Share Plans in TUPE Transfers – Ponticelli v Gallagher

Does a transferee have to provide a substantially equivalent share incentive plan when an employee had no contractual right to participate in a scheme operated by the transferor? In short, yes, as discussed in Ponticelli v Gallagher [2022].

The Facts

Gallagher (G) was given the opportunity to participate in a share incentive plan (SIP) operated by his employer, Total Exploration and Production UK Ltd (T). Participation was voluntary and there was no mention of it in G’s contract of employment. G completed an application and joined the SIP from August 2018. He contributed 5% of his salary to purchase shares. G was employed by T until 1 May 2020 when his employment transferred to Ponticelli (P) under TUPE. On the day of the transfer, G’s participation in the plan ended and the shares he had purchased were transferred to him. Shortly after the transfer, P told G he would receive a compensatory payment of £1,855 as compensation for the fact that P was not going to provide a SIP. G applied to the Tribunal for a declaration under s.12 of the Employment Rights Act 1996 (ERA) that he was entitled to be provided by P with the right to participate in an equivalent SIP to that which T had provided.

The ET Judgment

The ET held that the right to participate in the SIP was ‘caught by’ the wording of Reg 4(2)(a). G was only entitled to participate in the SIP because he was an employee of T; it was a benefit for employees of T and was Revenue approved. Looked at broadly, it was part of the overall financial ‘package’. It would, in the view of the Tribunal, undermine the purpose of the TUPE and possibly encourage attempts to try to avoid transferring financially significant benefits on a transfer if it was not regarded as such.

The EAT Judgment

P appealed on the ground that that the rights and obligations in the SIP did not arise either ‘under’ the contract of employment or ‘in connection with’ that contract. Therefore, Reg. 4(2)(a) did not apply. The ET by using the expression ‘caught by’ had not identified which part of Reg 4(2)(a) applied to the SIP. It was clear that the right to participate did not arise under the contract as the there was no mention of it in G’s contract with T. The case was therefore distinguishable from Mitie Managed Services Ltd v. French & Ors [2002]. Furthermore, P relied on Chapman v. CP Computer Group [1987] IRLR 462 in which it had been held that the right to exercise an option under stock option scheme when an employee did not transfer under TUPE 1981.

G accepted the SIP did not arise under the contract that he had with T but it did arise in connection with it.

Lord Fairley rejected P’s argument. Firstly, Chapman had not considered the words ‘in connection with’ and that it been subjected to significant academic criticism. Secondly, the Stock Option scheme in Chapman was different than the SIP operated by T which was directly connected to the way in which G was remunerated for his services as an employee. It also involved the provision to him of Matching Shares paid for entirely by his employer. As the Tribunal correctly noted, it was part of the claimant’s broader financial package of benefits as an employee. Finally, ‘in the absence of any suggestion that the mutual rights and obligations under the Partnership Share Agreement were terminated prior to the transfer, they transferred on 1 May 2020 in precisely the way envisaged by the EAT in MITIE’.

Employer Advice

The case is a reminder of how broad TUPE is when considering what transfers with employees. Whilst businesses will often focus on the contractual obligations, TUPE operates to transfer the whole employment relationship. This case specifically demonstrates that a non-contractual SIP will transfer. Businesses should consider that having reviewed the contractual obligations that transfer, Reg. 4(2)(a) will operate to broaden the contractual obligation to those ‘connected’ to the transfer. Moreover, obligations not deemed to be in connection with the contract of employment, are transferred under Reg 4(9), which operates as a ‘catch all’ clause to ensure the transfer will not ‘involve a substantial change in working conditions to the material detriment’. TUPE is a complex area of law, and business should always seek legal advice. Dr Adam Wickes is a leading specialist in TUPE and available to advise on all TUPE transfers.

Contact us to schedule your complimentary consultation.