Why the case matters

Whenever there is a business transfer, the transferee (buyer) steps into the shoes of the seller (transferor) in so far as the employment relationship is concerned. Regulation 4(2)(a) of TUPE 2006 provides that on completion of a business transfer, "all the transferor's rights, powers, duties and liabilities under or in connection with any such contract [of employment] shall be transferred by virtue of this regulation to the transferee".

What does this mean? How restrictively or widely should this be interpreted? In particular, are shares or share options operated by the employer in a separate scheme captured? The case reported below confirms that a wide interpretation will be adopted. Prospective buyers need to factor this into their due diligence, negotiations on pricing, and communications with employees. 

Relevant facts

Mr Gallagher was employed for several years by Total Exploration and Production UK Limited (Total). Total operated a Share Incentive Plan (SIP) which Mr Gallagher joined in 2018, entering into a separate SIP agreement with Total and the trustees of the SIP. On 1 May 2020, Mr Gallagher's employment transferred to Ponticelli Limited (Ponticelli). Mr Gallagher's membership of the SIP scheme ended when the transfer occurred, with Ponticelli offering Mr Gallagher a one-off payment of around £1800 on the basis that it would not be providing him with a SIP going forward.

Mr Gallagher did not accept the position taken by Ponticelli. He sought a declaration from an employment tribunal that as a transferee, Ponticelli was obliged to set up an equivalent SIP by virtue of Regulation 4(2)(a) of TUPE 2006 (see above). An employment tribunal made a declaration in Mr Gallagher's favour, finding that he was entitled to participate in a SIP scheme. Ponticelli brought an unsuccessful appeal. The EAT agreed with the employment tribunal, save that it clarified the right to participate in the SIP was "in connection with", rather than "under", Mr Gallagher's employment. Ponticelli appealed to the Court of Session (Inner House), arguing that a Court of Appeal case, Chapman, should have been had regard to and followed; in that case rights under a separate share scheme did not transfer.

Decision

The Court of Session dismissed Ponticelli's appeal. There had been no error of law by the employment tribunal or the EAT. Arguments that Mr Gallagher's rights arose under a separate contract, which was neither under or connection with his employment contract, were rejected. The wording of TUPE 2006 was wide enough to encompass rights directly under and in connection with employment. Previous case law supports a wide interpretation of what is capable of being construed as being in connection with employment (including, for example, tortious liability for personal injury at work). 

The case of Chapman (a case from 1987), could be distinguished and did not affect these conclusions. In that case, a share scheme participated in by an employee was found to be a separate contract. Construing the rules of that scheme, rather than how TUPE should be interpreted, was what the case was concerned with. Certain rights to exercise were triggered on redundancy so the case focused on what was considered to constitute 'redundancy' under the particular scheme and in that situation.

The case of Mitie [2002] was more relevant to the instant case and should be followed. In that case, the transferee was obliged under TUPE 1981 (the predecessor regulations to the 2006 regulations) to offer a profit share scheme which was substantially equivalent to the one offered by the transferor.

Comment

• The circumstances in which a share option or profit-sharing scheme are likely to be regarded as separate from the employment relationship, for the purposes of TUPE, are likely to be rare indeed. In this case, the Court pointed out that the 10% salary deduction made every month, so the employee could participate in the SIP, was a pretty strong indicator of the connection with employment. The fact that non-UK resident individuals, who did not have employment status, could participate in the scheme, did not alter the position.   
• A broad view will be taken by tribunals about which rights and obligations transfer under or in connection with employment when there is a TUPE transfer. Chapman looks increasingly like a strange decision confined to its facts.   
• When doing due diligence, prospective buyers should make sure they have sight of all contracts or arrangements relating to shares, options or profit-share. They will then need to decide whether this affects commercial negotiations/price of the business. 
• If the transferee does not wish to replicate a SIP or profit-share scheme, how will it deal with the employee's expectations? How would it like to see the risk of claims by employees dealt with in the commercial agreement? In this case, the offer of a one-off payment did not stave off a claim. In some cases, a more significant sum, with a tripartite agreement in place between transferee, transferor and employee, will lessen (albeit not eliminate) the risks.