Right to participate in share incentive plans transferred under TUPE

Posted: 09/11/2023

In its recent judgment, the Court of Session in Scotland found that the right to participate in a share incentive plan (SIP) can transfer to a new employer by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), even where the SIP does not form part of the employment contract. 

Background 

The claimant, Mr Gallagher, transferred to Ponticelli from his previous employer by operation of TUPE. Prior to the transfer, he had participated in a SIP operated by his former employer. Participation in the plan was voluntary and there was no reference to it in the claimant’s contract of employment. 

Shortly after the transfer, Ponticelli wrote to the claimant to advise him that he would receive a one-off payment of £1,855 as compensation for the fact that it was not going to continue to provide a SIP. Mr Gallagher rejected the offer and brought a claim in the Employment Tribunal.  He argued that his right to participate in such a scheme had transferred to the new employer under TUPE. Regulation 4 of TUPE provides:

‘Effect of relevant transfer on contracts of employment 

4.—(1) … a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, which would otherwise be terminated by the transfer, but any such contract shall have effect after the transfer as if originally made between the person so employed and the transferee. 

(2) Without prejudice to paragraph (1) … on the completion of a relevant transfer— 

(a) all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee; …’

As a result, Mr Gallagher became entitled to participate in a SIP of substantial equivalence or comparable value to the SIP operated by his former employer.

At first instance, the tribunal found that the SIP was ‘in connection’ with Mr Gallagher’s employment contract and that Ponticelli was required to provide a scheme of substantial equivalence. The Employment Appeal Tribunal upheld the tribunal’s decision.

Ponticelli appealed again and the matter came before the Court of Session.

Decision of the Court of Session

Lady Wise, sitting in the Court of Session, dismissed Ponticelli’s appeal and upheld the earlier decisions of the lower tribunals. 

In Lady Wise’s judgment, she noted that the SIP operated by virtue of salary deduction, with the employer also contributing funds in the form of matching shares, and possible further shares awarded linked to the employer’s bonus scheme. Therefore, the rights and obligations under the scheme formed an integral part of the claimant’s overall financial package. This meant that the SIP was ‘in connection’ with the employment contract and transferred to Ponticelli under TUPE. As a result, Ponticelli was required to implement a SIP of substantial equivalence to the plan Mr Gallagher had with his former employer. 

Practical points 

While this is a decision of the Scottish courts, the relevant provisions of TUPE operate across Great Britain and so employment tribunals in England and Wales are very likely to follow the Court of Session’s decision.

The decision makes clear that employers will not be able to avoid transfer of SIPs even where they operate outside of an employee’s contract of employment. This will make it very challenging for new employers who do not offer the same type of scheme or benefit that an employee had with their former employer. Therefore, it is vital that incoming employers ask the right questions during the due diligence phase of any business transfer as it could have significant financial implications. 

The Ponticelli case involved the transfer of a SIP. However, the principles established in the case go much wider and could apply to any additional benefit even where it is not referred to in the contract of employment. If the benefit arises ‘in connection’ with the employment contract, then there is a risk that it will transfer to the new employer under TUPE.

Finally, the principle of ‘substantial equivalence’ remains a thorny issue and there is no clear guidance on what might make two share schemes substantially equivalent. It is recommended that employers seek legal advice on this point as each case will be very fact specific. 

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