Transfer decision could force benefits policies

A recent ruling means companies could be obliged to set up comparable
benefit schemes when taking on TUPE staff

The Transfer of Undertakings (Protection of Employment) Regulations 1981
(TUPE) were implemented to ‘protect workers and, more particularly, to
safeguard their rights upon a change of employer’. Regulation 5(2) of TUPE
provides that all of the transferor’s rights, powers, duties and liabilities in
connection with the contract are transferred to the transferee. A strict
interpretation of this regulation would mean that all contractual rights of
employees transfer.

However, replicating such rights can often be impossible or impractical.
Share incentive plans are employee benefits which can cause difficulties. The
recent case of MITIE Managed Services Limited v French & Others [2002] IRLR
512, examines the obligation of an employer to offer participation in share
incentive plans to employees transferred under TUPE.

The facts

Mrs French was employed by Sainsbury’s and had a contractual right to
participate in the company’s profit-sharing scheme under which she could
receive either cash or shares.

Under TUPE, the supermarket giant transferred the part of its business in
which French worked to Pitney Bowes Management Services Ltd (PBMS). French
subsequently brought an action against PBMS claiming she was contractually
entitled to participate in the Sainsbury profit-sharing scheme after the
transfer.

Despite the scheme being discretionary, the Employment Tribunal concluded
there was a contractual entitlement to the scheme and that, post-transfer, she
remained contractually entitled to participate in the profit-sharing scheme.

PBMS (later replaced by MITIE Managed Services Ltd (MMS) due to a subsequent
TUPE transfer) appealed to the Employment Appeals Tribunal on the basis that it
would be impossible to operate Sainsbury’s scheme because it had no control over
it, and no ability to issue Sainsbury shares.

The appeal

The EAT agreed with MMS and overturned the original tribunal decision. It
held that a broad approach must be taken to the construction of Regulation 5(2)
and that "the entitlement of the transferred employees in such a case is
to participation in a scheme of substantial equivalence but one which is free
from unjust, absurd or impossible features".

Opinion

This case is significant because it puts a positive obligation on the
transferee employer to provide a scheme of some sort even if it did not operate
such a scheme prior to the transfer. Unfortunately, the EAT gave no guidance on
what constitutes a scheme of ‘substantial equivalence’. The decision of the EAT
is being appealed to the Court of Appeal and hopefully it will be able to shed
some light on this.

Depending on the outcome of that appeal, this decision could be wide-ranging
as it could affect all types of contractual share incentive schemes and other
contractual benefits which are difficult to replicate. When drafting contracts
which refer to participation in such incentive schemes, employers should be
careful to ensure that the employee has no contractual right to participate in
the scheme to avoid the scheme possibly transferring. Additionally, purchasers
of a business will need to be very thorough in the due diligence process to
check the drafting and operation of any incentive scheme of the transferor in
order to assess their potential liabilities and post-transfer obligations.

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