LLPs became a recognised business medium in 2001 and since then they have proved popular due to the protection they afford their members. They have, over the years, become very popular with small financial businesses such as hedge funds, private equity firms and family offices.
They are attractive because:
• They are a separate legal personality from that of its members. The LLP will therefore not dissolve automatically on the arrival or departure of members from the partnership.
• Any partnership liabilities and debts belong to the LLP rather than the individual members. The liability of the members will be limited to the capital they have contributed to the LLP.
A more distinct advantage is that members of an LLP will not be regarded as employees unless, if they were partners in a standard partnership, the members would be regarded as employees of the partnership (section 4(4) Limited Liability Partnerships Act 2000). In other words, the Courts will ask the question “what would the position be if this was a partnership not an LLP?” For example, salaried partners, limited equity partners and fixed share members may all be classed as employees.
There have been a number of cases where members of LLPs have sought to argue they are employees of the LLP. By succeeding with this argument, members would be entitled to additional rights that are, by default, only granted to employees. Examples of employee-specific rights are statutory parental rights (such as the right to maternity leave, paternity leave, adoption leave and parental leave), the right not to be unfairly dismissed and the right to receive a statutory redundancy payment.
A very interesting case particularly from a family office’s point of view is M Kovats v TFO Management LLP and The Family Group of Companies [2009] KEAT/0357/08/ZT. In this case Mr Kovats was admitted as a member into the LLP in 2004 and had entered into a members’ agreement with it. He was the Chief Investment Officer of the LLP and was entitled to a fixed membership distribution of £80,000 per year, which was to be a draw-down against the future profits of the LLP. He was entitled to a share of any additional profits of the LLP and also had rights in relation to the ownership of LLP assets.
In 2007, the LLP raised performance issues with Mr Kovats and later the same year the Claimant was forced to retire from the LLP on the grounds of “underperformance.” Mr Kovats brought a claim in the Employment Tribunal for unfair dismissal, which was dismissed at first instance and on appeal. The Employment Tribunal and the Employment Appeals Tribunal decided that on the facts of the case the Claimant was a member of an LLP and not an employee.
In reaching its judgment, the Employment Tribunal made a series of findings of fact to justify its decision. These findings included:
• the parties intended the arrangement to be a partnership and acted consistently with this belief;
• the Claimant never suggested he was an employee until he was forced to resign from the partnership and took legal advice;
• the Claimant signed two membership agreements and a side letter as a member as well as signing important documentation which bound the LLP;
• the Claimant had considerable autonomy and was a manager of the business, the success of which depended largely on the Claimant’s input; and
• the Claimant had his draw-down paid gross and accounted for income tax himself.
The Judge said “What must be done I think is to look at the substance of the relationship between the parties and there is ample authority for saying that the question of whether or not there is a partnership depends on what the true relationship is and not on any mere label attached to the relationship.”
In order to reach a decision as to the nature of the relationship typically the Tribunal will look at:
• whether the LLP exercised control over the employer;
• whether the member had the authority to act on behalf of or bind the LLP;
• whether the member had any interest in the LLP;
• whether the member had invested any capital in the LLP and whether the profits were distributed to him;
• whether he was permitted access to the LLP’s accounts or had any knowledge of the LLP’s partnership agreement; and
• whether he was paid a fixed salary that was linked to the profits of the LLP and was closely supervised and monitored.
Another interesting case involving a law firm was M Young Legal Associates Ltd v Zahid & Others [2006] EWCA Civ 613 where the Court of Appeal stated the absence of a direct link between the level of payments for work done and the profits of the LLP was a “strongly negative pointer” towards the crucial question of whether the recipient of those payments was a member of the LLP. Any conclusion must be formed by reference to all the features of the arrangement, any agreement and the true relationship.
The most recent case in this area is Tiffin v Lester Aldridge LLP [2010] UKEAT/0255/10/DM. In this instance the Employment Tribunal highlighted there is no statutory provision or authority, which states there is a minimum number or a certain minimum type of rights to vote or to participate in management decisions required for a person to be classed as a member.
The case law in this area provides a useful steer for LLPs to try and limit the potential liability for claims in the Employment Tribunal. For example, LLPs should ensure that they reduce the risk wherever possible as a successful claim for unfair dismissal can attract a total award of up to £80,400 (basic award: £12,000; compensatory award: £68,400). This figure does not include the additional legal fees of fighting a claim or the disruption this would cause to the business.
Although it may not be possible to eradicate the risk of an Employment Tribunal claim in relation to the status of members, if LLPs are aware of the risk and take protective steps where possible the LLP will be in a better position to defend and hopefully defeat any claim that may arise.
Because of the nature of the relationship and bearing in mind each case will be decided on its merits and facts, the debate regarding employment status of LLP parties is likely to continue. That said, in the interest of certainty and good governance it is always better if issues regarding status are tackled right from the outset by the parties so there can be no complications in the future.
