Right to participate in share incentive plan transferred under TUPE

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) are designed to safeguard the rights of employees when there is a transfer of the business they work within, or a change in the organisation providing the service they are employed to carry out. Under TUPE, those employees and all of the rights and liabilities connected with their employment, pass from the old employer to the new employer. It is essential that employers understand when TUPE applies, and what rights and liabilities will transfer to them, so that they are then aware of any significant burdens coming their way and can manage these.

The recent case of Ponticelli UK Ltd v Gallagher [2023] CSIH 32 considered whether an employee’s right to participate in a share incentive plan transferred under TUPE.

In this case, Mr Gallagher was employed by Total Exploration and Production UK Limited. Total Exploration and participated in a share incentive plan. This plan was not mentioned in his employment contract.

Mr Gallagher’s employment transferred to Ponticelli UK Ltd under TUPE in May 2020. His participation in the share incentive plan with Total Exploration ended and he was not offered a comparable share scheme. Instead he was to receive a lump sum payment of £1,855. Mr Gallagher rejected the offer and brought a tribunal claim, arguing that he had the right to participate in an equivalent scheme following the transfer.

The Employment Tribunal and Employment Appeal Tribunal upheld the claim, finding that as Mr Gallagher’s rights to participate in the plan formed an integral part of his financial package, they arose “in connection with” his contract of employment for the purposes of TUPE. Mr Gallagher’s rights to participate in the plan had therefore transferred under TUPE and he was entitled to participate in a plan of substantive equivalence or comparable value to the plan operated by Total Exploration.

Ponticelli UK Ltd appealed to the Court of Session, its main ground of appeal was based on the decision in Chapman v CPS Computer Group plc [1987] IRLR 462, CA. In Chapman, the Court of Appeal had held that employees who had been transferred out of a company had been made redundant for the purposes of a share option plan they were members of. As a result, this allowed them to exercise their options. Ponticelli UK Ltd used Chapman as authority that where a share option plan is separate from the contract of employment, the rights under the plan do not transfer under TUPE.

The Court of Session decided that Chapman was of no assistance. This was because the case only considered whether the option holders had ceased to be employees by reason of redundancy and did not address whether rights under the share option plan were “connected with” the contract of employment and capable of transferring under TUPE.

The Court of Session dismissed the appeal.

What does this mean?

Employers have usually avoided share schemes transferring under TUPE by deliberately keeping them separate from contracts of employment and stating within the scheme rules that they are not contractual. However, this case makes it clear that a share scheme, even where not mentioned in the contract of employment, can arise ‘in connection with’ the employment contract as part of an employee’s broader financial package.

This decision presents practical difficulties for organisations who may find themselves as incoming employers (transferees) in a TUPE transfer, particularly if they do not operate a similar share scheme for their existing employees. This could apply to other benefits, such as bonuses or commission payments, which are considered to be ‘in connection’ with employment, meaning incoming employers then having to implement a substantially equivalent benefit post transfer.

If you are involved in a transaction where TUPE applies, it is key that you establish whether the outgoing employer (the transferor) operates a share scheme, or other benefits, and gain full insight into how they operate. In doing so, you will be able to determine the true extent of your obligations post-transfer and address any issues before the transfer takes place.

If you have any questions in relation to this article, or in relation to TUPE or employment law generally, please contact a member of the team.

Contact Us

    You can always change your mind by unsubscribing here.

    We will only use your information to handle your enquiry and won’t share it with any third parties without your permission.