19 June 2012

When is a partner not a partner?

One of the first things I am asked to advise 'partners' is often whether or not they are really employees.  Sometimes this is so they can evade onerous post-termination restrictions, sometimes so that they can bring an unfair dismissal or a whistle-blowing claim in the Employment Tribunal and often for both reasons.  Generally the answer is that they are not employees but sometimes they are…. The Limited Liability Partnerships Act 2000 provides that a member of an LLP will not be an employee unless, in a normal partnership, they would be regarded as such. This is not very helpful!  Case law prior to this Act was generally unhelpful to partners seeking to prove that they were, in fact, employees and this trend has continued since the introduction of LLPs. The highest and clearest decision on this comes from the Court of Appeal in the case of Martin Tiffin v Lester Aldridge. The claimant was a 'fixed share partner' in a firm of solicitors. He contributed £6,250 of capital and received a salary plus five 'profit share points', the value of which depended on the firm's profit for the financial year.  In contrast, full equity partners had 100 profit share points (and no basic salary). He was able to vote on certain issues, although he had fewer votes than full equity partners. In theory, if the firm was wound up, he would have been entitled to a share of any surplus assets.  Mr Tiffin's arguments that he was really an employee because he was not involved in the management of the firm and his share of profits was too small were dismissed. The Court of Appeal held that, while a role in management may be a strong indication of status of partner, it was not a prerequisite and someone without a management role could nevertheless be a partner. More successful was a Mr Briars who brought a claim against Williamson & Soden Solicitors, a traditional partnership rather than an LLP.  Mr Briars received a 'guaranteed profit share' of £55,000 together with one-eighteenth of the net profits of the firm (anticipated to be in the region of a further £10,000).  Mr Briars had no risk of sharing in the firm's losses, had no capital stake and was not consulted about significant events in the life of the firm. The Employment Appeal Tribunal confirmed that he was, indeed, an employee. Law firms frequently have sophisticated layers of partnership from salaried partners (who tend to be employees) through fixed-share and junior-equity partners (who tend not to be employees) to full equity partners (who are never employees).  The situation is less clear in the financial services sector where power is often concentrated in a small coterie of partners or, sometimes, just one person. These firms often engage the services of highly-paid individuals, most whom are members of an LLP simply to save employers' National Insurance. There is still room for uncertainty in this area.  In particular, these workers are often remunerated by reference to their own performance rather than genuinely sharing the profits of the firm as a whole. I would say that makes them more like employees than partners but how the courts see this remains to be seen…

Category: Blog