Right of an employee transferred under TUPE to participate in a share incentive plan (SIP)

In a recent case, Ponticelli Ltd v Gallagher [2023] CSIH 32, the Court of Sessions held that an employee’s right to participate in a SIP transferred to the new employer under Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and the transferee employer must provide a scheme of substantial equivalence for the employee to participate in.

Facts

Mr Gallagher (the respondent), was employed by Total Exploration and Production UK Limited (Total). Although not part of his contract of employment, through a partnership share agreement (PSA) between the respondent, Total and the trustees of a SIP, the respondent joined a SIP operated by Total. When Pontecelli Ltd (the appellant) acquired Total, the respondent was transferred to the appellant under TUPE and was offered a compensation payment of £1,855 as the appellant would not be operating a SIP.

The respondent claimed that he was entitled to participate in a SIP equivalent following the transfer as such right had transferred to the appellant under TUPE. The respondent’s claim was accepted by the employment tribunal and the employment appeals tribunal. In this regard, regulation 4 of the TUPE Regulations 2006, among other things, provides that all of the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred to the transferee.

The appellant appealed to the Court of Sessions based on the argument that the respondent’s right to the SIP arose from the PSA which is a separate, discrete contract and was not part of the respondent’s employment contract. The appellant relied on Chapman and Elkin v CPS Computer Group [1987] IRLR 46, where the court held that the rights of the respondents (in that case) to exercise their share options arose from the option agreement which was a separate and discrete contract from their contact of employment.

In response, the respondent argued that the PSA was clearly in connection with the respondent’s contract of employment and based on caselaw, “in connection with the contract of employment” needs to be widely interpreted.

Decision

The Court of Sessions rejected the appellant’s argument and upheld the decision of the employment appeals tribunal. The court distinguished the Chapman case on the basis that it related to the interpretation of the definition in the specific share option agreement and not TUPE. Also, based on caselaw, the words “in connection with” need to be given a wide meaning. In the court’s view, participation in the SIP formed an integral part of the respondent’s overall financial package especially given that contributions were made by the respondent through deductions from salary. It was the purpose of the TUPE regulations to ensure that the contract of employment and the employment relationship continues and remain unchanged following the transfer.

Implications

• Even if equity incentives are normally granted under separate agreements and plans, this case widens the potential for share based incentives to be regarded as rights arising “in connection with” the contract of employment for the purposes of TUPE and be regarded as an integral part of an employee’s overall financial package
• A liberal interpretation of the TUPE legislation would perhaps be prudent given that it is the intention of the rules that the contract of employment and the employment relationship continue and remain unchanged following the transfer
• Parties should conduct more thorough due diligence to assess the ‘substantially equivalent’ equity incentives arrangement that would need to be made available following the transfer.

For further information, please contact JD Ghosh or Stuart James or Paul Norris.

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