Spotting a true partner

IT IS NOT always clear who is, and who is not, a genuine partner. This has become trickier to spot now that many accountancy firms are structured more like big corporations and where you can be an LLP member yet still potentially an employee. It is, however, important to be able to spot the difference between a genuine partner and someone who is in reality an employee, for a number of reasons, including, for example:

• Unlike partners, employees have unfair dismissal protections, and the firm would need to establish a potentially fair reason and follow a fair procedure in order to defend such a claim successfully. If the dismissal is unfair the firm may face an order for reinstatement or reengagement of the individual (with back pay), or compensation (based on losses) of up to £65,300.

• Employees are entitled to statutory redundancy pay; partners are not.

• Employees are protected by whistle-blowing legislation, whereas partners in a general partnership are not. It is arguable that LLP members may potentially come within the whistle-blowing protections, although this is untested in the tribunals as yet.

• Partners in a general partnership can dissolve a partnership, whereas employees cannot.

• Employees have the benefit of 52 weeks statutory maternity leave (though their right to receive normal pay during maternity leave is suspended by such legislation); generally speaking, partners are only entitled to such maternity leave (and pay) as their firm agrees.

• Employees also have the benefit of additional family-friendly rights. Genuine partners do not have such direct protections, although they are still protected against all forms of discrimination, including that on the grounds of sex.

Getting the person’s status wrong at the outset could mean that the firm begins to deal with the individual in a manner which may infringe their statutory rights, and unwittingly make the firm vulnerable to related claims, including for unlimited compensation. An early assessment of the individual’s true status at the outset can help protect the firm and place the partnership in a much better negotiating position if a dispute arises.
Partner or Employee?

Although held out as partners or LLP members to the outside world, it is generally accepted that salaried partners are in fact employees with employment law protections. However, it can often be more difficult to say with certainty whether fixed share, mezzanine, and other similarly ambiguously named mid-status partners who fall short of full equity, are in fact genuine partners or actually employees.

There are several factors relevant to determining a partner’s or LLP member’s true status, including whether they:

• receive a fixed remuneration payable irrespective of the firm’s profitability (indicative of employee status), or whether they participate fully in the profits and losses of the firm;

• receive a full indemnity from the other partners (whether express or implied) against debts and liabilities of the firm (again indicative of employee status), or merely a contribution towards those owed to third parties. This factor is less relevant in the LLP context where all members equally have the benefit of limited liability status, except in certain circumstances;

• are required to make a capital contribution to the firm (more indicative of partner status);

• share in the surplus assets on a winding up of the firm (suggesting partner status);

• have the right to hire and dismiss the firm’s employees (suggesting partner status); and

• have authority to sign cheques on behalf of the firm (again suggesting partner status).

Control and influence over the management and financial affairs of the firm are also important factors: the more an individual has the power to command and control (such as through partnership vote and participation in management), the more likely they are to be regarded as a partner. Conversely, the less they have such power and rights, the more likely they are to be an employee.

LLP Members
In the case of Kovats v TFO Management LLP, 2009, the Employment Appeal Tribunal clarified the point that if a member of an LLP meets the relevant requirements (such as those outlined above), they could also be an employee, with associated employment rights and protections such as the right not to be unfairly dismissed.

This means that, for example, when an LLP decides to expel certain members, the firm must have a fair reason and also follow a fair procedure (as outlined below) or the LLP may risk facing a claim of unfair dismissal.

Removal of a partner who is, in fact, an employee
If a firm wishes to remove a partner who, based on the above criteria, is in reality more likely to be an employee, they should follow procedural steps outlined in the ACAS Code of Practice on Disciplinary and Grievances Procedures (the Code) in order to minimise potential liability. The Code does not apply to genuine partners.

In disciplinary (and dismissal) matters the Code requires the firm as employer to go through a number of procedural steps, including:

• establishing the facts of each case and investigating, where practicable;
• informing the employee, in writing, of the problem and inviting them to a meeting to discuss the allegations/poor performance issues;
• holding a meeting with the employee in which they should be provided with an opportunity to respond to any allegations, a reasonable opportunity to ask questions, put forward their case and call on relevant witnesses;
• allowing the employee to be accompanied to that meeting and informing them of this right;
• deciding on the appropriate action; and
• providing the employee with the opportunity to appeal that decision.

Consequences of getting it wrong
A lack of careful assessment of a partner’s true status may result in that partner successfully bringing employment claims against the firm, for example for unfair dismissal.

Non-compliance with the Code, where relevant, may be taken into account when assessing the overall fairness of a dismissal in the context of an unfair dismissal claim. The tribunal also has discretion to increase any subsequent awards made against the firm by up to 25% if it considers that the firm’s failure to comply with the Code was unreasonable. This will still be subject to the statutory cap on compensation for unfair dismissal of £65,300.

However the potential increase also applies to discrimination claims brought by partners who are in reality employees, potentially substantially increasing an already sizeable claim for uncapped compensation.
Incidentally, if the partner unreasonably fails to follow the code, for example in relation to a grievance or an appeal, they could face a decrease by up to 25% of any compensation awarded to them. It is therefore equally important for the individual to ascertain their true status at an early stage.

A Cautious Approach
It may be the case that, even after applying the above criteria, it is still not possible to reach a final conclusion as to an individual’s true status within the firm. Some firms will be willing as a commercial matter to take the risk on the chin.

A more cautious approach though would be to undertake an early assessment of the status of your fixed share partners and consider whether they should be treated as de facto employees in relation to rights during and at the end of their engagement by the firm. It is important to raise awareness amongst senior management of the risk of those partners having employment rights and the need to manage them in a way which minimises related liability. On termination, for example, consider following a fair procedure regarding the proposed departure of any partner who does not have full equity status.

Also, as tribunals far prefer written evidence to witness testimony, adopting this approach (with a modified version for full equity partners as well) should also provide the firm with valuable evidence of the business rationale for the planned partner exit, and a stronger platform to defend costly partner discrimination claims (which apply to employees and genuine partners alike).

In our experience, well-motivated and legitimate business decisions of senior management are frequently undermined by a lack of cold hard written evidence; making this effort at the outset will normally save time and money later.

Clare Murray is managing partner at law firm C M Murray


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