a TUPE transfer to Ponticelli, his membership of the SIP ended and his shares were transferred to him. His new employer wrote to him to say that he would receive a one-off payment of £1,855 as compensation for the fact that they were not going to continue to provide a SIP. Mr Gallagher immediately responded by telling them to refrain from making such payment as he was seeking advice on his legal rights. He applied to the Tribunal seeking a declaration that he was entitled under TUPE to be a member of an equivalent SIP plan with his new employer.

The Employment Tribunal and the Employment Appeal Tribunal upheld his claims. They found that TUPE operates to transfer the contracts of employment of employees together with “all of the transferor’s rights, liabilities, powers, duties, and liabilities under or in connection with any such contract.” They considered his rights under the SIP to arise in connection with his contract of employment.

Ponticelli appealed against this decision and its grounds of appeal included arguing that:

• The SIP was voluntary and his rights under it therefore arose from his decision to enter into the scheme and from a distinct contractual relationship with his employers and the trustees of the scheme that sat outside of his employment contract.
• TUPE should not go beyond the EU Directive on which it is based. They compared it to a situation where an employer facilitates discounted gym membership for an employee. That should not transfer under TUPE because the contract is between the employee and the gym and is not “connected with” the employment contract.

Mr Gallagher argued that the ET and EAT had been correct:

• The SIP arose directly from his status as an employee, it was part of his remuneration package and deductions were made from his salary in order to facilitate his membership of the SIP.
• The case of Mitie Managed Services limited v French established the principle that where it was not possible for the new employer to provide the same scheme (in that case a profit-related pay scheme), it should provide a scheme of substantial equivalence. Just because Ponticelli did not operate a SIP did not mean that it could not provide some form of equivalent benefit to Mr Gallagher.
• The wording of the EU Directive did not prevent the conclusion reached by the EAT.

The Court of Session dismissed Ponticelli’s appeal and found in favour of Mr Gallagher. It concluded that Ponticelli was bound to provide a SIP or scheme of substantial equivalence.

Employers acquiring staff under TUPE should not ignore the rights of employees under SIPs or similar share-based schemes.  Providing replacement or substantially equivalent schemes may well present challenges for them.

See the Ponticelli Ltd v Gallagher case here.

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