Do Employee Rights Under Share Plans Transfer Under TUPE 2006?

Do employee rights under share incentive plans transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)?

Background

The case of Ponticelli UK Ltd – v – Gallagher arose following the transfer of an employee (Gallagher) to a new employer (Ponticelli) under TUPE. Gallagher had participated in a share incentive plan (SIP) (a type of UK tax advantaged share scheme allowing qualifying employees to acquire shares in their employing company) operated by his former employer even though his rights of participation were not formally documented in his contract of employment.

Gallagher argued that the former SIP was voluntarily entered into and that a contractual right of participation had been created which ought properly to have transferred under TUPE requiring Ponticelli to provide access to a new SIP on no less favourable terms.

Ponticelli disagreed and argued that it would not be providing Gallagher with rights under a materially equivalent SIP but would instead make a compensatory payment for loss of rights under the previous SIP. Gallagher rejected this argument and commenced legal proceedings.

What is TUPE?

TUPE operates as a matter of law in the UK to safeguard the rights of employees when some or all of a business is transferred from one owner to another, or where there is a service provision change. The overall effect of TUPE is to transfer the employment of certain employees of the transferring company to the acquiring company and to preserve the terms and conditions of service of such employees following the transfer.

As a general rule under TUPE, a transferring employee is entitled to terms and conditions of service with their new employer which are no less favourable than those which applied with their old employer.

The decision in the case

At the conclusion of protracted legal proceedings, it was held that Gallagher’s rights of participation in the previous SIP did transfer under TUPE, even though those rights were not formally documented in Gallagher’s contract of employment.

The decision was based on the reasoning that the rights of participation in the previous SIP formed part of Gallagher’s contractual financial package, and therefore that Ponticelli was obliged to offer access to a new SIP on terms no less favourable that those previously available.

The significance of the case in corporate and commercial transactions

In corporate and commercial transactions, TUPE is commonly encountered if, for example, a company sells or transfers its business and assets to another company as a going concern.

In such circumstances, the case of Ponticelli UK Ltd – v – Gallagher highlights the importance of the acquiring company undertaking detailed commercial due diligence into (amongst other things) the pre-existing rights of transferring employees to establish which rights may need to be replicated on no less favourable terms following a TUPE transfer.

How can we help?

The Corporate and Commercial and Employment teams at Wilson Browne Solicitors are ideally placed to advise on all aspects of Share Incentive Plans in addition to due diligence processes required in commercial transactions, including in relation to employee matters and the operation of TUPE. For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial and Employment teams at 0800 088 6004.