The Court held that the employee’s entitlement regarding the plan arose ‘in connection with’ his employment contract and therefore the transferee employer was obliged to provide a share scheme of substantial equivalence. This decision may be of persuasive value if a similar scenario was presented before an Irish court or adjudication body.

Background

In 2018 Mr Gallagher applied to join his employer’s Share Incentive Plan (“SIP”).  He entered a separate contract, a Partnership Share Agreement, with his employer and the trustees of the SIP. Participation in the SIP was voluntary and there was no express reference to it in Mr Gallagher’s contract of employment. Contributions to the SIP were made through salary deductions. For each partnership share purchased by salary deduction, the employer contributed funds for the purposes of two further “Matching Shares”. Other optional benefits included the opportunity to participate in the “Free Shares” part of the SIP which linked the award of possible further shares to the employer’s bonus scheme.

TUPE Transfer

In May 2020, upon the acquisition of the existing employer’s business by Ponticelli Limited (“Ponticelli”), Mr Gallagher’s employment transferred to Ponticelli under the UK Transfer of Undertakings (Protection of Employment) Regulations 2006.

Following the transfer of Mr Gallagher’s employment, his membership of the SIP ended and the shares held on his behalf were transferred to him.  Ponticelli informed Mr Gallagher that they would not be providing a SIP and offered him a once-off compensatory payment in the sum of £1,885. Mr Gallagher rejected the offer of compensation and brought a claim to the Employment Tribunal.

Proceedings

Mr Gallagher argued that his right to participate in the SIP validly transferred under Regulation 4(2) of the 2006 Regulations whereby all the transferor’s “rights, powers, duties and liabilities under or in connection with” a transferring employee’s contract of employment pass to the transferee, and therefore that Ponticelli was obliged to provide an equivalent share scheme.

Mr Gallagher’s claim was upheld at first instance by the Employment Tribunal, whose decision was affirmed on appeal to the Employment Appeal Tribunal. Ponticelli then appealed to the Court of Session. Ponticelli argued that as Mr Gallagher’s entitlement arose from a contract “quite separate” from his contract of employment, that the rights and obligations under the Partnership Share Agreement did not arise either “under” the contract of employment or “in connection with” it, and that therefore Regulation 4(2) did not apply.

Decision

The Court of Session dismissed Ponticelli’s argument, noting that the restrictive interpretation of TUPE proposed by Ponticelli would allow employers to subvert protections for employees of undertakings subject to a transfer “simply by creating separate contracts to confer various benefits additional to basic salary”. Instead, the Court agreed with the EAT that the rights and obligations under the SIP “formed an integral part of [Mr Gallagher]’s overall financial package” and he would be significantly disadvantaged by their removal.

It relied on the EAT decision in Mitie Managed Services Limited v French and others [2002] ICR 1395 in support of the position that the inability to transfer the rights and obligations in the same form as they were held prior to the transfer (in that case, a profit sharing scheme) did not present a barrier to achieving the objective of ensuring the protection of the employees’ full range of remunerative benefits.

Adopting a broad interpretation of the 2006 Regulations, the Court was satisfied that Regulation 4(2) was “wide enough to cover various obligations not contained within or “under” the contract of employment.” The Court held that membership of the SIP was a right “in connection with” the contract of employment or that employment relationship, which had transferred to Ponticelli. As such, while Ponticelli could not provide that particular share incentive scheme offered by the transferor employer, it was obliged to implement a substantially equivalent scheme.

Key takeaway

There has been some uncertainty as to whether an employee’s rights under a share option scheme transfer by way of TUPE. The decision in Ponticelli reinforces the view that the benefits of such schemes must be honoured by the transferee entity post-transfer. Although this decision was reached in the Scottish Court of Session and is not binding in Ireland, it may be of considerable persuasive value and could offer guidance to an Irish adjudication body or court if presented with a similar case based on the equivalent Irish TUPE provisions.With thanks to Anthony O’Shea, trainee in the Employment Group, for his contribution to this article.