TUPE regulations: Get a grip on TUPE share options, or else

When employee share options feature in TUPE transfers, major complications can arise.

Where Transfer of Undertakings (Protection of Employment) (TUPE) applies, the rights and liabilities of transferring staff automatically switch to the new employer on the same terms and conditions as applied under the original employment contract. Any attempt to change the terms and conditions is, broadly speaking, unlawful.

Most companies recognise and deal with these obligations on receipt of the standard employee liability information. What happens, however, when the transferring employee’s rights include staff incentives?

Where transferring staff have express or implied contractual rights to share incentives, they should be entitled to participate in “a scheme of substantial equivalence” that does not contain features the transferee can’t provide.

If the transferee does not provide said scheme, they could face claims for damages for breach of contract for the losses arising from an inability to participate in a share plan or constructive dismissal. Transferors might also face claims in anticipation of the transfer. However, replicating a transferor’s share incentive plans may be prohibitively expensive or simply not part of the ethos of the transferee.

Managing the risk

Transferees must identify the risks before they can manage them, and this may involve wider enquiries than the standard employee liability information provides, such as access to incentive scheme rules. Transferees can then: request an indemnity from the transferor in respect of potential claims brought by staff or request a price adjustment to take account of the risks or implement post-transfer share incentive arrangements or extend existing arrangements to the transferred staff. The first two options could be the easiest, but their viability depends on bargaining power.

Clearly, any risk of claims can be minimised where the new incentive arrangements broadly replicate existing ones. The risk is greatest if the transferee provides no replacement incentive arrangements. However, as the tribunals have not set guidelines as to what might be “substantial equivalence”, the middle ground is unclear.

Until guidelines are set, this will have to be judged on a case-by-case basis. However, transferees could take the approach that a basic replacement plan is sufficient and rely on the uncertainty of the substantial equivalence test to deter staff from bringing claims.

Tax issues

Transferees should also be aware of potential tax and national insurance contributions (NICs) liabilities that can arise where transferred staff retain share incentive rights in respect of shares in the transferor. The liability to account for income tax in respect of the incentives remains with the transferor. But, the liability to account for employer’s and staff NICs is passed to the transferee, who may not have a contractual right to withhold from employees’ salaries because it was not party to the original incentives contract.

The transferee should then seek an indemnity, from the transferor, in respect of any post-transfer NICs that arise due to the exercise or vesting of share incentive rights granted by the transferor, along with any related costs. The transferee should also require the transferor to notify it of the exercise or vesting of awards, so that it knows when it is required to account for NICs and so can claim under the indemnity – otherwise, the transferee may have no means of knowing the withholding obligation has arisen.

Key points

  • TUPE rules can apply to share incentives held by staff transferred at the time of an outsourcing transaction.
  • As non-compliance with TUPE can be costly, transferee companies need to assess the risks and manage them either at the time of transfer or through the introduction of replacement incentive rights.
  • Transferees also need to protect themselves against potential NIC costs arising in respect of share rights held by transferred employees.

With assistance from Jackie Cuneen, special counsel, K&L Gates

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