Check share scheme type after Scottish court’s ruling, warns lawyer

Last week we reported on the Scottish Court of Session’s ruling in Ponticelli Ltd v Gallagher and its impact on share plans. The court decided that the right to participate in a share incentive scheme can transfer to a new employer under TUPE even though there’s no mention of it in the contract of employment. We are returning to ask the key question – which type of share schemes might be caught by this ruling?

Central to this is regulation 4(2)(a) which, in this context, says the right to participate in a share scheme is a right ‘in connection’ with the employee’s contract so is be caught by TUPE. So even though it’s not a contractual right it transfers because it’s a right in connection with the contract. Case law dating back to 2002 says the duty on the new employer is to offer a scheme of ‘substantial equivalence’ to the scheme offered by the transferor before the transfer. It’s an obligation which prove difficult and expensive so it’s crucial to understand when that situation might arise.

Last week share plans specialist James Sullivan-Tailyour explained that whilst the specific share incentive plan in the Ponticelli case was caught by TUPE, not every scheme necessarily will be. So, Ponticelli was concerned with a SIP which operates on an all-employee basis with deductions being made from participating employees’ salary. In that case it’s easy to see the direct connection with someone's employment contract hence why it’s caught by regulation 4(2)(a). But what other schemes? What type of schemes might they be caught by TUPE? It’s a question I put to James:

James Sullivan-Tailyour: “Well I think it could potentially be any form of cash-based incentive arrangement, particularly if there are contractual rights to participate in those cash-based arrangements even if they are, strictly speaking, outside of the employment contract. So, obvious examples are annual bonus schemes that are contractual or, even if they're not contractual, but they have been operated for so many years that effectively they've become implied rights through custom and practice, commission based schemes and, obviously, a wider array of benefits and perks that might not strictly be referred to in an employment contract, but which nonetheless are part of the overall remuneration incentives package that an employer offers to its employees, including other  discretionary policies and things like that. One point I would make as well, though, just returning to the equity-based compensation theme, is that what I do think is important about the Ponticelli decision is that it was decided in the context of a share incentive plan which has a very specific meaning. It's a specific type of share plan that's operated on all-employee basis and operates by way of deductions being made from participating employees’ salary and I think that is important as to the reason why this decision was decided in the way that it was. With those types of share schemes, it's very easy to see the direct connection with someone's employment contract, where salary deductions are being made on a monthly and ongoing basis. Clearly, there are other types of share option schemes, you know, your typical long term incentive plans and share option plans for more senior executive directors, and senior employees, where you know, they are just straightforward share options with an exercise price that don't result in some salary reductions and a less periodic - they certainly wouldn't typically be granted monthly. In principle this Ponticelli decision also requires you to consider whether share option schemes of that nature also have to be offered on a substantially equivalent basis or not. Whilst there's no legal basis on which to draw a distinction between these sort of share incentive type all-employee plans on the one hand, and share option plans on the other, I do wonder whether in practice companies may be able to take a slightly more relaxed approach when it comes to share option plans that are available for more senior employees as against share incentive plans and other savings based, equity based, incentive arrangements which are offered on all employee-basis. As I say, there is no sort of legal basis for my thought on that, it’s more just a gut feel that the latter, an all-employee arrangement, does feel more inextricably connected with an employee's terms and conditions of employment, where deductions are being made from salary. But nonetheless, the Ponticelli decision does throw into light that you have to consider the whole sweep of incentive arrangements, be they all-employee share options or cash-based arrangements such as annual bonus schemes.”

Joe Glavina: “Is there any action for HR professionals to take as a result of this Ponticelli ruling?”

James Sullivan-Tailyour: “Well I certainly think it's a good idea to review service agreements and terms and conditions of employment to make sure that there are no express references to participation in share option schemes, or other equity-based incentive arrangements, unless there's a very good reason for them having been there in the first place. That is our standing advice anyway, apart from this Ponticelli decision, but this decision raises the importance of making sure that there is clear blue water between service agreements, employment contracts, on the one hand, and equity-based compensation on the other. I think the other thing that HR professionals need to make sure is that where they are in a situation where they are asked to look at the terms and conditions of employment of inbound employees who are going to come in by way of TUPE transfer, it is really important to make sure that the scope of the due diligence, the scope of the questions that you're asking about the terms and conditions of those incoming employees, encompasses wider remuneration incentive, other benefit arrangements, that might not necessarily sit within the employment contract so that these types of issues are picked up early, and in advance, and then the organisation can take appropriate advice on whether they need to offer equivalent schemes going forwards.”

Meanwhile, on the fundamental question of how it is that the right to participate in a share scheme transfers under TUPE even though there is no mention of it in the contract of employment we have a programme on that for you. That’s: ‘Right to participate in share scheme transfers under TUPE, rules Scottish court’ which is available now for viewing from the Out-Law website with Stuart Neilson providing the expert analysis. We have also put a link to the judgement at the centre of this, the Court of Session’s ruling in Ponticelli Ltd v Gallagher.

LINKS
- Link to HRNews programme: ‘Right to participate in share scheme transfers under TUPE, rules Scottish court’
- Link to Opinion of Court of Session in Scotland: Ponticelli Ltd v Gallagher