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’ which could prove difficult and expensive.
This is the EAT’s ruling in Ponticelli UK Ltd v Gallagher and shows that employers will not be able to avoid the transfer of employee’s rights under a share scheme by keeping the share schemes separate from employment contract, as often happens. That’s because regulation 4(2)(a) says the right to participate in a share scheme will be a right ‘in connection’ with the employee’s contract so will be caught by TUPE.
The facts briefly. Gallagher, the Claimant, was an employee of Total Exploration and Production Ltd. Total offered a share incentive plan, a SIP, and the Claimant was a part of the scheme. The scheme was voluntary and there was no mention of it in Gallagher’s employment contract. Sometime later Ponticelli UK Ltd, the Respondent, took over the contract and Gallagher transferred under TUPE.
Ponticelli didn’t not offer a comparable share scheme but instead offered a lump sum of around £1,800 to employees affected by the transfer. Gallagher rejected that and went on to bring a tribunal claim, arguing that his right to participate in an equivalent scheme had transferred to Ponticelli as part of the TUPE transfer. The tribunal upheld Mr Gallagher’s claim on the basis that the share scheme was in connection with his employment and so the new employer, Ponticelli, was obliged to provide an equivalent scheme. On appeal the EAT agreed.
So, clearly this has significant financial implications for transferees so let’s get a view on that. Earlier Stuart Neilson joined me by phone from the Glasgow office to discuss the case. I started by asking for his key takeaway from this case:
Stuart Neilson: “I think it's about getting some clarity around what has been a pretty tricky area of the law. It’s this issue that when you have somebody who transfers under TUPE, the transfer of undertakings regulations, what is it that transfers with them? So we're very comfortable with the fact that the terms conditions of employment transfer but, particularly in situations where someone is coming from an environment where they maybe had a share incentive plan, or a share option scheme, something like that, there's always been a bit of a grey area as to whether or not the right to be in that type of scheme would also transfer under TUPE and that’s particularly challenging for someone who is going to be the new employer if they don't offer that type of arrangement. There was a case from quite a considerable period of time ago called Chapman which seemed to suggest that no, that type of right would not transfer under TUPE, but that case has been doubted by a lot of commentators. So with case now, what we've had is a very clear statement from the Employment Appeal Tribunal in Scotland that, in fact, Chapman is not good law and if, as in this case, you have a share incentive plan that is essentially based on the fact that the individual has to be an employee to access the plan, then that is deemed to be a right which is connected with the contract of employment and therefore, in terms of the TUPE legislation, that will transfer. So, we now have a degree of clarity on the fact that these types of schemes can, and should, transfer.”
Joe Glavina: “Is there a message here for a potential transferee to make sure they ask the right questions at the due diligence stage so they find out about any scheme of that type?”
Stuart Neilson: “Yes, absolutely. I think it's a very key point that when you are assessing the workforce, checking what their rights and benefits are, then you need to make sure that you have checked whether or not there are some of these, what one might call, ancillary rights. So they're not necessary things which arise directly under the contract for employment. So, in the Ponticelli case the terms and conditions of employment made absolutely no reference to share incentive plan, it was all kept quite separate, but the share incentive plan did only apply if they were an employee of the company so, therefore, it was deemed to be something that was connected with the employment and did transfer. So, you've got to cast your net pretty wide and make sure that you are checking on all of these kind of ancillary rights and I guess the key things to be looking for are things like share incentive plans, share save schemes, share option schemes, anything that might be kind of equity-related in relation to the company are things that you need to just keep an eye on.”
Joe Glavina: “What if the new employer, the transferee, is not a listed company, can't offer shares, or does not offer a share scheme for existing employees, yet they face this duty to offer something that's ‘substantially equivalent’. That’s a challenging one, isn’t it?”
Stuart Neilson: “Yes, it’s a very challenging one. They obviously can't put in place something that is the same, or even close to it. In the Ponticelli case, in fact, the new company tried to buy out the right and they offered, I think, about £1,800 to the employee which was broadly equivalent to maybe two years’ value in the scheme that he was coming out of, and he rejected that. So, going forward, that's probably not going to be sufficient. I mean, you might get employees to agree to it and if they agree to it then fine, but I think it's got to be something that is broadly equivalent. So, the only thing I can think of is you might be able to put in place some kind of bonus scheme that might give you a similar kind of return as an employee to the return you would be making having been part of that share incentive schemes, or whatever. So, you'll have to do a bit of thinking about what did they get out of that scheme over the last two years, five years? Can we put in place a bonus scheme that sort of replicates that in some way, shape or form? I think that's probably your best bet. I suspect the pragmatic reality is that lots of employers in that situation would probably still look to try and do some kind of buyout. On a practical level, that may work, but you have to be very careful as to whether or not that would actually be legally effective.”
Joe Glavina: “Anything else to take from this case, Stuart?”
Stuart Neilson: “The only thing, and I don't really have an answer for it, is the interesting thing about this case is, obviously, it's focused on a particular share incentive plan here but I think the principle behind this case does go further than that and I think it is, therefore, capable of applying to share option schemes, almost any type of scheme that might be sort of equity related. We would need to apply our mind to whether there are other things that are sort of connected to the employment that might also be swept up by this, that might not be things that are obviously sitting in the terms and conditions of employment. So, a little bit of thinking maybe just in what could those other things be that might be caught by this.”
That case is called Ponticelli UK Ltd v Gallagher and is a decision of the Employment Appeal Tribunal in Scotland. We have put a copy of it in the transcript of this programme.