When is a partner an employee?

THE LATEST CHALLENGE to the status of a fixed share partner has been quashed by the courts. The primary danger in fixed share partners, whether they are partners in a partnership or members in an LLP, being found to be employees is that they can claim employment protection rights, including the right not to be unfairly dismissed.

A change in status could also complicate the tax position for both the firm and the individual concerned. The Court of Appeal delivered its judgment in the Tiffin case ([2012] EWCA Civ 35) on 1 February 2012.

Mr Tiffin was a fixed share partner in Lester Aldridge LLP, a firm of solicitors. He was given notice to leave and subsequently claimed unfair dismissal compensation on the basis that in reality he was an employee and not a true partner. The court of appeal was the third hearing of this case. Both lower courts had ruled in favour of Lester Aldridge and decided that Tiffin was not an employee. The Court of Appeal did likewise.

Partners in name and deed

Does this decision mean that firms can be confident that their fixed share partners are definitely true partners and not employees? It can mean that, if a firm's fixed share partners have the same characteristics as Tiffin.

The terms of Tiffin's membership of the LLP gave him the right to a fixed share of profits; the right to a small variable share of profits based on a points allocation; the obligation to make a capital contribution; signatory rights on the firm's client and office accounts; a right to share in the surplus assets on a winding up, by reference to capital contributed; and the right to vote on certain matters. Many firms have fixed share partners who do not have all these attributes.

Lester Aldridge had salaried partners in addition to fixed share partners. While the court pointed out that the title given to any one class of partners had no bearing on the true status of a partner, it was not helpful to Tiffin's case that the salaried partners were described in the members agreement as employees who were to be paid a fixed salary; with no share of profits and no obligation to contribute capital. This naturally put the fixed share partner category into much greater contrast than might have been the position had the firm not had salaried partners.

A change in status could also complicate the tax position for both the firm and the individual concerned. The Court of Appeal delivered its judgment in the Tiffin case ([2012] EWCA Civ 35) on 1 February 2012.

Mr Tiffin was a fixed share partner in Lester Aldridge LLP, a firm of solicitors. He was given notice to leave and subsequently claimed unfair dismissal compensation on the basis that in reality he was an employee and not a true partner. The court of appeal was the third hearing of this case. Both lower courts had ruled in favour of Lester Aldridge and decided that Tiffin was not an employee. The Court of Appeal did likewise.

Partners in name and deed

Does this decision mean that firms can be confident that their fixed share partners are definitely true partners and not employees? It can mean that, if a firm's fixed share partners have the same characteristics as Tiffin.

The terms of Tiffin's membership of the LLP gave him the right to a fixed share of profits; the right to a small variable share of profits based on a points allocation; the obligation to make a capital contribution; signatory rights on the firm's client and office accounts; a right to share in the surplus assets on a winding up, by reference to capital contributed; and the right to vote on certain matters. Many firms have fixed share partners who do not have all these attributes.

Lester Aldridge had salaried partners in addition to fixed share partners. While the court pointed out that the title given to any one class of partners had no bearing on the true status of a partner, it was not helpful to Tiffin's case that the salaried partners were described in the members agreement as employees who were to be paid a fixed salary; with no share of profits and no obligation to contribute capital. This naturally put the fixed share partner category into much greater contrast than might have been the position had the firm not had salaried partners.