Status Symbols - What factors will decide whether your partners are employees?

The recent Court of Appeal decision in Tiffin v Lester Aldridge might appear to give partnerships the certainty that fixed share partners are not employees and cannot, for example, sue for unfair dismissal. However, such a view is too simplistic. Firms must review a range of factors in order to assess whether any of their partners are, in fact, employees. This article analyses the most common indicators of partnership status and summarises the steps firms can take to reduce the chances of salaried/fixed share partners being deemed employees.

Why is it important?

Whether or not a fixed share/salaried partner is an employee is important in practice because it affects their rights on termination, as well as their entitlement to benefits such as paid maternity and paternity leave, and the amount of tax and national insurance which must be paid. Often, matters come to a head when a partner is dismissed and they claim unfair dismissal in the Employment Tribunal.

What factors do you need to analyse?

Tiffin is the most recent in a line of disputes concerning the employment status of fixed share/salaried partners. Each decision has turned on its facts, and partnerships ought to carry out a proper analysis of their fixed share partners’ working arrangements before taking any decision which might trigger an employment dispute.

  • Remuneration – An entitlement to share in the profits is indicative of employment status, but it will not be decisive.
    • In Tiffin, the lawyer received a fixed share of the profits paid as a monthly draw and he was not an employee.
    • However, in Williamson and Soden Solicitors v Briars [2010],  a lawyer used the title “partner” and was paid a salary which was then re-labelled as a fixed profit share. At the same time, he was given the entitlement to an annual bonus based on a percentage of the firm’s profits.  The change in remuneration, even though based entirely on the firm’s profits, was deemed insufficient to turn the employee into a partner. His lack of capital, exposure to risk and management responsibilities, combined with his subservience to the equity partners, were all indicators of employment status.
    • Similarly, in M Young Legal Associates Ltd v Zahid [2006], the Court of Appeal found that a solicitor in a law firm who was paid a fixed amount and had no entitlement to share in the profits was a partner because of other elements of his working relationship.
  • Pension / benefits – If a fixed share partner receives the same benefits as employees (such as income protection and private medical insurance) and/or contributes to an employees’ pension scheme, this suggests employment status. It is usually expected that a true partner will make their own pension and benefit arrangements.
  • Capital – Requiring capital contributions helps to establish that the individual is a partner and not an employee. However, case law suggests that little weight will be attributed to this factor: in both Stekel v Ellice [1973] and Zahid the salaried partners did not contribute to the capital but were still found to be partners.
  • Voting rights / Management responsibilities – The level of participation in management decisions is another factor which has been given considerable weight by the courts. For example, despite being salaried and not sharing in the firm’s losses, it was decided that having genuine participation (including a vote) in management decisions was indicative of partnership status in Bower v Hughes Hooker & Co Solicitors [2003]. In Williamson and Soden, the fact that the fixed share partner was not consulted about significant management issues influenced the judgment that the fixed share partner was, in fact, an employee.
  • Tax status – A true partner is self-employed and is therefore responsible for payment of his own tax and National Insurance, whereas an employee’s deductions are made by the employer through PAYE. Where employment/partnership status is disputed, the courts often consider the tax arrangements. This was an important factor in Stekel as it helped to show that the individual had changed from employee (when payment was made subject to deductions) to partner (when payments were made without deductions of tax).

Conclusion

All firms engaging partners at different levels ought to carry out a risk analysis to help determine whether salaried/fixed share partners might benefit from key employment rights. Firms can protect themselves by ensuring that all partners sign a carefully drafted partnership deed which properly reflects the way the relationship operates in practice, gives all partners a say in management decisions, requires a capital contribution, and treats them as self-employed for tax purposes.