Buyer beware: does employee share plan participation transfer under TUPE?

Ponticelli UK Ltd v Gallagher, a recent decision of the Court of Session (Inner House) looked at whether, in the context of a Transfer of Undertakings Protection of Employment (TUPE) transfer, the new employer must put in place a share plan for transferring employees on equivalent terms to their pre-transfer share plan with their former employer.

In short, the answer is yes, if the right to participate is a right in connection with the employee’s employment contract.

This decision may have significant costs, as well as practical implications for businesses who take on workforces by operation of TUPE as part of a corporate transaction. This article considers the decision and some practical considerations.

The general position is that, where there is a TUPE transfer, all the transferor’s ‘rights, powers, duties and liabilities’ under a contract of employment transfer to the new employer, such that the new employer effectively steps into the former employer’s shoes.

Whilst this principle seems straightforward, it can cause difficulties when transferring employees participate in the former employer’s share plans pre-transfer, given that not all businesses are able to or do offer these types of remuneration arrangements – for instance, because the business is a partnership, or has other forms of incentives.

Prior to Ponticelli, it was generally accepted that where there was a non-contractual share plan in place, or a share plan arising under a separate contract, those entitlements would not transfer to the new employer under TUPE. In fact, most employers take great care to ensure that share plans are expressly stated to be separate from their employees’ contracts of employment. This is to ensure that any claims for damages for loss of entitlement on termination of employment are excluded, as well as to prevent share scheme participation rights transferring to the buyer under TUPE.

In Ponticelli, Mr Gallagher, an employee, participated in a Share Incentive Plan (‘SIP’) operated by his former employer which, despite its generic sounding name, is a specific type of UK tax-advantaged employee share acquisition plan. As part of this, salary deductions were made each month in exchange for an appropriation of SIP partnership shares by the SIP trustee. Mr Gallagher had entered into a separate voluntary agreement with the company and the trustee regarding the SIP, which was not incorporated into his employment contract. When his employment transferred to the new employer by operation of TUPE, his membership of the SIP ended and he brought a claim against his new employer who did not offer a similar employee share plan.

The Court of Session agreed with Mr Gallagher that:

• The SIP formed an integral part of Mr Gallagher’s remuneration package and arose ‘in connection with’ his contract of employment;
• He would be financially disadvantaged if he lost the entitlement to participate in an employee share plan as a result of a TUPE transfer, despite the fact that his participation in the SIP arose out of a separate agreement to the employment contract;
• The SIP wasn’t equivalent to just another benefit such as a gym membership, unless that could also be argued to be part of an employee’s financial package; and.
• Where a share plan operated by a former employer cannot transfer, a ‘substantially equivalent’ plan must be implemented by the new employer.

The decision does not offer guidance on how to consider whether a replacement employee share plan, or other incentive arrangement, is ‘substantially equivalent’ to a plan provided by the former employer.

Therefore, in practice businesses will have to seek advice on a case-by-case basis to see whether entitlements can be mirrored in a new plan, or whether an equivalent cash plan can be set up. This will also enable companies to ascertain the cost of setting up any equivalent plan.

With TUPE transfers being an unsettling time for any workforce, it will be key to engage with transferring employees to explain both what will happen to their entitlements arising under the share plan with the outgoing employer (e.g., will they retain awards as ‘good leavers’?), together with an overview of what the key terms of the new share plan or equivalent incentive arrangement will be.

Early engagement with transferring employees and a clear communications strategy should minimise the risk of disgruntled employees claiming the arrangements are not equivalent.

Any ‘substantially equivalent’ arrangement can also replicate the discretionary nature of the former employer’s share plan, and any right of the employer to terminate the arrangement – although businesses should seek advice before doing so, as doing so may fall foul of TUPE employee protection.

Where transferee businesses are involved in a transaction to which TUPE applies, they should:

• Ensure that any due diligence exercise includes a thorough analysis of remuneration of the transferring employee population, including remuneration arrangements that may not be contained in employment contracts;
• Carefully consider the impact of any TUPE transfer from a workforce which benefits from share plans or other incentive arrangements, and seek advice to ascertain whether they are under the obligation to provide a ‘substantially equivalent’ arrangement.
• Assess and factor in the cost of providing any equivalent arrangements, and also consider the impact on the timeline of operationally designing and implementing a new plan – if there is a gap between the transfer date and the start of the new arrangements, consider how transferring in employees will be made whole; and
• Ensure there is no detrimental impact to employee relations by promoting early engagement and developing a communication strategy to ensure transferring employees understand the terms of the equivalent arrangements.

On both employee relations and employment law compliance risk, there is therefore a key role for HR and employment law leaders within an organisation in educating and guiding their guiding their Corporate Development colleagues.

For more information on how KPMG and our multi-disciplinary team of employment law, employment tax, payroll and reward specialists can support you, please get in touch with Donna Sharp, Dorothée Giret or your regular KPMG contact.