Right to participate in share incentive plan transferred under TUPE

In Ponticelli Ltd v Gallagher, the EAT determined that a transferee was obliged to provide the claimant (Mr Gallagher) with a share incentive plan which provided him with “substantially equivalent” benefits to those he had enjoyed before his employment was transferred under the TUPE Regulations. This was despite the fact that the plan was not even mentioned in his contract of employment.

In his previous employment with Total Exploration and Production UK Limited, Mr Gallagher had been a member of a share incentive plan put in place by its parent company, under arrangements set out in a “partnership share agreement” (PSA). Under the terms of the PSA, his participation in the scheme ended when the business in which he was working was sold to Ponticelli Ltd.

Mr Gallagher’s employment was transferred to Ponticelli under TUPE. As a result, all his former employer’s rights and liabilities arising “under or in connection with” his contract of employment transferred to Ponticelli. However, Ponticelli declined to make arrangements for a comparable scheme, arguing that they had no obligation to do so.

The EAT has confirmed that while the benefits of the share incentive plan did not arise “under” Mr Gallagher’s contract of employment, they clearly arose “in connection” with it. Applying a 2002 ruling of the EAT in Mitie Managed Services v French, this meant that Ponticelli had to provide a scheme with substantially equivalent benefits.

In Mitie Mrs French had a contractual right to participate in a share incentive plan. Since then employers have generally avoided creating such entitlements. This latest decision says this makes no difference: the rights to participate in such schemes still transfer under TUPE, even if there is no express obligation in the contract of employment to provide them.

What was interesting is that it appeared no attempt had been made to terminate the PSA before or after the TUPE transfer. This is relevant since it is an accepted principle that TUPE should not afford employees better rights than they enjoyed pre-transfer. The EAT made it clear that this issue was not raised, and therefore not considered, in this decision.

This decision also illustrates another anomaly. Had the business been sold by way of a share sale, Mr Gallagher would have had no redress. This is because he had no contractual right to the benefit. As per the scheme rules, Mr Gallagher’s participation in the scheme ended at the point his employer ceased to be part of the same group as its parent company. No doubt this is why the EAT was keen to emphasise that Ponticelli had not sought to exercise any right to terminate the PSA.

Putting in place schemes which provide substantial equivalent benefits is complex:

• Firstly, not all companies are able to create share or share-based incentive schemes.
• Secondly, since the value of shares fluctuates as can the tax and NI due on them, you cannot replicate share-based schemes with a cash equivalent, particularly if you are comparing publicly traded shares with those in a privately owned business.

The key take-away for organisations inheriting staff under TUPE is therefore to carry out effective due diligence about all benefits offered to staff who may transfer. Specifically, they should consider the right to terminate these arrangements, both pre and post-transfer.

For those drafting share or share based incentives, building in such termination rights into the award documentation will be important, not least as transferees who may inherit staff would factor in any additional cost into discussions on price.