The recent Supreme Court decision in the case of Bates Van Winkelhof v Clyde & Co concluded that members of limited liability partnerships (LLPs) who provide services to the LLP are "workers" for the purposes of the Employment Rights Act. This means that they gain the protection of a number of statutory provisions which apply to employees, even though they are not in fact employees.
LLP members have, therefore, as a result of the judgment acquired both individual rights, the key ones of which are set out below and, collectively, a set of obligations to members of the LLP.
The definition of "worker" contained in the Employment Rights Act (ERA) and a number of other employment statutes, within which LLP members are now held to, applies to the following rights:
- Protection from detriment because of whistle blower status. This was the subject of the Bates claim. There is no cap on compensation payable to a whistleblower who is dismissed for his actions as a whistleblower and nor is any minimum qualifying period of service required.
- Minimum wage. All workers are entitled to receive minimum wage (currently £6.50 per hour) in respect of their work. While for many LLPs the amount of minimum wage will be trivial in the context of overall earnings, the right to receive payments of minimum wage at least monthly may impact upon structures in which payments are made only after a year end in the form of distribution of profits to members. HMRC is the body with rights to enforce minimum wage obligations and fines are payable for failure.
- Working time regulations. Employees and workers are entitled to a range of rights including minimum periods of rest (11 hours between the end of one working day and the beginning of the next and 24 hours rest in every seven days or 48 in a consecutive period of 14 days). Annual leave entitlements of 20 days plus eight bank holidays or equivalent also arise. It is possible for an employee to contract out of his right to a maximum working week of 48 hours (and this should now be built into LLP agreements) but it is not possible to contract out of the other rights. A right to compensation for failure to permit an individual to exercise rights under the working time regulations arises but the number of the regulations are the subject of criminal penalties although it is fair to say that these have not been significantly exercised in practice.
- Right to be accompanied at disciplinary proceedings. Workers have the right to be accompanied at disciplinary proceedings, a concept which is more widely interpreted than simply the formal disciplinary process typically set out as applicable to staff, since it includes a hearing which could result in "the taking of some [other] action in respect of a worker by its employer". This might arguably include reduction of profit share related to poor performance.
- Right not to be treated less favourably because of part time working. This attracts a "pro rata" principle so that part-time workers should be eligible to participate in the same benefits and promotion opportunities as their full-time worker and employee colleagues.
All of the provisions relating to employment in the Equity Act, rendering unlawful discrimination on grounds of age, sex, race, gender, sexual orientation, religion and belief, transgender and marital status apply also to workers. The Equality Act contains specific provisions applying these protections to partnerships and to LLPs and so the position is unchanged by the Bates decision.
What is not covered?
LLP members do not qualify for:
- Rights available to fixed term workers.
- Rights to information and consultation in line with EU obligations placed on employers.
- Rights to maternity leave, paternity leave or parental leave.
- Rights to claim unfair dismissal.
- Right to redundancy payment.
Pensions and Auto-enrolment
The auto-enrolment obligations under the Pensions Act 2008 mean that employers are obliged to enrol certain workers into a qualifying pension scheme and to make contributions of 1% of qualifying earnings rising to 3% (in 2017) of qualifying earnings between (broadly) lower earnings limit (currently £5,772) and upper earnings limited (currently £41,865). The Pensions Act 2008 uses the same definition of worker as the ERA and these obligations will therefore now apply to LLP members. Where LLPs have already 'staged' for auto-enrolment purposes the obligations are immediate (subject to a possible postponement option of up to three months).
It is possible for individuals to opt-out of auto-enrolment. It would appear prudent for LLPs to address the issue by clearly communicating the opt-out option, both to existing LLP members and as membership of the LLP commences. It is important to note that LLP's should not actually provide the member with an opt-out form as there are strict anti-avoidance provisions in the auto-enrolment legislation. LLPs should also look at retaining a right in the members agreement or other profit sharing document to net off any contribution which the LLP becomes obliged to pay in respect of the member against profit share so as to ensure equity between partners although anti avoidance provisions must again be borne in mind.
LLP members who have in place HMRC protections in relation to their accumulated pension funds will need careful management to avoid breaching their protections.