Share incentive plans and TUPE

In Ponticelli UK Ltd v. Gallagher,the Employment Appeal Tribunal (EAT) held that obligations under an employer’s Share Incentive Plan (SIP) transferred under TUPE, even though the plan was not mentioned in the transferring employee’s contract of employment. The practical effect of this was that the transferee employer was obliged to put in place a replacement scheme of substantial equivalence to the transferor’s SIP.

TUPE and SIPs

When there is a relevant TUPE transfer, the position of contractual obligations is straightforward (except in relation to some pension rights) – all the transferor’s “rights, powers, duties and liabilities under or in connection with” a transferring employee’s employment contract pass to the transferee. However, SIPs tend to be contained in separate agreements, with scheme rules typically stating that they are not contractual and that participation in a share scheme is specifically excluded from the employment contract.  This is usually done to limit claims on termination of employment but it can also seek to avoid the employees’ rights to participate passing to a buyer under TUPE.

Previous case law position

Prior to the decision in Ponticelli, the EAT had recognised (in Mitie Managed Services Ltd v. French) that claimants who had participated in a profit-sharing scheme were not entitled to remain participants in that scheme post-transfer.  However the EAT went on to hold that the employees were instead entitled to participate in a scheme of “substantial equivalence“.

In Chapman and Elkin v. CPS Computer Group plc, claimants were granted the option to purchase shares which were only exercisable after a fixed period, save in circumstances such as redundancy. The Court of Appeal held that TUPE will not transfer rights under an option agreement, such as a SIP, which is separate to the contract of employment.

Ponticelli UK Ltd v. Gallagher – facts

Mr Gallagher participated in a Partnership Share Agreement SIP which enabled him to acquire shares in his employer’s parent company, Total Exploration, in a tax-efficient way. For each partnership share purchased with up to 2% of basic salary, Total Exploration contributed funds for the purchase of two further matching shares. This effectively formed part of the claimant’s overall remuneration. However, like Chapman, participation in the SIP was not mentioned in Mr Gallagher’s employment contract, but rather in an explanatory booklet.

On 1 May 2020, Mr Gallagher’s employment transferred to Ponticelli UK Ltd under TUPE. His participation in the Total Exploration SIP therefore ended, with the shares which had been held in trust being transferred to him. Ponticelli offered Mr Gallagher a one-off payment of £1,855 as compensation for the fact that it was not going to provide a SIP post-transfer. However, Mr Gallagher argued that it was his right to participate in a SIP scheme of substantial equivalence at Ponticelli as it was a right that transferred under regulation 4(2)(a) TUPE.

The decision

The EAT agreed that Ponticelli was obliged to provide Mr Gallagher with a scheme of substantial equivalence. It was irrelevant that Mr Gallagher’s contract of employment did not include wording regarding the SIP, because Mr Gallagher’s rights under the SIP were part of his overall financial package for his services. This was where the case differed from Chapman, where the Claimants were offered rights that were only exercisable once in a limited set of circumstances, because Mr Gallaghers’ rights were part of his overall remuneration. Therefore, Mr Gallagher’s rights to participate in the SIP were clearly “in connection with” his employment contract and thus caught by the wording of TUPE.

The EAT also made a declaration that Mr Gallagher’s terms and conditions of employment should be updated to reflect Ponticelli’s obligation to provide him with a SIP of substantial equivalence to the Total Exploration plan on the same terms as set out in the explanatory booklet. 

What does this mean for employers?

The key takeaway for employers who are taking on employees through TUPE transfers is to ensure that the due diligence process uncovers any transferor schemes in place which provide remunerative benefits.  These benefits and any right the transferor has to withdraw them need to be carefully considered as the transferee may need to provide a scheme of substantial equivalence.

Please get in touch with a member of our team if you have any questions on the impact of this case.