Firms welcome clarification of fixed-share status by CoA

With reorganisations within the ­partner ranks of so many firms, ­clarification over what it means to be a fixed-share partner is to be ­welcomed.

Last week (1 February) the Court of Appeal (CoA) handed down the latest ruling in a partnership dispute involving Lester Aldridge, concluding that fixed-share partners cannot be employees.

The consequence is that partners with fixed-share status will not be entitled to the same statutory ­employment rights as their salaried counterparts, who are considered to be employed.

Make a capital contribution to your firm or take a share of the profit and the court will consider you to be self-employed and ineligible to make statutory employment claims for ­unfair dismissal, wrongful dismissal or to receive a statutory redundancy payment other than for discrimination that applies equally to partners.

This was the view held by the ­Employment Tribunal, upheld by the Employment Appeal Tribunal and endorsed emphatically by the CoA in the matter of Tiffin v Lester Aldridge (2010).

In the beginning

The dispute began back in 2009 when Lester Aldridge, like many of its contemporaries, was making some changes to its partnership line-up. The appellant Martin Tiffin had been working in the firm’s property department for four years, starting as a salaried partner before joining the fixed-share ranks in 2006. The ­following year the firm converted to LLP status.

At that point Tiffin was one of 11 fixed-share partners who together held 3.3 per cent of the firm’s capital. Compare that with the 19-strong ­equity partnership that held 96.3 per cent of the capital.

It was agreed that voting rights would depend on the number of ­equity points accrued, meaning that the full equity partnership held 96.7 per cent of the vote. The requirement was that, to be passed, resolutions needed to have 51 or 57 per cent of the vote. Tiffin later told the court that this meant the fixed-share partnership was effectively locked out of ­pivotal decisions.

As a fixed-share partner Tiffin ­received monthly drawings based on a fixed annual amount together with five profit-share points, the value of the latter depending on the profit of the firm. This compared with 100 points for full equity partners.

This was the evidence put to the court as Tiffin attempted to persuade it to classify him as an employee. In doing so it would allow the partner, who parted company with Lester Aldridge in February 2009, to pursue claims against the firm.

In its judgment, however, the court was emphatic, and this has been broadly welcomed by the profession.

Fixed decision

In his substantive ruling, Lord ­Justice Rimer, who shared the panel with Lord Justice Jackson and Sir Nicholas Wall, president of the family division, said: “A reading of the ­members’ agreement shows it to be tolerably obvious that [Lester Aldridge] was intending to set up a relationship between the various ­signatories and adherents to it of a nature that, if 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.”

“This is great news for law firms, particularly given the march of ­alternative business structures,” says Kingsley Napley partnership specialist Michelle Chance. “Law firms will be run more like corporate entities when accepting outside capital and non-lawyers play a key role in law firm management structures.

“The concept of partnership is being redefined and transformed by the new legal landscape and the opportunities the Legal Services Act affords.”

Whether there will be a further ­appeal is yet to be decided, but for now fixed-share partners, says one lawyer, “are in a pretty tough position. They have to give up employment status to move to fixed-share if they want to get to full equity. That’s just the risk you take.”

For those firms managing partners out of their businesses, this ruling is to be welcomed. For the fixed-share partners on the receiving end, it is a bitter pill.

In a fix
Peter Garry, partner, Keystone Law

While the Tiffin judgment more or less confirms the existing law, the fact that the issues have been dealt with by the Court of Appeal gives more certainty as to the outcome in any particular case.

This will enable partnerships and LLPs to draft or redraft their governing agreements with greater confidence that their intentions
as to the status of fixed-share partners or members (as non-employees) will be upheld.

Equally, individuals who aspire to the status of partner will have more clarity as to whether or not they are giving up their employment law rights.

While there can never be complete certainty as to whether or not fixed-share partners or members will be found to be employees, there are a number of factors or hallmarks that, if present in the relationship, will tend to suggest strongly that the relationship is one of partnership or membership rather than employment. These include the introduction of capital into the business, a share of profits that varies in size depending on the success of the business, and a voice in management.