Right to Take Part in Share Scheme Transfers Under TUPE

TUPE Transfers and Share Incentive Plans

The Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE) protects employees' rights where there is a business transfer or service provision change. Affected employees will transfer from the outgoing employer (the transferor) to the new employer (the transferee). Regulation 4(2)(a) TUPE provides that all of the transferor's "rights, power, duties and liabilities under or in connection with" a transferring employee's contract pass to the transferee (emphasis added).

A share incentive plan (SIP) is a type of tax-advantaged employee share plan. Under a SIP, companies can invite employees to acquire shares in the company. If one company in a group is sold, the employees' shares will no longer be subject to the SIP. If TUPE applies, there will be an exemption from income tax.

What Was the Case About?

In the case of Ponticelli UK Ltd v Gallagher, Mr Gallagher's employment transferred to Ponticelli under a TUPE transfer in May 2020. In his previous employment, Mr Gallagher had been a member of a SIP. Ponticelli refused to provide an equivalent scheme when Mr Gallagher's employment transferred. Mr Gallagher brought an Employment Tribunal claim, asserting he was entitled to be a member of a SIP equivalent of his former employer's plan. He argued that his right to participate in an equivalent SIP had transferred to Ponticelli as part of the TUPE transfer. The Tribunal upheld Mr Gallagher's claims and Ponticelli appealed to the EAT.

What Did the EAT Decide?

The EAT dismissed the appeal. Mr Gallagher had entered into an agreement as part of his previous employment, under which he agreed to deductions being made at source from his monthly salary in order for his former employer to purchase shares for him. Even if those obligations did not arise 'under' the contract of employment, they certainly arose 'in connection with' his contract for the purposes of regulation 4(2)(a) TUPE.

What Can Employers Learn from This Decision?

This decision clarifies the scope of the wording of regulation 4(2)(a) TUPE, demonstrating the types of rights that can be said to arise 'in connection with' employment for the purposes of a transfer. In practical terms, it is important for employers to ensure that prior to a TUPE transfer they establish whether a SIP plan is in place, and explore the details of this using detailed questions as part of the due diligence process. Employers will then be able to determine the extent of their post-transfer obligations, addressing any issues before the transfer takes place.  

For more information or advice, please contact Mark Stevens in our Employment Law team on 0117 314 5401, or complete the form below.