LLP Members Qualify for Worker Rights: Implications for LLPs and their Members

The Supreme Court has given a ruling which has significant ramifications for Limited Liability Partnerships (LLPs) and their members. It ruled that a junior equity partner in a LLP was a ‘worker’ and was therefore able to pursue a whistleblowing claim. The finding of worker status means that an LLP member may qualify for a whole range of other employment protection rights available to workers, including the right to paid holiday, working time rights, part-time worker rights, the National Minimum Wage, and the right not to suffer unauthorised deductions from wages. However, LLP members still do not qualify for rights which are only available to employees, such as the right to claim unfair dismissal or a statutory redundancy payment. 

The facts

In Bates van Winkelhof v Clyde & Co LLP, B was a junior equity member of Clyde & Co LLP. She received both a profit-related element of remuneration and a guaranteed level of remuneration. She was expelled from the partnership after she reported to Clyde & Co that the managing director of the Tanzanian firm to which she was seconded had paid bribes to secure work. She alleged that her expulsion was due to her having made a protected disclosure and that this amounted to detrimental treatment on whistleblowing grounds. These claims are denied by Clyde & Co and have not yet been tried. 

The definition of a worker

A worker is defined in s230 (3) Employment Rights Act 1996 (“ERA”) as an individual who has entered into or works under:

(a) a contract of employment; or(b) any other contract …….. whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.

B did not argue that she worked under a contract of employment, but instead relied on limb (b) of the definition.

The decision

Clyde & Co argued that B was not a worker and could not therefore bring a whistleblowing claim. The question of whether B was a worker was considered as preliminary issue. The employment tribunal considered that she was not a worker. Although she worked under a contract to perform work personally for Clyde & Co, she was in business in her own right receiving a share of the profits in relation to the work carried out. The EAT disagreed, finding that she was a worker. B was an integral part of Clyde & Co’s business, she could not offer her services to anyone else, she was in a subordinate position and Clyde & Co were not her client. 

Court of Appeal

Clyde & Co’s appeal to the Court of Appeal was successful but on a completely different ground. The Court of Appeal decided the issue by reference to the Limited Liability Partnership Act 2000 (the "LLP Act"), which had not been considered previously. It ruled that the effect of the LLP Act was to preclude a finding that an LLP member was an employee or worker, where they would have been a partner if the LLP were a traditional partnership (rather than an LLP). In the Court of Appeal’s view, there was no doubt that B would have been a partner if the LLP had been a traditional partnership. She had significant rights in the running of the business and had been held out in various ways as a member of the firm. In addition, the terms of the deed of adherence and the members’ agreement made this clear. Although the Court of Appeal did not therefore have to decide whether B fell within the definition of worker in the ERA, it considered that an essential element of worker status is that one party has to be in a subordinate relationship to the other i.e. B could only be a worker if she was subordinate to Clyde & Co. On this basis, the Court of Appeal was inclined to agree with the employment tribunal that B was not a worker.

Supreme Court

The Supreme Court overturned the Court of Appeal’s ruling. By the time the case reached the Supreme Court, the parties accepted that B was employed under a contract which required her personally to perform work or services for Clyde & Co and that Clyde & Co was not a customer or client of a business carried on by her. On the face of it therefore she appeared to meet the statutory definition of a worker. However, there was disagreement on two issues:

• whether an essential element of worker status is that one party is subordinate to the other; and
• the effect of the LLP Act. 

The Supreme Court disagreed with the Court of Appeal’s view on the effect of the LLP Act and ruled that it has no bearing on the statutory definition of a worker. The LLP Act only concerned itself with whether a person who was a partner was also an employee in the narrow sense and not a worker within the wider sense. 

This meant that the issue of whether B was a worker had to be decided purely by reference to the definition of worker in the ERA. In the Supreme Court’s view, it is not necessary for one party to be subordinate to the other in order for worker status to be established. Instead the words of the statute should be applied to the facts of each case. While subordination may sometimes assist in distinguishing workers from other self-employed people, it is not a freestanding and universal characteristic of being a worker. 

It is necessary to distinguish between self-employed people who are in business on their own account and undertake work for clients or customers (who will not be workers) and those who provide their services as part of a profession or business carried on by someone else (who may be workers, depending on the facts of each case). B could not market her services as a solicitor to anyone other than Clyde & Co and was an integral part of its business. Clyde & Co were in no sense her client or customer. She therefore fell squarely within the wording of s230 and was a worker. 

Finally, the Supreme Court expressed reservations about the correctness of the current view that a partner in a general partnership can never be an employee of a partnership. The view is based on the argument that a person cannot employ himself and as a partnership (unlike an LLP) is not a separate legal entity but a group of partners, they cannot enter into employment contracts with themselves. However, it did not need to decide this issue and therefore left open this issue and, by extension, the question of whether a partner could be a “worker” in their firm for the purposes of the ERA.

Implications

For LLP members

Whether an LLP member is a worker will depend on the facts of each case and whether the statutory definition of worker is met. However, in most cases it seems likely that they will qualify as a worker. 

This decision gives LLP members protection from retaliation by their firm in response to the member making a protected disclosure (blowing the whistle) about a legal or regulatory wrongdoing. Retaliation could include, for example, a demotion, compulsory retirement or expulsion as was alleged by B in this case. An LLP member, if successful in a whistleblowing claim, will be entitled to both uncapped compensation based on their future losses and also an award for injury to feelings.

As well as whistleblowing protection, worker status confers a range of other rights and protections, including the right to paid holiday, other working time rights, part-time worker rights, the right to receive the National Minimum Wage and the right not to suffer unauthorised deductions from wages. LLP members who consider that these rights have been breached will be able to bring employment tribunal claims to enforce them. 

However, LLP members do not have the same legal protection as employees. In particular they do not have the right to claim unfair dismissal or a statutory redundancy payment. 

For LLPs

LLPs will need to ensure that they treat their members in accordance with these rights and that whistleblowing, holiday and other policies as appropriate are amended to reflect the fact that they apply to LLP members. 

They will need to ensure that they do not treat LLP members detrimentally for blowing the whistle or for exercising rights under the Part Time Workers Regulations. The business reasons for any detrimental treatment should be recorded as this will assist in showing that whistleblowing or the exercise of part time worker rights was not the reason. 

Under the unlawful deductions provisions of the ERA, workers have the right not to have deductions made from their wages unless the deduction is authorised by the contract (or the worker has agreed in writing to the deduction). LLPs should check any “clawback” provisions in their LLP agreements to make sure they are wide enough to cover any claw backs they might wish to make. In addition, when seeking to claw back a bonus they should check that any deduction they make is expressly permitted by the terms of the agreement. If an employment tribunal finds an unauthorised deduction to have been made, the LLP will have to pay back the money to the LLP member and will be unable to recover the sum from the LLP member by any other means. 

It is also possible that, as workers, LLP members will be covered by pensions auto-enrolment obligations as a similar definition of worker is used for the purposes of the Pensions Act 2011. 

In other cases, the acquisition of new rights may not be as big an issue as they might first appear. Most LLP members will already have paid holiday which more than satisfies the statutory entitlement of 5.6 weeks (including bank holidays). It is possible that in some cases LLP members may be exempt in any event from the 48 hour limit on the working week - on the basis that they fall within the exception for managing executives and those with autonomous decision-making powers who control the hours they work and whose working time is not monitored or determined by their employer. However this exemption is unlikely to apply to LLP members who have core hours they must work. In cases where the exemption does not apply, LLPs will either need to ensure that the 48 hour average is not exceeded, or that they obtain an opt-out agreement from the LLP member opting out of the working time limit. 

In addition, the right to receive the National Minimum Wage is unlikely to cause many difficulties, but LLPs may need to consider how to structure drawings to make sure that the legislation is being complied with.

For general partnerships

The Supreme Court’s questioning of the long-held view that partners in a general partnership cannot be employees (or workers) of that partnership paves the way for further litigation on this issue. Having resolved the issue for LLP members it has left the question wide open for partners in a general partnership.