The Court of Session in Scotland has ruled that the right to participate in a share incentive scheme can transfer to a new employer under TUPE, even though there’s no mention of it in the contract of employment. It means, after the transfer, the new employer is obliged to offer a scheme of ‘substantial equivalence’. There is a cost to that obviously but, aside from cost, not every company is able to create share or share-based incentive scheme, so where does that leave the parties? We’ll ask a share plans specialist.
This is case of Ponticelli Ltd v Gallagher with the Court of Session ruling that by virtue of regulation 4(2)(a) of TUPE, the right to participate in a share scheme is a right ‘in connection’ with the employee’s contract so is be caught by TUPE. So, even though it’s not a contractual right, it transfers because it’s a right in connection with the contract. The court made clear that the duty on the new employer, the transferee, is to provide a scheme of ‘substantial equivalence’. But what does that mean in practice?
To help shed light on that, earlier I spoke on the phone to share plans specialist James Sullivan-Tailyour. I asked James if this case changes things:
James Sullivan-Tailyour: “It does change things, yes. Unfortunately, I think it leaves the position a little bit unclear for companies that are undergoing, or contemplating, a TUPE transfer of employees into their organisation. Previously, when that had happened companies had been able to take almost a policy approach that, provided that the transferring company’s equity-based arrangements had been set up so that they were outside of employment contracts, there wasn't any requirement to offer an ongoing participation in a similar, equivalent, equity-based arrangement. But, this decision, which is probably decided correctly in accordance with the law, leaves that position that most people had previously taken in doubt because it suggests that notwithstanding that equity based arrangements which are outside of direct reference in a service agreement nevertheless have to be replicated, or a scheme of substantial equivalence has to be offered by the new employer going forwards, and it raises a number of tricky questions where you're an organisation that can't, or at the very least doesn't, offer such an arrangement. How do you go about determining what are equivalent terms? Can that be cash based when the arrangement was previously shared based, and a whole number of other practical issues that are associated with that. So, it's just going to require a little bit more application of thought on a case-by-case basis when organisations are confronted with a TUPE transfer of employees into their organisation.”
Joe Glavina: “What if the transferor’s scheme is drafted so that participation in the scheme is a discretionary benefit that can be terminated at any time? So, could the transferee implement a similar scheme, with a similar unilateral termination right, and rely on that to terminate the scheme on or after the transfer? So the transferee could get round it that way, maybe?”
James Sullivan-Tailyour: “Well yes, absolutely, that’s a problem that this judgment throws up. In a strict sense yes, because almost all equity-based arrangements will be discretionary and can be withdrawn by the employer company, the company that offers the arrangement, unilaterally and at any time and for any reason and so a scheme of substantial equivalence that is implemented by a new employer would presumably have a similar termination right and, yes, in theory you could enforce that termination right immediately on the TUPE transfer being complete. I'm doubtful, though, that an employment tribunal would regard that as within the spirit of the TUPE regulations, notwithstanding that it might technically be permissible, but nonetheless, yes, it's a problem that's raised by this judgment and something that hasn't yet been tested. It might be workable, but I'd be nervous about being the first company to rely on it without any definitive statement from the courts on whether that is or is not acceptable, but certainly it wouldn't be seen to be in the spirit of the TUPE regulations.”
Joe Glavina: “Is there any action for HR professionals to take as a result of this Ponticelli ruling?”
James Sullivan-Tailyour: “Well I certainly think it's a good idea to review service agreements and terms and conditions of employment to make sure that there are no express references to participation in share option schemes, or other equity-based incentive arrangements, unless there's a very good reason for them having been there in the first place. That is our standing advice anyway, apart from this Ponticelli decision, but this decision raises the importance of making sure that there is clear blue water between service agreements, employment contracts, on the one hand, and equity-based compensation on the other. I think the other thing that HR professionals need to make sure is that where they are in a situation where they are asked to look at the terms and conditions of employment of inbound employees who are going to come in by way of TUPE transfer, it is really important to make sure that the scope of the due diligence, the scope of the questions that you're asking about the terms and conditions of those incoming employees, encompasses wider remuneration incentive, other benefit arrangements, that might not necessarily sit within the employment contract so that these types of issues are picked up early, and in advance, and then the organisation can take appropriate advice on whether they need to offer equivalent schemes going forwards.”
Finally, it’s worth saying, the Ponticelli ruling was decided in the context of a share incentive plan which is a specific type of share plan that operates on an all-employee basis with deductions being made from participating employees’ salary. With those types of share schemes it's very easy to see the direct connection with someone's employment contract and so why it’s caught by TUPE. That’s not necessarily true of other schemes you might operate for more senior executives, so how does this case impact on those? That’s a question we’ll look at next week when we’ll return to this case and hear again from James.
Meanwhile, on the fundamental question of how it is that the right to participate in a share scheme transfers under TUPE even though there is no mention of it in the contract of employment, we have a programme on that for you. That’s: ‘Right to participate in share scheme transfers under TUPE, rules Scottish court’ which is available now for viewing from the Out-Law website with Stuart Neilson providing the expert analysis. We’ve put a link to it in the transcript of this programme. We have also put a link to the case at the centre of all of this, the Court of Session’s decision in Ponticelli Ltd v Gallagher.