384: Do my employee share scheme rights transfer under TUPE?

In the recent case of Ponticelli UK Ltd v Gallagher, the Employment Appeal Tribunal (EAT) held that a company acquiring another under TUPE was under a duty to provide employees with a substantially equivalent share incentive plan after the TUPE transfer had occurred.

On a TUPE transfer, all of the seller’s rights, duties and liabilities “under or in connection with” the employment contract of transferring employees pass automatically to the purchaser. Whilst this is normally straightforward, some benefits such as profit share and share incentive plans (SIPs) are difficult or impossible to transfer. In order to avoid the potential practical and financial issues for acquiring companies, SIPs normally state that they are not contractual, and that participation is not a right connected with employment. However, case law has established that transferring employees may be entitled to participate in a substantially equivalent plan.

Mr Gallagher’s employment transferred from Total Exploration and Production UK Ltd to Ponticelli UK Ltd under TUPE. Prior to the transfer, he participated in a SIP by entering into a Partnership Share Agreement with Total Exploration and the SIP trustees. This stated that the SIP was not part of his employment contract. Under the terms of the agreement, Mr Gallagher had bought partnership shares by contributing up to 10% of his basic salary. For each partnership share purchased with up to 2% of salary, Total Exploration contributed funds for the purchase of two further matching shares. Mr Gallagher’s participation in the SIP ended on the transfer of his employment to Ponticelli.

Ponticelli refused to provide an equivalent scheme after the transfer but offered Mr Gallagher a one-off compensation payment of £1,855, equal to twice his average contributions to the SIP over the preceding two years. Mr Gallagher brought an Employment Tribunal claim arguing that his right to participate in an equivalent SIP had transferred to Ponticelli under TUPE. Ponticelli argued that his rights under the SIP did not arise “under or in connection with” his contract of employment so had not transferred under TUPE.

The Tribunal agreed with Mr Gallagher, ruling that his right to participate in the SIP formed part of his overall remuneration package and therefore arose “in connection with” his contract of employment. Accordingly, Ponticelli had an obligation to provide a SIP of substantive equivalence.

The EAT has now confirmed this reasoning. The Partnership Share Agreement created a contract between Mr Gallagher and Total Exploration under which he agreed to deductions from his salary being used to purchase shares for him, and his employer also agreed to provide free matching shares. Mr Gallagher was only eligible to join the SIP because of his status as an employee, so his rights under the Partnership Share Agreement clearly arose “in connection with” his employment. This meant that Ponticelli had a duty to provide him with a SIP of substantial equivalence after the transfer.

Whilst share schemes are normally drafted so as to be separate from employees’ contracts of employment, the right to participate in a SIP can be regarded as a collateral contract for the purposes of TUPE. As this case illustrates, the right to participate in a SIP is likely to be a right “in connection with” a transferring employee’s contract of employment and will transfer under TUPE. As part of the due diligence process, it is therefore vital that acquiring companies consider both the practical and financial implications of having to provide a SIP of substantial equivalence.

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