For businesses operating as a partnership, promotion and ownership of the business can be controlled by means of operating different levels of partnership, for example a salaried partner, fixed term partner or equity partner.
Whereas salaried partners are sometimes regarded as glorified employees and will normally enjoy full employment rights, “fixed share” are a different breed as normally they will only contribute a relatively small share of the capital, and as a result be excluded from much of the decision making within the business and have limited voting rights. In terms of their actual stake and control of the business, there may in fact be little to distinguish between them and their salaried partner colleagues, but it now appears, in law, that salaried partners are much better protected when the business decides to end the partner’s tenure.
The Court of Appeal case of Tiffin v Lester Aldridge LLP, reported this month, has provided clarification that a fixed share partner, even one with very limited capital contribution and voting rights, does not have employee status and therefore is not entitled to seek unfair dismissal compensation if they are levered out of the business against their will.
Mr Tiffin started with Lester Aldridge, a firm of solicitors, as an employee in 2001. In 2005 he was promoted to “salaried partner” and retained the status of employee. He was promoted again in 2006 to a “fixed share partner” and instead of salary, received monthly drawings based on a fixed share of the profits. He was obliged to make a £5,000 capital contribution to the partnership. He received five profit share points, the value to be assessed once the profits were known for the financial year. He became responsible for dealing with his own income tax and his national insurance contribution class changed to 2 and 4. In 2007, the firm converted to an LLP and Mr Tiffin entered into a members’ agreement where, as a fixed share partner, he was described as a “member”, whereas salaried partners were referred to, in the members’ agreement, as “employees”. His voting rights were limited and the agreement provided that if the firm was wound up, he would receive less than 25 times the value than a full equity partner. His capital contribution increased by £1,250.
The partnership decided to terminate his membership of the LLP with effect from February 2009. Mr Tiffin issued an unfair dismissal claim and other related claims in the employment tribunal. His employment status was disputed and he failed to persuade the employment tribunal he was an employee, in order to pursue his employment claims.
Because the partnership was an LLP Section 4(4) of the Limited Liability Partnerships Act 2000 also applied, which states that LLP members can enjoy employment status in certain circumstances but a member shall not be deemed as employed “unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership”. This means that the same principles apply to determine whether a member of an LLP is an employee as apply to establish whether a partner in a partnership is an employee.
Though salaried partners in the Lester Aldridge business made no capital contribution, enjoyed no share of the profits or share in surplus assets in a winding up and no say in the management of the firm, the fixed share partners enjoyed all of these things, though to a far lesser degree than the full equity partners. Therefore the features of the fixed share partners bore a much closer resemblance to the equity partners than their salaried partner colleagues. The Court of Appeal considered that the intention of the parties in signing up to the members’ agreement was to establish a relationship of partnership and not employment.
Mr Tiffin argued that he had no real say in the management of the firm. However, the court reviewed the fact that he had been entitled to speak at partners’ meetings and he had voted on 22 of 52 proposed resolutions. He had a vote when it came to opening or closing an office, merging or acquiring another business, selling part of the business, admission of new partners and amending the members’ agreement.
Although Mr Tiffin sought to argue in favour of being an employee, (that he did not have a prospect of a real share in the profits of the business), the Court of Appeal found that because he did draw a share of the profits, albeit less than the equity partners, in addition to the fact that in a winding up situation he would be entitled to a share of surplus assets and he had contributed capital to the business. This established him as a partner and not an employee.
The law does not provide for any minimum levels of capital contribution, profit sharing, voting rights to distinguish as between partners who can be employees and those who cannot.
Equity partners may, as a result of this decision, consider that they are best protected by having all their junior partners as fixed share partners, and moving away completely from the salaried partner grade. With a relatively minimal capital contribution and the granting of limited voting rights with fixed profit share as opposed to salary, it appears that the business may escape the employment relationship and the risk of unfair dismissal and employment related claims if the relationship goes sour.