The Court of Session has confirmed that participation in a SIP may fall within the scope of the automatic transfer principle under TUPE.
In this case, the court found a sufficient connection between the employee’s rights under the SIP and their employment for the right to transfer. The consequence of this finding could be costly for purchaser businesses and incoming service providers, who may find they have to provide transferring employees with a SIP of substantial equivalence.
Operation of SIP
Mr Gallagher was employed by Total Exploration and Production UK Ltd (Total Exploration) and applied to join a Share Incentive Plan (SIP) operated by the company in 2018. In doing so, he entered into an agreement with his employer and the trustees of the SIP. The agreement entailed Mr Gallagher sacrificing 10 percent of his salary each month in consideration for the purchase of shares, and his employer contributed matching shares at the rate of 2:1.
Transfer to Ponticelli
In May 2020, Mr Gallagher’s employment transferred to Ponticelli Limited by operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Mr Gallagher’s participation in Total Exploration’s SIP ended on the transfer of his employment and the relevant shares were transferred to him. Ponticelli offered Mr Gallagher compensation for the fact that he would no longer be able to participate in the SIP. Mr Gallagher considered this insufficient and that his right to participate in an equivalent SIP lawfully transferred with his employment.
Was participation in the SIP connected with Mr Gallagher’s employment?
The matter was put before an employment tribunal. Ponticelli argued that, because Mr Gallagher’s entitlement to participate in the SIP arose from a separate agreement to his employment contract, the right did not arise “under” or “in connection with” his employment contract and so did not transfer under TUPE. The employment tribunal disagreed and held that Mr Gallagher’s right to participate in the SIP did transfer, making him eligible to participate in a SIP that was of substantial equivalence or of comparable value to Total Exploration’s SIP. Ponticelli appealed to the Employment Appeal Tribunal, which agreed with the employment tribunal and dismissed the appeal. Ponticelli appealed to the Court of Session.
New employer to provide access to equivalent SIP
The Court of Session upheld the decisions of the lower courts and held in favour of Mr Gallagher. The court agreed that the element of salary sacrifice in return for the allocation of shares formed part of Mr Gallagher’s overall financial package and, without being able to participate in an equivalent SIP with his new employer, Mr Gallagher would be disadvantaged. The court interpreted the phrase, “in connection with”, widely and was of the view that, while Ponticelli was unable to mirror exactly the SIP operated by Total Exploration, it was within its gift to provide access to an equivalent plan.
Key takeaways for employers
The right to participate in a SIP may be considered a right “in connection with” a transferring contract of employment, in which case an equivalent SIP should be provided by the transferee employer.
Businesses looking to acquire a business should undertake careful due diligence to identify whether any transferring employee participates in a scheme, the right to which may transfer under TUPE.
Dominic Northey