Section 4 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) states that all the transferor’s rights, powers, duties and liabilities “under or in connection with” a contract will transfer over to the transferee after a transfer. In Gallagher v Ponticelli UK Ltd, the Employment Appeal Tribunal (EAT) held that this included a non-contractual share incentive scheme which was provided “in connection with” the contract.
Thompsons was instructed by Mr Gallagher’s union, Unite, to act on his behalf.
Basic facts
Mr Gallagher’s employment with Total Exploration and Production UK Limited (TEPUK) transferred under TUPE on 1 May 2020 to Ponticelli UK Ltd (PUK). Prior to the transfer, he was a member of a Share Incentive Plan (SIP) allowing him to acquire shares in TEPUK’s parent company. Participation in the plan was voluntary and it was not mentioned in his contract.
PUK wrote to Mr Gallagher on 10 June 2020 offering him a one-off payment of £1,855 as compensation for the fact that it was not going to provide a SIP, post transfer. The amount of the compensation payment was twice Mr Gallagher’s average contributions to the TEPUK plan over the preceding two years.
Although he asked the company not to go ahead with the payment as he was having discussions with ACAS and his union regarding the effect of the TUPE transfer on his entitlements to a SIP, the company made the payment in the June 2020 payroll.
Mr Gallagher then lodged tribunal proceedings arguing that his right to participate in an equivalent SIP and the related obligations on his employer transferred under Regulation 4(2)(a) of TUPE.
Relevant law
Section 4(2)(a) states that “all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract, shall be transferred by virtue of this regulation to the transferee” on completion of a transfer.
Tribunal decision
The tribunal found that, following the transfer of his contract of employment to PUK, Mr Gallagher became entitled to participate in a share scheme of “substantive equivalence” to the one operated by TEPUK on the basis that it was broadly part of the overall financial package to which he was entitled. As such, the statement setting out his new terms and conditions with PUK had to reflect that obligation.
Otherwise, the tribunal said, the whole purpose of the regulations would be undermined and might possibly encourage employers to try to avoid transferring financially significant benefits on a transfer if membership of a scheme such as this one was not deemed to be covered under the TUPE regulations.
PUK appealed, arguing that as the benefit did not arise “under or in connection with” Mr Gallagher’s contract, but instead arose under a collateral contract, TUPE did not apply.
EAT decision
Dismissing the appeal, the EAT found that on entering into the partnership share agreement to join the TEPUK plan, a contract was created between Mr Gallagher and TEPUK containing mutual rights and obligations. Those included an agreement by Mr Gallagher to deductions being made at source from his monthly salary and an agreement by TEPUK to use the amounts of those deductions to purchase shares for him.
Although it was conceded that the obligation to provide the SIP did not arise “under” the contract, the EAT held that the shares were part of Mr Gallagher’s broader financial package of benefits as an employee and plainly arose “in connection with” his contract of employment, and thus fell within the scope of Regulation 4(2)(a) of TUPE
Comment
Even though the TUPE Regulations were enacted in 2006, this is understood to be the first time an appellate court has considered the meaning of the words “in connection with” in Regulation 4(2)(a) of TUPE.
In deciding that the requirement to provide a SIP of substantial equivalence did transfer, on the basis that the shares were plainly part of Mr Gallagher’s broader financial package of benefits, it may now be possible to argue that other benefits provided by employers, to which there is no strict contractual entitlement, will also transfer if such benefits are provided “in connection with” the contract of employment.