Key takeaways

• This decision potentially widens the ability for a transferring employee to argue that a right to a share scheme is a right "in connection with" their employment contract; thus, transferring under TUPE as share options and incentives will often form part of an employee's overall financial compensation.
• It is, therefore, important to ensure that proper due diligence is undertaken before the transfer. This would enable the parties to consider the feasibility of setting up a substantially equivalent scheme, take steps to consult with the transferring employees to buy out their right to entitlement if the transferee is unable to establish an alternative scheme, and/or exercise any rights to terminate the scheme - many employee equity schemes are introduced for a specific period, or are capable of revocation on their terms, so it's possible that in other cases, a transferee may be able to rely on those terms so as to limit the need to operate a substantially equivalent scheme post-transfer. 

In more detail

Background

Regulation 4 of TUPE provides:

"Effect of relevant transfer on contracts of employment

1. Except where an objection is made under paragraph (7), a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, which would otherwise be terminated by the transfer, but any such contract shall have the effect after the transfer as if originally made between the person so employed and the transferee.
2. Without prejudice to paragraph (1), but subject to paragraph (6) and regulations 8 and 15 (9), on the completion of a relevant transfer—
   1. All the transferor's rights, powers, duties, and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee.
   2. Any act or omission before the transfer is completed, of or in relation to the transferor in respect of that contract or a person assigned to that organised grouping of resources or employees, shall be deemed to have been an act or omission of or in relation to the transferee."

Facts

Mr. Gallagher had a right to join a share incentive plan (SIP) operated by his employer, Total Exploration. The right was not set out in his contract of employment but was set out in a separate contract, a Partnership Share Agreement, with Total Exploration and the SIP trustees. After his employment was transferred to Ponticelli Limited under TUPE, his participation in Total Exploration's SIP ended, and the shares held on his behalf were transferred to him. Ponticelli notified him that they would not be continuing to provide a SIP and that he would receive a compensation payment of GBP 1,855.

Mr. Gallagher claimed that his right to participate in a SIP had transferred to Ponticelli under TUPE, which was accepted by the employment tribunal and Employment Appeal Tribunal. Ponticelli appealed to the Court of Session, arguing that the right to the SIP arose from a separate, discrete contract and was not part of Mr. Gallagher's employment, and so would not transfer under Regulation 4(2)(a) of TUPE. Ponticelli tried to rely on a Court of Appeal decision, Chapman and Elkin v. CPS Computer Group, where the court held that the share option contracts in that case did not transfer.

Court of Session decision

The Inner House of the Court of Session dismissed Ponticelli's appeal. The tribunal and EAT were correct that Chapman did not apply to this decision as that was a case about the interpretation of the share option contract rather than rights that transfer under TUPE. Accordingly, there had been no consideration of whether the share option contracts were rights connected with the contract of employment for the purposes of TUPE. In this case, the Partnership Share Agreement provided that contributions to the SIP were made through salary deduction, and the employer would also contribute funds to buy further matching shares. There were also other optional benefits that included the opportunity to participate in the free shares part of the plan, which linked the award of possible further shares to the employer's bonus scheme. The tribunal was correct in finding that the rights and obligations under the SIP formed an integral part of Mr. Gallagher's overall financial package and were, therefore, in connection with his employment contract.

Ponticelli Ltd v. Gallagher

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For advice or to discuss what this means for you and your business, please contact your usual Baker McKenzie contact.