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‘In connection with’ and Regulation 4(2)(a) TUPE
Regulation 4 of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) states as follows (my underlining):
“Effect of relevant transfer on contracts of employment
4.—(1) … a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, which would otherwise be terminated by the transfer, but any such contract shall have effect after the transfer as if originally made between the person so employed and the transferee.
(2) Without prejudice to paragraph (1)… on the completion of a relevant transfer—
(a) all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee; and
(b) any act or omission before the transfer is completed, of or in relation to the transferor in respect of that contract or a person assigned to that organised grouping of resources or employees, shall be deemed to have been an act or omission of or in relation to the transferee.”
The case of Ponticelli UK Ltd v Mr A Gallagher [2022] EAT 140 looked at the meaning of the phrase ‘in connection with’ in the context of a Share Incentive Plan (SIP).
What was it about?
Mr Gallagher’s contract of employment transferred to Ponticelli UK Ltd under TUPE, 2006 on 1 May 2020. Prior to the transfer, he had been a member of a SIP operated by the transferor which he had joined in August 2018 pursuant to an agreement amongst himself, the transferor and the plan trustees. The transferee (Ponticelli UK Ltd) refused to provide an equivalent scheme after the transfer and Mr Gallagher brought proceedings before the Employment Tribunal. The claims brought by Mr Gallagher were under Section 11 & 12 Employment Rights Act 1996 (ERA).
This type of claim enables an employee to ask a Tribunal in respect of the statement of particulars to confirm, amend, or substitute the particulars (S 12(2) ERA). As observed by the Employment Tribunal the remedy is not a ‘good fit’ however it is the accepted approach in such circumstances (note the approach was not challenged in this appeal).
Before the hearing the parties had agreed certain facts which were in essence that:
- The transferor operated a SIP which was voluntary.
- There were no references to any entitlements under any share plans in Mr Gallagher’s contract of employment
- Mr Gallagher had joined the SIP prior to the transfer.
What did the Employment Tribunal think?
The Employment Tribunal concluded relying on MITIE Managed Services Limited v. French [2002] ICR 1395 that the right to participate in the SIP was ‘‘caught’’ by the wording of Reg 4(2)(a) TUPE. This was because Mr Gallagher was only entitled to participate in the SIP because he was an employee of the company. It was a benefit for employees of TEPUK (the transferor) such as Mr Gallagher and was part of his overall financial ‘‘package’’. The Tribunal noted that it would undermine the purpose of TUPE and possibly encourage attempts to try and avoid transferring financially significant benefits on a transfer if it was not regarded as such.
What did the Employment Appeal Tribunal think?
The transferee appealed on the basis that the SIP did not arise either “under” the contract of employment or “in connection with” the contract of employment. Mr Gallaghers Counsel conceded that the SIP did not arise under his contract of employment but argued relying again on Mitie that it did arise in connection with his contract of employment.
Lord Fairley was faced with a Court of Appeal authority Chapman v. CP Computer Group [1987] IRLR 462 which had in respect of a similar situation found that the scheme did not transfer. He also had to decide what the word ‘caught’ meant in the judgment as this word is not found in TUPE and nowhere had the Employment Tribunal used the phrase ‘connected with’.
He observed that the SIP scheme in the present case was not the same type of scheme which was under consideration in Chapman as it was part of Mr Gallagher’s broader financial package of benefits as an employee.
In Chapman the Court of Appeal were concerned with entitlements under a stock option scheme run by the employer’s group of companies. The terms of the scheme provided that the right to exercise an option was triggered by an employee ceasing to be an employee of a group company by reason of redundancy. The Court of Appeal concluded that the option was triggered when the employer’s business transferred under TUPE 1981 since the transfer gave rise to a redundancy situation within the meaning of the stock option scheme.
Whilst able to distinguish Chapman on the facts it remained the case that Chapman was in essence a Court of Appeal decision which found that the right to participate in the share option scheme did not transfer under TUPE.
This is why Lord Fairley considered Chapman further making it clear that Chapman had not in fact considered the phrase ‘connected with’ observing that this phrase did not appear anywhere in the Court of Appeal’s judgment. Lord Fairley commented that Chapman had come in for significant criticism by academics and lawyers with The IDS Handbook Transfer of Undertakings (March 2020 edition) @ para 3.67 suggesting that “although Chapman has never been overruled or officially doubted…it is likely that this point would be decided differently today”.
For these reasons he did not feel obliged to follow Chapman and found that the Employment Tribunal had correctly applied Mitie and dismissed the appeal.
What can we take away from this?
This is an important decision albeit one made by the Employment Appeal Tribunal. Both Professor McMullen[1] and John Bowers KC[2] have criticised the decision in Chapman and the conclusion in the present case that the SIP was ‘connected with’ Mr Gallagher’s employment is a welcome clarification of the position.
On a practical note this decision did create a problem for the transferee. The obligation imposed after the appeal on the transferee was that “the written statement of particulars to which he is entitled under Part 1 of the Act should include reference to an obligation to provide him with a Share Incentive Scheme of substantive equivalence to that provided to him prior to 1 May 2020 under and in terms of the Partnership Share Agreement amongst the claimant, Total E&P UK Limited and EES Trustees Limited dated 28 August 2018”
As was observed by the Employment Tribunal at para 100, “It is recognised by courts and tribunals, and by us, that problems frequently occur when trying to match schemes such [as] profit sharing schemes on a transfer.” I would suggest that where such a scheme exists then steps must be taken to reach agreement as to the terms of any equivalent scheme with the relevant employees or trade union prior to the transfer or alternatively agree to buy the right out with a suitably worded settlement agreement. This should avoid unnecessary complications arising post transfer.
[1] McMullen, Business Transfers and Employee Rights, 7-66.1
[2] Bowers, Transfer of Undertakings A3.22.1
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