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The right under a collateral contract to participate in share incentive plans transferred under TUPE

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The right under a collateral contract to participate in share incentive plans transferred under TUPE

The right under a collateral contract to participate in share incentive plans transferred under TUPE

It’s not uncommon for employers to provide share option or similar as a way of incentivising their employees but, these types of schemes can be problematic for buyers in the context of TUPE transfers as the case below shows:-

In the case of Ponticelli UK Ltd v Gallagher, the EAT held that an employee’s rights under a collateral contract to participate in his employer’s share incentive plan arose ‘in connection with’ his contract of employment for the purposes of Reg 4 (2)(a) of the Transfer of Undertakings (Protection of Employment) Regulations 2006.

The EAT determined that a transferee was obliged to provide the employee with a share incentive plan which had ‘substantially equivalent’ benefits to those which the employee had prior to the TUPE transfer. The fact that the employee’s share incentive plan was not in his employment contract did not matter because the benefits of the share incentive plan clearly arose ‘in connection’ with the employment contract The change in identity of the employer and the replacement of the share incentive plan with a plan of substantially equivalent incentive should have been raised and notified with the employee. This is in accordance with the duty to notify workers of changes to their particulars of employment under S.4 of the Employment Rights Act 1996.

This EAT decision emphasises yet another anomaly in the law. If the company the employee worked for had been sold via a share sale, then he would not have had a claim as he does not have a contractual right to the benefit. If a company is planning to inherit staff under a TUPE transfer it is extremely important that they carry out effective due diligence to understand all the benefits that the staff involved in the transfer are currently offered. As part of this due diligence process, they should carefully consider the right to terminate these arrangements, both pre and post-transfer.

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If you are thinking of introducing a share or share based incentive it would be prudent to build termination rights into such an agreement. Further, if you are inheriting staff under TUPE, consideration of all employee benefits (whether contractual or not) should be part of your due diligence process. If you have any queries relating to this update, or require any advice on issues you may be facing in the Employment sector, please do get in touch with Jon Taylor for further advice or assistance.

This article was prepared by Claudia Pert.