The case revolved around Anthony Gallagher, the Claimant, who was an employee of Total Exploration and Production Ltd, and the subsequent acquisition of his employer by Ponticelli UK Ltd, the Defendant.
Mr. Gallagher was part of Total's Share Incentive Plan (known as a SIP), a voluntary scheme not outlined in his initial employment contract. Following Ponticelli's takeover, the new employer chose not to provide a comparable share scheme but instead offered a lump sum of approximately £1,800 to the affected employees. Mr. Gallagher declined this offer, which sparked a legal dispute regarding the transfer of his rights to participate in an equivalent scheme under TUPE.
The Employment Tribunal initially ruled in favour of Mr. Gallagher, asserting that the share scheme was inherently connected to his employment. As a result, Ponticelli was deemed obligated to provide an equivalent scheme. This decision was subsequently upheld by the Employment Appeal Tribunal (EAT).
In a decisive verdict, the Court of Session has now confirmed that both the Employment Tribunal and the EAT made the correct judgement. The Share Incentive Plan was indeed transferred under TUPE, setting a precedent for the protection of employee rights during such transfers.
The position after Ponticelli UK Ltd v Gallagher
This ruling has cast a shadow of uncertainty over established practices. Previously companies would generally rely on the view that share schemes acted independently of employment contracts, and that there was no obligation to continue offering an equivalent arrangement to the transferred employees during TUPE transfers. However, this decision will require a change of approach.
The ruling suggests that even when share scheme arrangements are not explicitly referenced in a service agreement, new employers may be required to replicate these arrangements or provide a scheme of substantial equivalence going forward. This presents a conundrum for organisations that are unable or unwilling to offer such arrangements. Determining what qualifies as equivalent terms becomes a pressing issue for the new employer and raises a host of practical questions and complexities for companies navigating TUPE transfers. The intricacies of replicating these benefits in practice may present difficulties, potentially making the transition less straightforward than anticipated.
As a result, organisations will have to give careful consideration to a transfer of employees using TUPE on a case-by-case basis. For the potential new employers, the outcome in Ponticelli UK Ltd v Gallagher highlights the increased importance of conducting thorough due diligence to identify and understand any benefits that exist outside of the standard employment contract, which may be subject to transfer under TUPE regulations.
In anticipation of any potential future TUPE transfer, it is imperative that employers incorporate termination rights within its share plan documentation. This crucial step becomes even more significant, as potential transferees who are poised to inherit staff, consider the added cost implications during negotiations on the price of the acquisition. By proactively addressing this aspect in the share plan documentation, transferors can better align their interests with potential transferees and ensure a smoother transition during the transaction.
Our tax team advises a wide range of clients from small and medium sized enterprises to large international publicly listed companies in relation to share schemes. If you would like any guidance regarding your specific requirements please contact James Cashman.