Following the Supreme Court Uber decision, fixed share partners at LLPs could argue that they are actually employees, with added statutory rights, argue Ivor Adair and Dean Fuller.
Much has been said about the implications of the Supreme Court ruling in Uber BV and others v Aslam and others on the gig economy. However, Uber may yet have a far wider impact that may not be immediately obvious to many. Partnerships ought to be particularly alive to the risk of legal challenges in the open forum of an employment tribunal, particularly in relation to expulsions and forced retirements of fixed share partners.
Uber makes clear that whereas the contract the parties entered into should not be ignored, signing up to terms set out in a contractual document does not mean that document represents the parties’ true agreement”
Fixed share partners
Many entering into partnership for the first time will be designated as a salaried partner, or increasingly commonly, a “fixed share” partner rather than a full “equity partner”. There are significant numbers of this type of partner in professional practice. In the case of a fixed share partner, the partnership agreement will usually establish that remuneration is payable out of anticipated profits irrespective of profitability. The fixed share may be a cap on profits or a guaranteed fixed sum, but this will depend on the wording and interpretation of the relevant terms of the agreement.
A change of approach
Under English law you cannot be both a partner and an employee of the same firm nor a member of an LLP and an employee of the same LLP. The starting point is therefore to work out if the fixed share partner is a partner/member, or an employee. The approach taken to this task will change following Uber, and the outcome may be different.
Uber makes clear that whereas the contract the parties entered into should not be ignored, signing up to terms set out in a contractual document does not mean that document represents the parties’ true agreement. Moreover, the Supreme Court found that terms which classify the parties’ legal relationship or exclude statutory protections must be disregarded. This may be significant as partnership documentation typically contains statements as to the partner’s employment and tax status. Those fixed-share partners who have little or no participation in the management of the firm, are subject to the directions of a management board and are guaranteed a fixed profit share – tantamount to salary – may following Uber have a stronger case that they are in truth, employees with enhanced statutory rights.
The Supreme Court confirmed that the primary question is one of statutory, not contractual, interpretation. In Uber the employment legislation invoked was aimed at protecting vulnerable workers from being paid too little for the work they do. If a fixed share partner wished to argue they were in truth an employee they would seek to rely on the Employment Rights Act 1996, legislation which protects employees from unfair dismissals.
Why claim employment status?
A fixed share partner who is expelled or subject to a compulsory retirement may attack that decision on a number of grounds. For example, on the basis of an unlawful exercise of expulsion powers, a proper procedure (either express or implied) or principles of natural justice not being followed, or bad faith or an improper motive. However, these issues will almost always be resolved in the private forum of an arbitration. There is also the possibility of discrimination claims that are available to partners and whistleblowing claims in relation to LLP members but not traditional partners.
However, only an employee can pursue an unfair dismissal or whistleblowing dismissal claim and in the latter case, seek interim relief in an employment tribunal claim, a right which cannot be ousted by the partnership deed. An employee can also claim reinstatement or re-engagement. The threat of ventilating a whistleblowing dismissal claim shortly after a decision to expel or compulsorily retire in the forum of an employment tribunal – which must be held in public – is a scenario to be taken more seriously now. A partner who is in truth an employee might also consider claims for a failure to provide a statement of employment particulars, seeking two to four weeks’ pay and a written statement of reasons for their dismissal, seeking two weeks’ pay.
Only an employee can pursue an unfair dismissal or whistleblowing dismissal claim and in the latter case, seek interim relief in an employment tribunal claim, a right which cannot be ousted by the partnership deed”
That same partner could also mount an attack on the enforceability of post-retirement covenants within the partnership deed designed to protect the firm, such as non-solicit, non-deal and non-compete provisions. The partner may argue that principles established in traditional partnership and LLP cases that concern challenges to covenants do not apply to them as employees. Viewed in that light the covenants may be too wide and unenforceable against them, albeit enforceable against true partners.
Depending on the circumstances, the size of the partnership body and its culture, some firms may want to consider what they can do to reduce the risk of a finding of employee status for their fixed share or junior equity partners. This may include requiring those partners to make a larger contribution to capital, ensuring they have an entitlement to a share in the partnership profits on a winding up, or requiring them to participate in the management of the firm.
Many of those fixed share partners that are compulsorily retired in the context of performance issues being raised against the backdrop of the impact of the pandemic on their practice, may look to claim enhanced employment status. Management teams within partnerships ought to be considering the impact of Uber on those status arrangements that they have grown accustomed to and the partnership documentation on which they rely. It may be that the partnership body contains, in truth, a number of employees in partners’ clothing.