The Employment Tribunal recently held in the case of Ponticelli UK ltd v Gallagher that an employee’s right to a Share Incentive Plan (SIP) could transfer under TUPE. This was despite the fact that the employee’s contract of employment made no specific reference to the plan. The details of the plan were included in a separate partnership share agreement executed in tripartite between employee, employer and the trustees of the SIP.
Mr Gallagher’s employer believed, as is common, that including the scheme in a separate agreement would ring-fence the benefit of the scheme in the event that the employee brought a claim for unfair dismissal or where the employee was being transferred under TUPE.
The end of Mr Gallagher’s employment terminated his membership in the SIP and consequently all relevant shares were transferred to him. Ponticelli proposed a one-off compensation payment in recognition of the fact that Mr Gallagher would no longer be receiving the benefit of the SIP as part of his employment as they understood the matter. Mr Gallagher refused this and consequently made an application to the Tribunal, asserting that he was entitled to be offered a similar SIP plan by his new employer and wished to be rewarded on the same terms.
Both the Employment Tribunal and the Employment Appeal Tribunal upheld this. The Tribunals held that all “of the transferor’s [outgoing employer] rights, liabilities, powers and liabilities under or in connection with any such contract” will transfer under TUPE. The SIP rights were considered by the Tribunal to arise in connection with Mr Gallagher’s contract of employment. The Tribunal considered that the SIP was a direct consequence of his status as an employee and noted that he had deductions made from his salary to take account of his membership in the scheme. Key also, was the fact that this scheme formed part of Mr Gallagher’s remuneration package, the removal of this on TUPE grounds would likely cause him financial loss.
Consequently, Ponticelli was required to provide a scheme of “substantially equivalent alternative” as Mr Gallagher’s employer.
Key Takeaways for employers
This case addresses the difficulties share based incentive schemes create where the incoming employer does not provide, or cannot provide, a similar scheme (e.g. because their shares are not traded or they are a partnership or LLP).
Incoming employers in a TUPE situation must carry out sufficient and early due diligence to establish the full range of benefits currently available to the transferring employees in order to understand the employment obligations they will be taking on if they proceed.
It is not possible for employers to ring fence share based incentives. Incoming employers will likely be responsible for offering the transferring employees a substantially equivalent scheme. Quite what this will consist of will vary from case and case.