The right to participate in a share incentive plan did transfer under TUPE, Court of Session rules

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), whenever there is a relevant transfer (typically either a business transfer or a service provision change (outsourcing or insourcing)) from one business (the transferor) to another (the transferee), the employment of any assigned employees will move across to the transferee. All rights and obligations under or in connection with the contract of employment will also transfer to the transferee. Usually, these rights and obligations are easy to establish and continue – they will be set out in the relevant contracts of employment. However, in the recent case of Ponticelli v Gallagher the Scottish Court of Session was asked to decide whether the right to participate in a share incentive plan (SIP) which a transferring employee had been a member of prior to transfer and which was not referred to in the relevant employment contract, transferred to the transferee following a TUPE transfer.

The Court confirmed that it did. TUPE states “all the transferor’s rights, powers, duties and liabilities under or in connection with any …[contract of employment] shall be transferred ….to the transferee” (Regulation 4(2)(a)). The Court confirmed that the right did not need to be contained within the contract of employment itself. Contributions were made by way of deduction from salary and the employer contributed funds for the purchase of matching shares. The scheme was clearly an integral part of the claimant’s overall financial package. The Court looked at the case of Martin v Lancashire County Council where personal injury claims arising out of workplace injury were found to have arisen from or in connection with the contract of employment and therefore transferred under TUPE to support their conclusion.

The transferee could not continue to provide the same scheme as the scheme related to shares in the transferor’s business, something which it did not have any control over. It was therefore required to provide a scheme of ‘substantial equivalence’ in order to meet its TUPE obligations (MITIE v French).

This is an important case because it demonstrates that a right which exists outside of the contract of employment itself can still transfer under TUPE. In the context of share incentive plans in particular it makes it clear that any attempts by employers to avoid rights to participate transferring by including documentation in separate agreements is unlikely to succeed if the right is ultimately rooted in the employment relationship.

For more information please contact a member of our Employment team.