Salaried partner contributions help to clarify legal status

The increasing use of fixed-share ­partners and members (both referred to as partners in this article) over salaried ­partners is often due to the saving on National Insurance contributions and the absence of unfair dismissal rights and other employment protection (although ­discrimination law does apply to partnerships). This allows firms to deal with and remove fixed-share ­partners having regard primarily to the partnership deed rather than statutory employment protection. However, it has long been unclear whether fixed-share partners are true partners or really just employees. Partnership and employment law are different but not unrelated. They converge confusingly in the LLP ­legislation, which provides that a member will not be an employee of the LLP unless - if the LLP had been a ­partnership - they would have been an employee of the ­partnership.

The Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view to profit”. The courts will consider factors such as whether someone shares in the profits and losses, is entitled to a distribution on a sale of the business and whether the parties acted as though they were a partner.

Employment law applies a number of tests, the most relevant of which are whether the partner operates under the control or direction of the firm and whether they bear the risk of loss or the opportunity of sharing in the profits. ­Common to both is that courts or ­tribunals must decide every case on its facts and that labels applied by the parties are not conclusive. The answer reached may depend on whether one looks first at the facts from a partnership or an ­employment ­perspective.

Two recent decisions of the Employment Appeal Tribunal (EAT) illustrate this well. In Tiffin v Lester Aldridge LLP (2010) it was found that, apart from his fixed share of profits, a fixed-share ­member made a ­contribution to capital, took part in the management and was treated ­distinctly from the salaried ­partners. He was therefore a partner under the 1890 act and could not bring unfair dismissal ­proceedings.

Most recently, in Williamson & Soden Solicitors v Briars (4 July) a salaried ­partner who was acknowledged to be an employee had his remuneration changed from a fixed salary to a guaranteed profit share plus a small variable profit share. However, he made no contribution to ­capital and, ­crucially, there was no change in how he was treated by the firm. The paperwork did not clearly show a change in his status or relationship with the firm and its ­partners, merely changing the way he was paid. The EAT held there is no rule of law requiring the test of partnership or the test of employment to be applied first.

Firms therefore need to be clear about the status and role of non-equity partners. All too often firms simply rely on the fact that someone is called a fixed-share ­partner and pays Schedule D tax to justify treating the partner as more than an employee. If the paperwork and day-to-day reality do not match the firm will find itself at risk from claims. The greatest risk is in relation to those who worked their way up through the ranks. In those cases, there should be a clear break with the past and a change in the partner’s role.

It is unlikely that simply requiring fixed-share partners to contribute to ­capital will make all the difference to a person’s status, but it can’t hurt.

Richard Linskell, partner, Speechly Bircham