LLPs & Partnerships - Employment Status of 'Partners'

Siobhan Bishop: Welcome to the first of our series of three podcasts on LLPs and Partnerships.

The first topic today, in this podcast, is the employment status of partners and LLP members. I'm joined by Tessa Livock, a principal associate in our Employment, Labour & Equalities team at Gowling WLG. These issues will be relevant to all sectors dealing with setting up and operating a business through an LLP structure or partnership as well as individual LLP members who need to understand their rights and obligations and how they might want to exit such a structure.

So firstly, Tessa, we will look at the extent to which employment status applies to partners and LLP members. There's a misconception that partners and LLP members can't have any employment rights.

Tessa Livock: Yes, that's right. The traditional view is that partnership and employment are mutually exclusive but, actually, partners and members may have rights not traditionally associated with partnership. It is probably fair to say that tribunals are showing an increasing willingness to find partners and LLP members do enjoy some employment rights. The increasing size of partnerships and LLPs and changes to the way that they're run, for example, more complex management structures and the use of committees, may mean that many LLP members particularly, for example, salaried or fixed share members or partners may be closer to employees than to genuine business owners.

Siobhan: So why does this matter? What are the risks with all of this?

Tessa: Well, of course, there's the potential financial exposure if a firm or LLP is subject to legal claims from partners or members asserting employment rights. Compensation for some claims that may be available to partners, such as discrimination or whistleblowing claims is unlimited, but as well as the financial aspects there's a risk and reputation issue. The press generally are more interested in partner spats than say regulatory or technical breaches and so there is potential for adverse publicity.

Siobhan: So, even if someone is not an employee they may still have valuable rights?

Tessa: Yes, that's right. Even if they are not employees they may be workers and have valuable employment protections, for example, they may be protected as whistleblowers, they may be protected from discrimination and they might have other rights that you would be forgiven for assuming do not apply to partners or LLP members, such as the right to paid annual leave or protection under the part time worker regulations or minimum wage protection.

Siobhan: So what about the LLP or partnership deed itself, is there any way that can override these rights?

Tessa: Importantly not, it isn't possible to contract out of statutory employment rights without entering into a settlement agreement which complies with certain formalities and on which the individual has the chance to take independent legal advice. So, if a partner or member has employment rights, their rights to bring claims may override the provisions of the deed including any provisions around compulsory dispute resolution.

Siobhan: Okay, so in deciding whether someone is an employee or indeed a worker, employment tribunals will look at all the factors in the round. But what are the really important factors when looking at the status of these individuals?

Tessa: There's a wealth of case law on what constitutes employment or worker relationship. It is clear that partners in a traditional partnership can be employees, there are conflicting authorities on whether LLP members can be employees. But it is clear that LLP members, as well partners, can be workers. And when looking at the status of partners and members, bearing in mind the established case law tests for whether there is a contract of employment, factors relating to control and financial risk are probably the most relevant as these vary a great deal from firm to firm and as between partners. So, you might consider does the person have a genuine stake in the performance of the firm? The greater the financial risk to the partner or member, the more this will point away from them being an employee. So it might be that salaried partners or fixed share partners are more likely to have employment rights but that won't necessarily preclude full equity partners from having employment rights if the rest of their arrangements are enough to indicate employment or worker status. The level of control by the firm over the individual in the form of performance targets, handbooks and disciplinary or holiday provisions and other management sector requirements will also be relevant, as will an individual's participation in management as a business owner, for example, what's the extent of their voting rights? How may firms allow partners to vote on all of the matters set out in the partnership deed as opposed to just a few significant events in the life of the firm? The question of voting rights is really important because it goes to the equality of bargaining power between the member and the firm. How many professionals on becoming a partner or member read the partnership deed or agreement and assume that they can put forward any amendments? Most partners will be integrated into the business of the firm and held out as a partner on its website and in its documentation.

Siobhan: So can LLPs and partnerships structure their business in a way to avoid the individuals gaining employment status?

Tessa: Yes, potentially, having regard to some of the factors that we've talked about. But, in many cases, it may not be practicable for professional firms to try to avoid members acquiring status and rights. The efficient running of the firm will often trump the need to try to structure arrangements with partners or members so as to avoid them having employment rights. But it is really important to understand where those rights might arise in order to be able to identify where people enjoy those statutory protections.

Siobhan: So the reality is that it is often quite difficult, especially for larger professional firms, to avoid employment status?

Tessa: Yes, that's often the reality.

Siobhan: Okay, so how can organisations minimise their risks in this area then?

Tessa: Well the factual circumstances in which claims might be raised vary hugely, but I think it is possible to make a few general recommendations. It is clear partners already have considerable and valuable employment rights and the direction of travel is towards increasing protection for partners and LLP members. So I suppose the first point is don't assume that they don't have any employment rights in the way that you deal with them. In fact it is better to assume that they will be protected from discrimination, so the processes and measures that you have in place to ensure your firm is a discrimination free workplace, might need to be adapted, as far as possible, to be applied to partners as well as the rest of your staff. Partners may also have whistleblowing protection and you should avoid automatic refusals of employee type requests, such as flexible working. Although that is a right that is available to employees if you refuse to consider requests based on status alone there's a risk you will be faced with indirect discrimination arguments. So I think the key thing is to treat partners equally and consistently and above all with dignity.

Siobhan: Thank you very much Tessa. As we mentioned at the beginning this is the first of our series of three podcasts. The second podcast with Martin Chitty a partner in the team will discuss what happens when someone wants to leave the partnership or LLP. And finally, in the third podcast, Jonathan Chamberlain, another partner in the team, will cover team moves, including international team moves and getting compensation for damage caused.

We hope you found this podcast useful and if you have any questions on the topics we have covered today, or generally, please don't hesitate to contact Tessa, Martin or Jonathan and they would be delighted to help you.

Thank you.