The Employment Status of Partners

Whether or not someone is a partner or an employee of a business will depend on the exact nature of the relationship and the agreement that exists between the parties. In Tiffin v Lester Aldridge LLP, the Court of Appeal has upheld the findings of the Employment Tribunal (ET) and The Employment Appeal Tribunal (EAT) that a former member of a Limited Liability Partnership (LLP) had been a partner in the firm and not an employee.

Solicitor Mark Tiffin joined the Lester Aldridge Partnership in 2001 as an associate. In October 2005, he was made a salaried partner before being admitted as a fixed share partner on 1 May 2006, at which time the firm no longer considered him to be an employee and issued him with a P45. From then onwards, he was responsible for dealing with his own tax affairs and was paid monthly drawings calculated on the basis of an annual fixed share of the profits, plus a further amount based on five profit share points in the Partnership. He also became an authorised signatory on the Partnership’s client and office bank accounts and was required to contribute the sum of £5,000 to the Partnership. Other differences were that Mr Tiffin’s status for National Insurance purposes changed from employed to self-employed, the firm paid for additional permanent health insurance and life insurance benefits, he was required to make his own pension arrangements and he could claim travel and telephone expenses for personal use. He was also entitled to a share of the residue of the firm in the event that it was wound up.

On 1 May 2007, the Lester Aldridge Partnership converted to an LLP and Mr Tiffin signed the Members' Agreement as a fixed share partner. On 1 November 2007, the LLP admitted salaried partners, but they continued to have the status of employees, as was confirmed in their contracts of employment. In October 2007, Mr Tiffin made an increased capital contribution to the LLP (of £1,250), as did the full equity partners and the other fixed share partners in the appropriate proportions. Under the Members' Agreement, Mr Tiffin was entitled to attend members’ meetings and also had certain limited voting rights. Salaried partners had no voting rights and could only attend partners’ meetings by invitation.

In 2008, Mr Tiffin’s membership of the LLP was terminated, in accordance with the terms of the Members' Agreement, after he failed to establish a big enough client base. He claimed that he had been unfairly dismissed, but the ET found that he was a partner within the meaning of Section 1(1) of the Partnership Act 1890 and not an employee within the meaning of Section 230(1) of the Employment Rights Act 1996. The ET did not therefore have jurisdiction to hear his claim.

Mr Tiffin appealed against the ET’s ruling and lost. His argument that the ET’s decision was perverse, because his limited voting rights and the fact that he was under the direction of the other partners meant that he did not carry on ‘business in common’ with the LLP, was dismissed. The EAT held that there is no minimum threshold that has to be reached as regards a person’s capital contribution, their right to profits or their involvement in management decisions before they can be regarded as a partner. In the EAT’s view, the ET had considered all the relevant facts before reaching its decision, which it was entitled to reach based on the facts of the case.

Mr Tiffin appealed again and the Court of Appeal was in no doubt that his appeal must fail. There was no suggestion that the Members' Agreement signed by him was in any relevant respect a sham. It was clearly intended to establish a relationship between those who had signed it that, when ‘analysed through the prism of the law relating to partnership under the Partnership Act 1890, could fairly be regarded as a partnership relationship between the full equity partners and the fixed share partners’. The character of the interests of those two classes of the LLP's members was essentially the same, notwithstanding the difference in degree of their capital contribution, share in the profits or involvement in the management of the firm. The relevant contrast drawn by the Members' Agreement was not between the full equity partners and the fixed share partners but between those two classes of partner and the salaried partners, who made no capital contribution, were not entitled to a share of the profits nor a share in surplus assets on a winding up and had no say as to the management of the firm.

Decisions in cases such as this will depend on the individual facts. It was perhaps significant that in this case Mr Tiffin had contributed capital to the partnership, was entitled to a small share of the profits and had a degree of involvement in the running of the firm. The fact that all three factors were present made the suggestion that the ET’s decision was perverse an impossible one.

 

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LouiseAttrup
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The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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