Does the benefit of a non-contractual share incentive plan transfer under the Transfer of Undertakings Regulations (TUPE)?

Yes it does, held Scotland’s Inner House of the Court of Session in the recent case of Ponticelli Limited v Gallagher.

The case was about whether the Claimant’s employer share incentive plan transferred under TUPE meaning the Respondent was obliged to provide a plan of ‘substantial equivalence’. The employer argued that a share incentive benefit plan did not arise ‘under’ or ‘in connection with’ the Claimant’s contract, so the benefit did not transfer under TUPE. The Court of Session rejected this, noting that the restrictive interpretation of TUPE proposed by the employer would permit employers to subvert TUPE protections by creating side contracts for benefits additional to salary.

Prior to this decision, the view has always been taken that if an employee transferring under TUPE was entitled to something very company specific, which could not be replicated by the new employer, such as a share scheme, then much in the same way as happens with final salary pensions, they were not obliged to provide it.  However, unlike pensions, where the TUPE legislation makes specific provision for what to do when faced with the impossible, there is as yet no statutory carve out in these circumstances.

This means that on any TUPE transfer, business owners should be aware that any kind of share scheme could potentially affect the value of the business being acquired because, so far as the case law is concerned, the transferring employee must be provided with a scheme which is a substantially equivalent alternative.