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 ( 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.
The other confirmation which the case gives to firms is that if they have a category of partner who is paid a fixed salary with no profit share or obligation to contribute capital; no right to share in the assets on a winding up and no vote on management issues, that partner is likely to be an employee, even if not described as such in the firm’s members agreement.
Middle ground still foggy
What the case does not deal with is the middle ground between these two positions. There are a number of decisions which make it clear that no one characteristic is essential in order to qualify as a true partner. For example, partners who have been described as salaried partner and who have received a fixed salary without any profit share or capital contribution, have been held to be true partners.
We have seen many LLP arrangements where there are fixed share partners who are paid a profit share but do not have all of the other characteristics equivalent to those enjoyed by Tiffin. It is fairly common for fixed share partners to be required to contribute capital but it is not so common that along with the capital contribution comes a right to share in the surplus assets on a winding up.
It did not come as a surprise that the decision went against Tiffin. If it had been decided in his favour firms of all shapes and sizes would have been considering whether a fundamental restructuring of their classes of partner was necessary.
Some clarity, but not total
It is unfortunate that a partner with many fewer entitlements was not the subject of the scrutiny of the Court of Appeal. A case where the claimant is a fixed share partner who was formerly an employee and who had become a member of an LLP on the same arrangements, in practice, as applied to him as an employee, except that his salary is now a fixed share of profits and he has a nominal capital contribution, would give more conclusive guidance.
Until that happens, there will remain an element of uncertainty as to the true status of many fixed share partners in partnerships and LLPs.
Doug Preece is a partner in the professional practices group at law firm Fox Williams LLP
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