In Ponticelli Limited v Gallagher, the Scottish appeal court, the Court of Session (CS) found that an employee’s right to participate in a Share Incentive Plan (SIP) transferred under TUPE, even though it was not referred to in his contract of employment. This meant that the purchaser of the business was required to provide a benefit that was substantially equivalent to the SIP following the purchase.

Mr. Gallagher’s contract of employment transferred to Ponticelli by operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Prior to the transfer, he participated in a SIP operated by his former employers, Total Exploration and Production UK Limited (TEP). The SIP was governed by a contract between Mr. Gallagher, TEP and the SIP trustees. Participation in the plan was voluntary and was not referred to in Mr. Gallagher’s contract of employment. On the sale of the business to Ponticelli, Mr. Gallagher’s membership of the SIP ended, the shares held in it on his behalf were transferred to him, and he was paid £1,855 in compensation, which was equivalent to two years’ contributions to the SIP. 

Mr. Gallagher applied successfully to the Employment Tribunal (ET) for a determination that his right to participate in the SIP had transferred to Ponticelli under TUPE, and that he was therefore entitled, as an employee of Ponticelli, to be a member of a benefit plan that was equivalent to the SIP provided by TEP. Ponticelli’s appeals to both the Employment Appeal Tribunal (EAT) and the CS were unsuccessful.

Regulation 4(2) of TUPE provides that ‘...on completion of a relevant transfer, all the transferor’s rights, powers, duties and liabilities under or in connection with [the employment] contract shall be transferred by virtue of this regulation to the transferee…..’ Whilst Mr. Gallagher’s right to participate in the SIP was not a right ‘under’ the contract, the CS had to consider whether it was a right ‘in connection with’ the contract.

In finding for Mr. Ponticelli, the CS noted that there was clear previous case law authority that rights and duties that do not arise under the contract of employment, such as personal injury claims, can transfer to the purchaser under TUPE. 

The CS also noted that participation in the SIP was an integral part of Mr. Gallagher’s financial package. Contributions to the SIP were made through salary deductions of up to 10 percent, in return for which the employee was allocated shares. For each share ‘purchased’ by the employee, the employer contributed funds to ‘purchase’ two further matching shares for the employee. Further shares could be awarded to an employee as part of the employer’s bonus scheme. The employee would be financially disadvantaged if he could not participate in a similar scheme following the transfer to Ponticelli. 

The CS concluded that the right to participate in the SIP was clearly a right ‘in connection with’ the contract of employment and fell within Regulation 4(2). How that right would apply as against Ponticelli was to be determined in accordance with the approach established in Mitie Managed Services Ltd v French [2002] IRLR 521. In that case, which addressed a profit sharing bonus scheme, it was held that where it is not possible for transferring employees to remain in the previous employer’s scheme post transfer, the obligation on the transferee is to provide a scheme which is ‘substantially equivalent’ to the previous scheme. 

In reaching this conclusion, the CS noted that, if it were to allow the appeal, employers would be able to circumvent the provisions of TUPE by setting out any benefits that are additional to basic salary in separate contracts such that they would not transfer across. This would clearly not fulfil the purpose of TUPE (or the underlying Acquired Rights Directive) to ensure as far as possible that on a relevant transfer the employment relationship continues unchanged, and that the employee is not placed in a less favourable position as a result of the transfer. 

Takeaway: This is a Scottish decision and therefore persuasive rather than binding on English courts. 

It nonetheless emphasises the need for purchasers of businesses to consider making arrangements to replicate or put in place substantially equivalent share incentive or other similar schemes operated by the seller’s group prior to a TUPE transfer, even where the scheme in which the transferring employees participate is very specific to the seller’s business in its detail. This can present challenges in the design of replacement arrangements to apply post transfer, given that each case will be very fact specific, and there is little guidance in the case law on what constitutes a ‘substantially equivalent’ scheme.