Share incentive plan transferred under TUPE

If TUPE applies on a transfer of an undertaking or service provision change, all the transferor employer’s “rights, powers, duties and liabilities under or in connection with” any contract of employment transfer to the transferee. In Ponticelli Ltd v Gallagher, the Court of Session in Scotland had to decide whether an employee’s right to participate in a share incentive plan (SIP) transferred under TUPE.

What happened

Mr Gallagher was employed by a company in the Total group. He joined the company’s SIP, entering into a tripartite contractual agreement with his employer and the plan trustees. There was no mention of the SIP in his contract of employment.

When his employment transferred to Ponticelli under TUPE, Ponticelli indicated that it would not provide a SIP and offered a one-off compensatory payment to reflect this. Mr Gallagher rejected the payment. He argued that his right to participate in the SIP transferred under TUPE and that Ponticelli had to provide a scheme of substantial equivalence. The employment tribunal and EAT upheld the claim and Ponticelli appealed to the Court of Session.

The decision

Ponticelli’s argument was based on an older decision, Chapman v CPS Computer Group. In that case the Court of Appeal found that for the purposes of a share option plan, employees who had been TUPE transferred out of the company had been made redundant. Under the terms of the plan this allowed them to exercise their options. On the employer’s case, Chapman was authority for the proposition that where a share option scheme is separate from the contract of employment, the rights under the scheme do not transfer under TUPE.

The difficulty with that argument was that the Court of Appeal had only interpreted a specific rule in the share option contract. It had not considered the position under TUPE and did not address whether rights under that contract were “connected with” the contract of employment and as such capable of transferring. The decision was of no assistance in deciding Mr Gallagher’s claim.

Previous cases have interpreted the phrase “in connection with the contract” widely, to include liability for personal injury for example. Rights and liabilities do not have to be contractual to transfer. Here the rights and obligations under the SIP were an integral part of Mr Gallagher’s financial package and he would be financially disadvantaged by their removal. They arose “in connection with” the contract of employment or the employment relationship and the tribunal and EAT had been correct to find that they transferred. Although Ponticelli could not provide the specific scheme offered by the transferor, it had to provide a substantially equivalent alternative.

Next steps

Although the decision was reached by the Court of Session in Scotland, the relevant provisions in TUPE apply across Great Britain. Faced with the same issue, the EAT in England and Wales would almost certainly follow the Court of Session decision.

The case highlights the importance of proper due diligence in any transaction to identify which rights and liabilities are capable of transferring, including any that are not contained in employment contracts. A transferee employer will then have to review the terms of relevant schemes to decide whether it must provide them post-transfer and if so in what form.

Authored by Jo Broadbent, Eleanor Doubleday and Stefan Martin.