In the recent case of Ponticelli UK Ltd and Gallagher, the Employment Appeal Tribunal (EAT) held that an employer’s obligations under a partnership share agreement transferred to the buyer because the obligations arose "in connection with" the employee’s employment contract under regulation 4(2)(a) of TUPE, despite not being contained in the employee’s employment contract.
Background
The claimant was an employee of Total Exploration and Production UK Limited (Total) and participated in a Share Incentive Plan (the plan). The plan was governed by a partnership share agreement was not mentioned in his employment contract.
On 1 May 2020, when his employment transferred to Ponticelli UK Limited (Ponticelli) by virtue of TUPE, the claimant’s participation in the plan ended in accordance with the plan rules and his shares were returned to him. Ponticelli then made a payment of £1,855 to the claimant as compensation for the fact it was not going to provide a similar share incentive plan post transfer.
The claimant applied to the tribunal arguing that his right to participate in an equivalent share incentive plan transferred to Ponticelli under TUPE.
Regulation 4(2)(a) of TUPE states that: “all of the transferor’s rights, powers, duties and liabilities under or in connection with any such [employment] contract shall be transferred by virtue of this regulation to the transferee”.
The tribunal found that the employee’s right to participate in the plan was caught by regulation 4(2)(a) of TUPE because:
- the claimant was only entitled to participate in the plan because he was an employee of Total,
- the plan was part of his overall financial package,
- it would undermine the purpose of TUPE to exclude the plan from the transfer.
Ponticelli appealed, arguing that regulation 4(2)(a) of TUPE could not apply as the claimant’s rights under the plan did not arise "under" or "in connection with" the claimant’s employment contract.
Decision
The EAT upheld the tribunal’s decision and dismissed Ponticelli’s appeal.
It stated that, even though the claimant’s rights under the plan did not arise "under" his employment contract, they clearly rose "in connection with" it. Ponticelli was therefore obliged to provide the claimant with a share scheme "of substantial equivalence" as part of his financial package.
The EAT also held that the claimant should have been provided with a s.4 Employment Rights Act 2006 update to his employment contract stating not only the details of his new employer but referencing the share incentive plan that Ponticelli would initiate in place of the plan.
Practical implications
This case is a useful reminder of the automatic transfer principle and that employer obligations under share schemes can fall within this. As well as presenting the buyer with a significant cost burden, the obligation to provide a share scheme of substantial equivalence may cause considerable practical difficulties, particularly if the buyer is not a listed company, cannot offer shares or does not operate a share scheme for existing employees.
Historically, some businesses sought to avoid this issue by keeping share schemes separate from contracts of employment. However, this case makes it clear that even if an employer’s obligations do not arise under the contract, but “in connection with” that contract, they still transfer under TUPE.
In addition, this case is a helpful reminder that, post transfer, buyers should send a letter to the transferring employees confirming the details of their new employer and any replacement benefit schemes.