425: Can an employee’s right to participate in a share incentive plan transfer under TUPE?

Where TUPE applies to the transfer of a business, all of an employer’s rights, powers, duties, and liabilities ‘under or in connection with’ employees’ contracts of employment transfer automatically to the purchaser. In Ponticelli UK Ltd v Gallagher, the Inner House of the Court of Session (Scotland’s Court of Appeal) has ruled that an employee’s right to participate in a share incentive plan (SIP) arose ‘in connection with’ his contract of employment, and therefore transferred under TUPE, even though that right was not mentioned in his contract. This meant that after the transfer he was entitled to participate in a substantially equivalent scheme.

Mr Gallagher participated in a SIP offered by his employer, Total Exploration and Production UK Ltd (Total). He made contributions to the SIP through salary deductions, and Total contributed two matching shares for each share purchased by salary deduction. The SIP trust deed and rules provided that the SIP was not part of any employment contract, and the SIP was not mentioned in his employment contract. When Mr Gallagher’s employment transferred under TUPE to Ponticelli UK Ltd (Ponticelli), his participation in Total’s SIP ended. Since Ponticelli did not offer a SIP, Mr Gallagher was offered a one-off payment of £1,855 in compensation, calculated on the basis of twice his average contributions to the SIP over the preceding two years. Mr Gallagher rejected this payment and brought a Tribunal claim alleging that under TUPE, his right to participate in an equivalent scheme had automatically transferred to Ponticelli.

The Court of Session has now agreed with the Employment Tribunal and the EAT that the SIP arose ‘in connection with’ Mr Gallagher’s employment contract, and that accordingly his right to participate in a SIP had transferred automatically under TUPE. The SIP was an integral part of Mr Gallagher’s financial package, and he would be financially disadvantaged if he was unable to participate in an equivalent scheme with Ponticelli. Recognising that for practical reasons a SIP cannot itself transfer, the Court of Session ruled that Ponticelli was obliged to offer a scheme of substantial equivalence or comparable value.

This is a Scottish case but is likely to be applied in England and Wales, subject to any appeal by Ponticelli. It confirms the 2002 decision in Mitie Managed Services Ltd v French where the EAT held that the right to participate in a profit sharing scheme of substantial equivalence transferred under TUPE. Employers should note that the decision potentially applies to a wide range of profit and share incentive schemes, however they are structured, and that provisions stating that a scheme is separate from employment contracts cannot override the TUPE legislation. The Court of Session noted that to rule otherwise would mean that employers could avoid the effects of TUPE simply by creating separate contracts for additional benefits. Where a new employer does not operate an existing scheme, this can have difficult practical and financial consequences, although employees may accept a cash alternative or an alternative bonus or profit share structure. This decision also highlights the importance of carrying out detailed due diligence prior to a TUPE transfer to establish what rights employees may have to participate in bonus schemes, SIPs and other equity-based or profit-sharing plans.