CM Murray LLP: Specialists in Employment and Partnership Law Key legal issues to consider on partner admissions APP – Up and Coming Members Susanne Foster CM Murray LLP 24 September 2012

CM Murray LLP: Specialists in Employment and Partnership Law Scenario You are advising a client on joining a UK LLP as a new member

CM Murray LLP: Specialists in Employment and Partnership Law Summary Documents & Information to review and consider Partner Status / Employment Rights Practical Pointers

CM Murray LLP: Specialists in Employment and Partnership Law DOCUMENTS AND INFORMATION

CM Murray LLP: Specialists in Employment and Partnership Law Partner Duties 1.LLP Agreement 2.Implied terms in LLP Agreement 3.Default Rules from LLP Regulations 4.Fiduciary duties 5.Tortious duties (e.g. duty of care express or implied) 6.Statutory duties (e.g. CA 2006 etc)

CM Murray LLP: Specialists in Employment and Partnership Law Documents & Information Members Agreement Current and last years mgt accounts Copies of firms accounts last 3 years Budgets for coming year Business Plan Details of PII cover Major Claims and partner disputes Annuities for former partners Profit allocation process and criteria

CM Murray LLP: Specialists in Employment and Partnership Law LLP Agreement Capital contribution –How much? / capital loan arrangements? / recent capital calls? Profit Share –Structure / how calculated / budgeted value per equity point –Drawings policy / timing of distributions of balance Voting Rights –How are major decisions taken / weighted voting?

CM Murray LLP: Specialists in Employment and Partnership Law LLP Agreement Plan ahead (rights on exit / if circumstances change): Retirement provisions Notice period on retirement Garden Leave Restrictive covenants (including clients) Timing of repayment and profit share balance Maternity and flexible working

CM Murray LLP: Specialists in Employment and Partnership Law LLP Agreement Also consider: Inclusion of express duty of good faith Exclusion of CA 2006, s994 protection Exclusion of LLP Regs 2001, Reg 7(7) – access to partnership records Exclusion of LLP Regs 2001, Reg 7(8) – obligation to render true accounts and full information Liability – normally limited to capital contribution subject to claw-back provisions (NB: watch out for any non-standard provisions)

CM Murray LLP: Specialists in Employment and Partnership Law PARTNER, EMPLOYEE, OTHER?

CM Murray LLP: Specialists in Employment and Partnership Law Type of Partner Full Equity - genuine partner Fixed Share (FSP)/Fixed Equity – true status dependent on facts Salaried - more in common with employees

CM Murray LLP: Specialists in Employment and Partnership Law Why status is important A FSP may have employment rights A formal consultation process may need to be followed to exit an FSP for conduct, performance or redundancy reasons An FSPs complaint may need to be dealt with as a grievance Restrictive covenants more likely to be enforceable against genuine partners than employees Ensure FSP are correctly assessed for tax and NI Exiting Partners may raise it to try to improve their negotiating position

CM Murray LLP: Specialists in Employment and Partnership Law Statutory rights not available to genuine partners Unfair dismissal Statutory Redundancy Payment Collective Redundancy Consultation Rights TUPE protections Statutory Maternity & Paternity Leave & Pay Statutory Minimum Notice of Termination Written reasons for dismissal Continuity of Service (And others)

CM Murray LLP: Specialists in Employment and Partnership Law Who is an Employee? s.230 Employment Rights Act 1996:..an individual who has entered into or works under.. a contract of employment..contract of employment means a contract of service..whether express or implied..oral or in writing

CM Murray LLP: Specialists in Employment and Partnership Law Who is an Employee? A contract of service will exist if 3 basic conditions are fulfilled: The individual agrees to provide own work and skill in performing a service, in return for pay; Agrees to be subject to employers control to a degree sufficient to make employer the master: (control inc. what is to be done, how, where & when); and The other provisions of the contract are consistent with a contract of service Ready Mixed Concrete (South East) Ltd v Minister of Pensions & NI [1968]

CM Murray LLP: Specialists in Employment and Partnership Law Status of LLP Members? A Member of an LLP can be an employee of it S 4(4) Limited Liability Partnership Act 2000 A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership On the facts, would the person whose status is in question have been regarded as a partner? If not, on the facts would he have been an employee? (NB just because hes not a partner, doesnt mean hes automatically an employee)

CM Murray LLP: Specialists in Employment and Partnership Law Partner, Employee, Other? Starting point to identify a genuine partner: s.1 Partnership Act 1890: Partnership is the relation which subsists between persons carrying on a business in common with a view of profit s.1(3) PA 1890: The receipt...of a share of the profits of the business is prima facie evidence that he is a partner in the business but..does not of itself make him a partner in the business…

CM Murray LLP: Specialists in Employment and Partnership Law Range of Factors..impossible to say …. a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner depending on the facts…. What must be done is to look at the substance of the relationship between the parties … and not..any mere label attached to that relationship. One must in every case look at the terms of the relationship to ascertain whether or not it creates a true partnership Stekel v Ellice [1973] Megarry J

CM Murray LLP: Specialists in Employment and Partnership Law Range of Factors Sharing in profits and losses Sharing in liabilities Capital Investment Participation in management Ability to hire, fire & sign cheques Participation in surplus assets on winding up of the Firm Held out as a partner, inc name on firm notepaper Guaranteed pay Indemnity against liabilities from Partners No capital requirement Subject to control No such rights No participation Not held out vvvvvvvvvvvvvv

CM Murray LLP: Specialists in Employment and Partnership Law Range of Factors Critical question – did they intend to create a partnership rather than another relationship? All features of the agreement have to be considered to establish that intention The absence of profit sharing, capital or dominant management rights does not undermine or negate other evidence of partnership

CM Murray LLP: Specialists in Employment and Partnership Law Tiffin v Lester Aldridge LLP (2012) Solicitor employed by LA as an associate Promoted to salaried partner Appointed to fixed share partner as a stepping stone to equity Fixed profit share, plus 5 profit share points Capital contribution of £5,000 Signatory to bank accounts Issued with P45 Tax and NI as self-employed Signed Members Agreement on LLP conversion Entitled to participate in the surplus assets on winding up of the firm in proportion to his capital Certain voting rights, though not on all matters

CM Murray LLP: Specialists in Employment and Partnership Law Tiffin v Lester Aldridge LLP (2012) Was served notice by the partnership Claim to ET for unfair dismissal, breach of contract and Redundancy: rejected – he was a partner, not an employee Appealed to EAT arguing he was in reality an employee He was not involved in management of the firm as FS Partners voting rights were minimal His share of profits and capital were too small The ET decision placed too much weight on labels rather than reality

CM Murray LLP: Specialists in Employment and Partnership Law Tiffin v Lester Aldridge LLP (2012) EAT: There is no certain minimum number or types of rights to vote or to participate in management decisions to qualify as a partner..in many large professional partnerships, all but a few of the partners have any right to participate in the overwhelming range of decisions made by the firm and yet they are clearly partners HELD: Appeal rejected – he was a partner, not an employee, and could find no error of law in the ET's approach

CM Murray LLP: Specialists in Employment and Partnership Law Tiffin v Lester Aldridge LLP (2012) Court of Appeal: Members Agreement reflected the parties intention to set up a partnership No suggestion by Tiffin that Members Agreement was a sham No minimum threshold requirement for managerial involvement or profit share He did have a real voice in the firms management by his (more limited) voting rights Tiffin contributed to the capital, took a profit share He participated in surplus assets on a winding up Held: Appeal rejected - he was a Partner

CM Murray LLP: Specialists in Employment and Partnership Law Discrimination / Whistleblowing Protection from discrimination on grounds of age, disability, gender reassignment, marriage and civil partnership, pregnancy or maternity, race, religion or belief, sex and sexual orientation Provisions in partnership agreement which seek to preclude from pursuing these rights in an ET will be void (Clyde & Co LLP and anor v Winkelhof [2011]) Worker status? Bates van Winkelhof v Clyde & Co LLP and anor [2012]– Fixed share partner/Whistleblowing

CM Murray LLP: Specialists in Employment and Partnership Law Key practical points Documents + Info + Status = Full Picture Written terms not necessarily determinative – court will look at the whole picture and the reality of the relationship. May have employment protections on retirement Try and be as informed as possible (publically available information; consider signing confidentiality agreement) Include in membership terms offered? Guarantee (check drafting ensure no proviso e.g. performance) Consider carve out from restrictive covenants

CM Murray LLP: Specialists in Employment and Partnership Law Key practical points Others?: –UK office of US firm? (more sophisticated structure? Member of US LLP (may need US legal advice) Ask about mgt structure; check target settings; short notice of termination; off-shore office goes first) –Substantial or upcoming liabilities e.g. premises / claims not covered by insurance / pension funds / annuities –Non-transparent discretionary profit share scheme –Merger plans?

CM Murray LLP: Specialists in Employment and Partnership Law Susanne Foster CM Murray LLP 37 th Floor Canary Wharf, London, E14 5AA