An employee’s right to participate in a share incentive plan transferred to a new employer under TUPE, Scotland’s Court of Session has ruled.
In Ponticelli v Gallagher, Scotland’s highest civil court upheld previous rulings from the employment tribunal and Employment Appeal Tribunal, which found that the new employer was obliged to provide a share incentive plan (SIP) of “substantial equivalence”, even though the SIP was not included in the claimant’s employment contract.
Mr Gallagher was transferred to Ponticelli – a company that provides industrial services to firms in the energy, chemical and pharmaceutical sectors – under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) in 2020.
TUPE regulations
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Since 2018 he had participated in an SIP operated by his former employer, Total Exploration and Production UK. Deductions of up to 10% each month were made from his salary in exchange for shares, and the employer contributed funds to purchase further shares on his behalf.
The SIP did not form part of his employment contract; he had to enter into a separate, voluntary SIP agreement with the company.
When Ponticelli acquired the company, Gallagher’s membership of the SIP ended and the shares he held were transferred to him. Ponticelli advised him that he would receive a one-off payment of £1,855 as compensation for the fact it would not offer an SIP.
Gallagher launched an employment tribunal claim, arguing that his right to participate in an SIP transferred to the new employer under TUPE.
His claim was upheld, with the tribunal agreeing that he was entitled to participate in a SIP of substantial equivalence or comparable value to the SIP operated by his former employer.
Ponticelli appealed against the tribunal’s ruling. It argued that the SIP entitlement arose from a contract separate to his employment contract and therefore his right to participate in the share plan was not part of its TUPE obligations. This was dismissed by the EAT.
Gallagher’s lawyer argued that the share payments were made as a result of his status as an employee and that the SIP was part of his remuneration package. There was no other reason why he could have deductions made from his salary in return for shares.
The Court of Session agreed that the employee would be disadvantaged financially if he was unable to participate in an equivalent scheme with his new employer.
Lady Wise’s judgment says: “The restrictive interpretation of the [TUPE] Regulation proposed by the employer in this case would enable employers to subvert the important protections the [EU Directive 2001/23/EC] and the Regulations are designed to bestow, simply by creating separate contracts to confer various benefits additional to basic salary.
“The words used in the Regulations are clearly wide enough to cover various obligations not contained within or ‘under’ the contract of employment. Whether obligations outside the formal contract are regarded as arising ‘in connection with’ that contract or ‘from the employment relationship’, the outcome would be the same in the present case.”
Implications for employers
Beverley Sunderland, managing director at Crossland Employment Solicitors, said: “Prior to this decision, the view had always been taken that if an employee transferring under TUPE was entitled to something very company specific, which could not be replicated by the new employer, such as a share scheme, then much in the same way as happens with final salary pensions, they were not obliged to provide it. However, unlike pensions, where the TUPE legislation makes specific provision for what to do when faced with the impossible, there is yet no such statutory carve out in these circumstances.
“This means that on any TUPE transfer HR will need to be particularly vigilant for any kind of share scheme of this kind as it could significantly affect the value of the business being acquired – because so far as the case law is concerned, the transferring employee must be provided with a scheme which is a ‘substantially equivalent alternative’. Practically speaking it is often not going to be possible to do so – the acquiring business may be a sole trader and not have shares or the cost of creating an employee share ownership scheme is just going to be too great.”
Sunderland said organisations could consider offering a scheme that ‘tracks’ what would have happened if they were still members of the scheme.
“Although this will work for publicly quoted companies, what about private companies? Usually there will be a restriction on selling shares and the only time that the employee benefits is if the business is sold – which could mean a very large payment if this ever happens,” she said.
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“The most practical advice is for companies to build into such schemes the right to terminate them (both pre and post transfer) and for the government to amend TUPE to confirm what a transferee can offer in its place, in much the same way as it does for pensions.”
