In Ponticelli Ltd v Gallagher, the Court of Session was asked to consider whether an employee's rights under his employer's share incentive plan transferred with him to his new employer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). It concluded those rights did transfer and the new employer had to provide a substantially equivalent scheme post transfer.

In 2018, Mr Gallagher had applied to join a share incentive plan (SIP) operated by his employer, Total Exploration and Production UK Limited (Total). This was an optional benefit and there was no reference to it in his contract of employment. Instead, his rights were recorded in a partnership share agreement with Total and the trustees of the SIP.

In 2020, Total's business was sold to Ponticelli and Mr Gallagher was told his employment would transfer to Ponticelli under TUPE. As part of the transfer process, Mr Gallagher was also told that Ponticelli did not have a SIP and instead it offered to pay Mr Gallagher a one-off payment of £1,855 as compensation for loss of this benefit. This was equivalent to two years' contributions into the SIP.

Mr Gallagher was not satisfied with the offer of compensation and turned to the Employment Tribunal (ET) to seek a determination that he was entitled to be offered membership of an equivalent SIP with Ponticelli. He relied on Regulation 4(2)(a) of TUPE which provides that all of Total's rights, powers, duties and liabilities under or in connection with his employment contract transferred to Ponticelli under TUPE. While the SIP was not in his contract of employment, Mr Gallagher said the right arose in connection with his employment contract and was therefore covered by Regulation 4(2)(a).

The ET and the Employment Appeal Tribunal (EAT) agreed with Mr Gallagher and found that he was entitled to be offered membership of a SIP that was substantially equivalent and of comparable value to the plan in which he had been with Total. Ponticelli appealed to the EAT but the decision of the ET was upheld. Ponticelli appealed again to the Inner House of the Court of Session on the basis that the contractual arrangements concerning the SIP were distinct from Mr Gallagher's contract of employment and were not covered by Regulations 4(2)(a).

The Court of Session agreed with the ET and the EAT, finding that the right to join the SIP arose in connection with Mr Gallagher's contract of employment. By way of explanation, it found that Mr Gallagher's contributions to the SIP were made through salary deduction and other optional benefits under the SIP were linked to Total's contractual bonus scheme. It was found that the SIP was an integral part of Mr Gallagher's remuneration package and he would be financially disadvantaged by the removal of the SIP.

This decision follows in the footsteps of another recent case, MITE Management v French & others. Here, the EAT found that a financially beneficial scheme to which an employee belonged transferred via TUPE, even though the scheme also fell outside the employee's employment contract. In that case, the EAT highlighted that the purpose of TUPE was to protect employee rights on a TUPE transfer. It cautioned against a restrictive interpretation of TUPE in relation to benefits, even if they were not expressly stated in the contract of employment. Otherwise, employers could simply avoid obligations under TUPE by creating separate contracts to grant benefits to their employees which would then not be protected on a TUPE transfer because they were not expressly stated in the contract of employment. 

The effect of both these decisions is that employers need to conduct careful due diligence of employee benefits when contemplating a TUPE transfer to identify any rights and obligations arising from the employment contract and any other benefits which may be connected to that employment contract, but not expressly stated in the contract. The implications are potentially wide-ranging as arguably most benefits are connected with the employment contract as they only exist by virtue of the employment relationship. Particular care should be taken in assessing whether the buyer of a business is required to establish an equivalent share (or similar incentive) plan for transferring employees as that is a potentially costly and onerous requirement on the new employer. The Ponticelli case confirms the longstanding trend of courts adopting a purposive approach to interpretation of TUPE to protect employee rights in a transfer.