Solicitors for Partners

Our employment law team have considerable experience in advising partners on employment and partnership issues.  The issues which we generally deal with include the employment status of partners, handling partner departures (voluntary and involuntary), the enforceability of restrictive covenants, discrimination against partners and the effect of dissolution of a partnership on partners.

IBB Law’s employment law team can provide clear, practical guidance on issues relating to advising partners. Our team includes some of the region’s top ranked employment lawyers with decades of experience representing employees of all levels.

For advice on employment and partnership for partners, please contact our experienced employment solicitors today on 03456 381381 at our local offices in Beaconsfield, Reading and Uxbridge, or you can email your details to employmentlaw4 you@ibblaw.co.uk.

Definition of partnership

A partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.

Types of partner

Equity partner – an individual will have made a capital contribution to the partnership, will liable for all partnership debts and obligations in full regardless of the amount of the contribution, and will receive profits depending on the contribution and the terms of the partnership agreement.

Fixed share partner – an individual will have made a lesser capital contribution to the partnership, will be liable for all partnership debts and obligations to a fixed amount and will receive a fixed profit amount.

Salaried partner – an individual will have made no capital contribution to the partnership and for employment law purposes will be an employee.

Member – there are designated members (often referred to as A members) who perform certain duties in relation to the legal administration of an Limited Liability Partnership (LLP) and normal members (often referred to as B members) – the type of member will normally be determined by their capital contribution.

Types of partnerships

General partnerships – are governed primarily by the Partnership Act 1890, case law and the terms of any partnership agreement where the individual partners are collectively known as a ‘firm’.

Partnerships at will – are a form of general partnership whose duration is not fixed by contract and is terminable at will by any partner. Partnerships at will typically exist where the partners have not entered into a written partnership agreement.

Limited liability partnerships – are governed by the Limited Liability Partnerships Act 2000, which applies two or more persons wishing to set up in business together. Key features of an LLP are:

• separate legal personality, which is not dissolved automatically when a member joins or leaves
• limited liability for obligations and debts, which are those of the LLP not the individual members. Members of the LLP have financial exposure only to the extent of their interest in the LLP
• accounting and filing requirements in the same way as other companies but the LLP it is taxed as a partnership.

Limited partnerships – are governed by the Limited Partnerships Act 1907 and is where a business is managed by one or more general partners, supported with capital by limited partners who do not participate in management but who share in profits and whose individual liability is limited to the amount of their respective capital contributions.

Employment status of partners

For external purposes an individual may be referred to as a partner suggesting seniority or status within the business but internally this may not necessarily be the case.

A ‘genuine’ partner will be self-employed.  Whereas a salaried partner will be an employee.

Establishing whether a partner is likely to be regarded as an employee or self-employed is important for a number of reasons:

• it will determine whether the partner has employee-specific rights and duties or partner-specific rights and duties
• individuals who are held out as partners, but who are in fact employees, have no proprietary interest in the business (although an individual who is held to be an employee by an employment tribunal may still be a partner for partnership law or tax purposes as the two tests are not the same)
• genuine partners will have almost no statutory parental rights – although some partnership agreements may provide some form of entitlement for partners
• genuine partners owe the more onerous duty of good faith to their partners in all matters. Partners who are employees are subject to the lesser implied obligation of mutual trust and confidence between themselves and their employers (but not to other partners)
• restrictive covenants will be more readily enforceable against partners than employees. Therefore, restrictive covenants are usually far more onerous in partnership agreements than employment contracts.

The status of the individual will also affect the tax treatment of their remuneration and any exit package. HMRC will look at the substance of the relationship, rather than the label applied to it. The fact that an individual is held out as a partner will not (of itself) be sufficient to avoid PAYE obligations, including employer’s National Insurance Contributions. The tax relief on the first £30,000 of termination payments under the Income Tax (Earnings and Pensions) Act 2003 is not available to partners.

With respect to LLPs, certain members are treated as employees for tax purposes. Three conditions must be met for a member to be considered a ‘salaried member’ and, therefore, subject to tax as an employee. These conditions relate to the extent to which:

• the member’s remuneration is variable depending on the LLP’s profits
• the member is entitled to exercise control of the LLP’s business
• the member is obliged to provide capital to the LLP.

The question as to whether partners are workers of the partnership and, consequently, enjoy greater employment protection than the genuinely self-employed was clarified, in the context of LLP members, by the Supreme Court in Clyde & Co LLP & another v Bates van Winkelhof which found that an equity member was clearly a worker and therefore eligible to bring a whistleblowing claim against the firm. However, the Supreme Court left unresolved the question of whether partners in general partnerships can also be workers.

Factors relevant to status

The label given to an individual is not determinative of status. There are a number factors that need to be considered to determine if an individual is self-employed or an employee, such as:

• whether the individual receives a fixed remuneration payable irrespective of the firm’s profitability, or whether he has a share of the profits and losses of the firm
• whether he receives an express or implied indemnity against debts and liabilities of the firm from other partners, or merely a contribution towards those owed to third parties
• whether he is required to make a capital contribution, or have any entitlement to share in the firm’s surplus assets on a winding up
• the level and extent of the right to participate in management decisions, management meetings and partnership votes
• whether the individual’s name appears on all partnership documentation, whether he has the right to hire and dismiss the firm’s employees and authority to sign cheques on behalf of the firm.

The fact that someone receives a share of the profits will not, of itself, point to being a genuine partner and the background to relationship between the individual and the firm will be relevant and in particular control and influence over management and financial affairs of the firm are important factors in establishing an individual’s status.

When tribunals come to consider the question of the employment status of partners, there is no rule of law that they must explicitly consider the Partnership Act 1890 or whether or not the parties are carrying on business in common with a view to profit, before determining whether the individual is or is not an employee.

Partner departures

There are two types of departure expulsion and retirement.

Expulsion is the compulsory removal of one partner at the instigation of the other partners. This is normally with or without cause and the process will be set out in the partnership agreement.  If there is no express expulsion provision in the partnership agreement, the partners may apply to the court for dissolution. However, the court can only order a dissolution of the whole partnership and cannot order dissolution against the one partner alone.

A partner has no right, under either the Partnership Act 1890  or common law, to leave a partnership (known as retiring) unless the partnership agreement allows, or the other partners consent.

Partnership agreements will usually set out the notice required from a partner who wishes to retire from the partnership.  In some partnership agreements there may be a provision that a partner will retire on a specific birthday.

Discrimination

Extent of protection

Partners (including members of LLPs) have similar rights to employees not to suffer unlawful discrimination on grounds of the nine protected characteristics under the Equality Act 2010:

• age
• disability
• gender reassignment
• marriage and civil partnership
• pregnancy and maternity
• race
• religion or belief
• sex
• sexual orientation.

Provisions in partnership agreements which seek to preclude a partner from pursuing rights relating to a protected characteristic in an employment tribunal will be void.

Recruitment, promotion and training

This would relate to:

• in the arrangements made for the purpose of determining who should be offered a position as partner.
• in the terms on which a position as partner is offered.
• by not offering an individual a position as partner.
• a firm may not discriminate against an existing partner:

• • in the terms on which s/he is a partner.
  • in the way s/he has access to opportunities for promotion, transfer or training, or for receiving any other benefit, facility or service.
  • by expelling the partner
  • by subjecting the partner to any other detriment.

However, such discriminatory treatment may be lawful if an occupational requirement exists, the positive action provisions in the Equality Act 2010 apply, or if the discrimination in question is capable of objective justification.

Harassment and victimisation

It is also unlawful to discriminate against a partner by subjecting her/him to:

• Harassment – means that treatment violates the partner’s dignity or creates an intimidating, hostile, degrading, humiliating or offensive environment.
• Victimisation – means that treating the partner less favourably because s/he has done a protected act e.g. raised an issue under the Equality Act 2010.

Expulsion on discriminatory grounds

It is unlawful to expel a partner from the partnership on the grounds of a protected characteristic

Expulsion is defined in the Equality Act 2010 as:

• by the expiry of any period (including a period expiring by reference to an event or circumstance)
• by an act of the person (including giving notice) in circumstances such that the person is entitled, because of the conduct of other partners or members, to terminate the position without notice
• (in the case of a partner of a firm) as a result of the dissolution of the partnership.

Equal pay

Partners have the right to be paid the same compared to someone of the opposite sex if the partnership agreement provides that s/he carries out the work personally under the Equality Act 2010 unless there is a material factor for paying partners of the opposite sex for doing the same work.

For further information about equal pay, please click here

Disability discrimination

The duty to make reasonable adjustments arises under the Equality Act 2020 where a provision, criterion or practice (PCP) applied by or on behalf of a firm (or any physical feature of premises occupied by the firm, or lack of auxiliary aid), places the disabled partner at a substantial disadvantage in comparison with those who are not disabled. The firm must take such steps as are reasonable, in all the circumstances of the case, to prevent the PCP, physical feature, or lack of auxiliary aid placing that partner at a disadvantage.

For further information about disability discrimination, please click here

Age discrimination

Unlike other protected characteristics, is that direct age discrimination can be objectively justified.

Any provision in a partnership agreement that requires partners to retire at a certain age will need to be objectively justified and firms will have to identify the legitimate aim that they intend to achieve and show that setting their chosen retirement age is a proportionate way of achieving it e.g. planning and retention.

Remuneration structures within partnerships may also amount to indirect age discrimination. The traditional lockstep system, under which partners progress up a points ladder over a fixed period of time and are allocated profit share based on their number of points, as points are rewarded based on longevity of service within the partnership and be detrimental to younger partners.

For further information about age discrimination, please click here

Enforcing restrictive covenants against partners

Restrictive covenants in partnership agreements usually prevent a departing partners from doing certain activities for normally a period of 6 to 12 months. These activities may include:

• non-solicitation or canvassing the firm’s clients
• non-dealing with the firm’s clients
• non-competing within a specified geographical area
• non-poaching partners or members of staff.

Restrictive covenants against partners are treated differently from restrictions against employees. This is essentially because the courts consider that there is a greater equality of bargaining power between partners (if they are all subject to and benefit from the same restrictions in a partnership agreement) than as between an employer and an employee.

The starting point for construing restrictive covenants, is that they are void on the grounds of public policy unless they extend no further than is reasonably necessary to protect the firm’s legitimate business interests. If not, a restrictive covenant may be unenforceable.

Even if no express restrictive covenants exist between a partner and the firm, a partner can be subject to implied restrictions. Most significantly, a partner who retires from a partnership, while free to set up in competition and to act for clients of a previous firm who approach her/him of their own volition, is prevented from canvassing or soliciting such clients as long as they remain clients of that firm (Trego v Hunt).  However, the same cannot be said of salaried partners where no such implied provision exists (Wallace Bogan & Co v Cove and others).

Our expertise with partner issues

IBB Law is one of the top ranked legal firms for employment law in the South East. Employment Law Partner Richard Devall is a member of the Employment Lawyers Association and is ranked as one of the top lawyers in the country by Chambers and Partners in the field of employment law.

We always tailor our approach to your situation, helping you to get a fair outcome for your claim as quickly and easily as we can. Wherever possible we will seek to resolve your claim without the need for an employment tribunal, saving you time, money and stress.

Contact our specialist solicitors for partners today

IBB Law’s employment law specialists represent individuals at all levels no matter the size or sector of the partnership. If you have an issue regarding partnership, we can offer fast, reliable guidance on what to do next.

Contact our specialist employment law solicitors today on 03456 381381 or email your details to employmentlaw4you@ibblaw.co.uk.