News & Insights

Collateral Damage – Caught in the TUPE Crossfire

Do the rights and obligations contained in a collateral contract transfer under TUPE?

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006) when a relevant transfer occurs (often by way of a business acquisition), the seller’s employees normally automatically transfer to the buyer with their existing employment terms protected.

The case of Ponticelli Ltd v Gallagher explores the extent to which employees can claim that their entitlement under share incentive plans in a collateral contract can pass to a buyer upon a TUPE transfer.

Mr Gallagher was employed by Total Exploration and Production UK Limited (TEP). During his employment, Mr Gallagher participated in a voluntary share incentive plan (SIP) operated by TEP. As part of this arrangement, Mr Gallagher had entered into a partnership share agreement with TEP and trustees of the SIP. There was no mention of the SIP, or the partnership share agreement, in Mr Gallagher’s employment contract.

On 1 May 2020, as part of a business acquisition, Mr Gallagher’s employment transferred to the purchaser, Ponticelli Ltd, under TUPE. Upon this transfer, Mr Gallagher’s membership of the SIP automatically ended, and the shares that were held on his behalf were transferred to him. As compensation for the fact that it was not going to provide an equivalent scheme post-transfer, Potincelli agree to make a one-off payment of £1,855 to Mr Gallagher.

Mr Gallagher applied to the Employment Tribunal for a determination that he was entitled to be a member of a SIP equivalent to that which had been offered by TEP, on the basis that his right to participate in such a scheme had transferred along with his employment under Regulation 4(2)(a) of TUPE 2006.

The Employment Tribunal accepted Mr Gallagher’s argument that he was entitled to participate in a SIP of substantially equivalent or comparable value to that operated by TEP. On appeal, the Employment Appeal Tribunal (EAT) upheld the Tribunal’s decision, save that they found that the transferred obligation on Ponticelli in fact arose from the collateral partnership share agreement, rather than the contract of employment itself.

Ponticelli jumped on this, and appealed to the Court of Session, arguing that Regulation 4(2)(a) could not apply if Mr Gallagher’s entitlement arose from the collateral partnership share agreement, as the obligation to provide the SIP therefore did not arise under or in connection with Mr Gallagher’s employment contract. Ponticelli pointed to the 1987 case of Chapman v CPS Computer Group, in which the Court of Appeal had held that, under the then-applicable Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE 1981), although the claimants’ employment transferred, their rights under a share option agreement did not, as this was a separate and discrete contract.

The Court of Session dismissed Ponticelli’s appeal. Chapman was not applicable to the present case, as it was not concerned with the interpretation of Regulation 4(2)(a) of TUPE 2006, but with the previous iteration, TUPE 1981. Cases subsequent to Chapman, which did deal with Regulation 4(2)(a), noted the width of the language used in that regulation and the absence of any indication that the obligations and liabilities must themselves be contractual in order to transfer. Here, contributions were made to the SIP via salary deduction and the scheme included an optional benefit allowing employees to link TEP’s bonus scheme to the award of future shares – this demonstrated that the rights and obligations under the SIP formed an integral part of Gallagher’s overall financial package, justifying their transfer under Regulation 4(2)(a).

In MITIE Management Services Ltd v French, the EAT had accepted that where a specific scheme cannot be transferred for practical reasons, a substantially equivalent scheme must be implemented by the new employer. Therefore, the fact that rights and obligations cannot be transferred in the exact same form, as was the case for the SIP in the present matter, does not prevent the operation of TUPE 2006 to protect the employee’s benefits.

The Court of Session also flagged that the restrictive interpretation of Regulation 4(2)(a) proposed by Ponticelli, under which only those rights and obligations specifically included in the employment contract are transferred, would enable employers to easily circumvent the protections afforded by TUPE 2006. Employers could just draw up multiple contracts to confer additional benefits beyond basic salary, and only the basic salary contained in the employment contract would be transferred.

The Court of Session’s decision reiterates the strength of employee protections under TUPE 2006, which some employers might see as unnecessarily onerous. Nevertheless, it is important to bear decisions like this one in mind if you are set to acquire employees under a TUPE transfer. Contractual arrangements, such as share plans or other incentive schemes, may appear to be outside the scope of TUPE at first glance, but it is entirely possible that the obligation to provide an equivalent scheme will fall on your shoulders following the transfer.

If you would like advice regarding your obligations under TUPE, please get in touch with our Head of Business Services, Ian Machray, at [email protected]

Further or in the alternative, if you need help with a business acquisition, then our experienced Corporate team may be able to assist – you can contact them here.