Regulation 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 of employment will transfer over to the transferee after a transfer. In Ponticelli UK Ltd v Gallagher, the Court of Session held that those rights included a Share Incentive Plan.
Thompsons was instructed by Mr Gallagher’s union, Unite, to act on his behalf.
Basic facts
Mr Gallagher's contract of employment transferred to Ponticelli Limited under the TUPE regulations on 1 May 2020. Prior to the transfer he had joined a Share Incentive Plan (SIP) operated by his former employers. Participation in the plan was voluntary and it was not mentioned in his contract.
Ponticelli 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. 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
Regulation 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.
Decisions of lower courts
The tribunal found that following the transfer, Mr Gallagher became entitled to participate in a share scheme of “substantive equivalence” to the one operated by his former employer on the basis that it was broadly part of the overall financial package which he had previously enjoyed.
Ponticelli appealed arguing that as the benefit did not arise “under or in connection with” Mr Gallagher’s contract, but under a collateral contract, TUPE did not apply.
Although Mr Gallagher conceded before the EAT (ELR 800) that the obligation to provide the SIP did not arise “under” the contract, it 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.
Relying on the decision in Chapman and anor v CPS Computer Group, Ponticelli appealed to the Court of Session, arguing that as Mr Gallagher’s entitlement to the SIP arose from a contract that was separate from and collateral to his contract of employment, it could not be said to have transferred "under" it or "in connection with" it under Regulation 4(2)(a).
Decision of Court of Session
The Court of Session disagreed, however. It distinguished this case from Chapman on the basis that it was concerned with a specific rule in a share option contract, not a provision of the TUPE Regulations.
The Court noted that the purpose of the directive "is to ensure, as far as possible, that the contract of employment or employment relationship continues unchanged with the transferee”. As such, if it were to adopt the interpretation of the regulations put forward by Ponticelli, employers would be able to subvert the “important protections” provided under the directive and the regulations simply by creating separate contracts to confer various benefits additional to basic salary.
The Court therefore dismissed the appeal, holding that the tribunal and the EAT were correct to find that the rights and obligations under the scheme formed an integral part of Mr Gallagher’s overall financial package and that Ponticelli was obliged under TUPE to provide a plan which was of comparable value to the SIP operated by his former employer.
Comment
The Court of Session has now provided much needed clarification as to the meaning of the words “under or in connection” with the employment contract, and in particular confirmation that SIPs are caught by regulation 4(2)(a), even where the entitlement to the SIP arises under a collateral contract. This is an important clarification and will mean that transferee employers will now have to provide substantially equivalent schemes following a TUPE transfer or face litigation from employees.
