Can a share incentive plan transfer under TUPE? Ponticelli UK Ltd v Gallagher

In the recent case of Ponticelli UK Ltd v Gallagher, the Court of Session in Scotland upheld earlier decisions by the Employment Tribunal and the Employment Appeal Tribunal that the right to participate in a share incentive plan (SIP) transferred under TUPE. Even though the employee’s right to participate in the SIP was not stated in his employment contract, it arose ‘in connection with’ his employment contract, was part of his overall financial package and therefore the transferee employer was required to provide a scheme of substantial equivalence.

In situations where the TUPE regulations apply to a business transfer or a change in service provision, the transferring employer's ‘rights, powers, duties, and liabilities under or connection with’ each employment contract passes over to the new employer, referred to as the transferee.

What is TUPE?

TUPE, or the Transfer of Undertakings (Protection of Employment) Regulations 2006, is a UK employment law based on European law that safeguards employees' rights when a business or part of it changes ownership or when there is a service provision change (usually in outsourcing or when services are taken back ‘in house’), ensuring that employees’ employment terms and conditions are preserved in the transfer process and afterwards. We go into more detail in our TUPE frequently asked questions guide.

What is a share incentive plan (SIP)?

A SIP, or Share Incentive Plan, is a UK tax advantaged employee share scheme that allows eligible employees to acquire shares in their company under a specific legislative regime designed by the UK government to encourage employee ownership and to foster employee engagement and incentivisation.

What happened in the case?

Gallagher, who was employed by Total Exploration and Production UK Ltd (Total), and participated in Total’s SIP during his term of employment. Notably, the SIP was not explicitly referenced in his employment contract.

When his employment was transferred to Ponticelli under TUPE, Ponticelli informed Gallagher that it would not be providing a SIP and instead offered a one-off compensatory payment. Gallagher rejected this and argued his right to participate in the SIP transferred under TUPE and that Ponticelli had to provide an equivalent scheme. The Employment Tribunal and Employment Appeal Tribunal upheld the claim and Ponticelli appealed to the Court of Session.

What does this mean for UK employers?

The case underscores the significance of conducting thorough due diligence in all transactions to ascertain which rights, benefits and obligations are eligible for transfer, including those not explicitly outlined in employment contracts. Following this, the transferee employer must scrutinise the terms of relevant schemes and on what basis these have been offered to determine whether they are obligated to continue providing them (or equivalent arrangements) after the transfer and, if so, in what manner.

Employee Share Schemes Partner, Ian Fraser, comments:

The question of whether employees involved in a TUPE transfer must be offered an employee incentive right of substantial equivalence regularly causes significant debate in asset sale/TUPE transfer transactions. This case is helpful in providing additional clarity that a right should be offered. However, it does not address the issue that the new owner/employer cannot operate a share plan in respect of the seller’s shares or establish what constitutes ‘substantial equivalence’ – although it appears that companies may need to conduct additional valuation work to see if cash payments will be sufficient to replace tax advantaged share rights.

How do I set up and operate a share incentive plan?

Share incentive plans are a great way for companies to attract and retain employees and to reward and incentivise them by aligning their interests with those of their shareholders. If you need help with setting up a share incentive plan, or you need advice on your business’ obligations under TUPE, speak to us. Contact us on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact.