UPDATE: Are you a partner or employee?

Many private equity firms have chosen UK limited liability partnerships as the legal entity for their UK advisor due to a number of benefits (for example , greater tax transparency, social security savings and privacy relative to other types of legal entities offered in the UK).   

Whilst those benefits are of course welcome, the status of members of LLPs and, in particular, whether they may also be employees and/or workers for the purpose of workplace legislation has been uncertain.  This uncertainty has to some extent been clarified by two recent court decisions, which confirmed that whilst there is still a grey area, LLP members may often be workers but will less frequently be employees.

The first case involved a fixed share member of a law firm established as an LLP who attempted, and failed, to establish that he was an employee of the firm. This was important as the member wanted to bring a claim for unfair dismissal, which is a remedy only available to employees. 

This type of case is fact sensitive.  Here, the member made a capital contribution of £5,000, received a small share of profits in addition to his fixed share, was entitled to a small proportion of the surplus on a winding up of the LLP, had voting rights in relation to a limited number of issues and was able to attend management meetings although he had no say in some of the more important issues. Importantly, the firm also had a distinct group of salaried partners, who were treated as employees and who made no capital contribution, had no profit share, no interest on a winding up and no role in management of the firm.   

The Court of Appeal accepted that a member of an LLP can also be an employee of the LLP but found that this particular member was not. There is no magic formula to determine whether or not an individual is an employee, as the answer depends on the facts. The presence of factors such as capital contribution, share in profits (including a variable element rather than an entirely fixed share), involvement in management and voting rights all point towards partnership. Those factors were all in play in this case – that may not necessarily be so for all private equity firms.  As such there is still a grey area where some of those factors are absent and where the tipping point is found.

The distinction between partner and employee is well known.  Less well known is the fact that even if a member is not an employee, they may be a ‘worker’ for the purpose of workplace legislation. The significance of this is that workers have some specific rights, such as whistleblowing protection, the right to paid holiday and other rights under working time legislation, as well as certain other generally less important rights. Note that discrimination protection is available to employees, workers and LLP members alike.  

This issue arose in a separate recent case involving a preliminary hearing to determine whether another law firm partner was a worker, so that she could bring a claim relying on whistleblowing legislation. The partner succeeded in that preliminary hearing.  Once again there is still a grey area, as the court noted in passing that a senior equity member who is fully dependent on a share of the organisation's profits for remuneration may not be a worker, suggesting that some element of subordination is required.

Both judgments provide some food for thought, and given the light shed on the issues, it may be time for some LLPs to undergo a health check to see where employee/worker issues arise.

David Innes, partner and Christopher Garrett, associate, are based in the London office of international law firm Debevoise & Plimpton.