Whistleblowing Ruling: What it Means for LLPs - as published in Economia

Accountants and other members of Limited Liability Partnerships now qualify for workers’ rights following a new judgment entitling them to whistleblowing protection. This may be good news for some individual LLP members but bad news for LLPs in general

This ruling by the Supreme Court at the end of May has wide-ranging ramifications for the large number of accountancy Limited Liability Partnerships (LLPs) and their members as, perhaps surprisingly, our top court ruled that a member (or partner) in an LLP was "a worker" and therefore entitled to protection under whistle-blowing legislation.

This is important for two reasons. Firstly, not only will an LLP partner be a worker for whistle-blowing purposes, but also other worker protections under employment law will apply.

Secondly, it is important to bear in mind that the whistle-blowing legislation is frequently used as a bargaining chip by dismissed executives to seek higher compensation. This is now an option open to LLP partners too - so the upshot is that it is generally going to be harder and more expensive to get rid of under-performing partners or partners who have been involved in a falling-out.

The Supreme Court’s decision

The decision follows from a case which was brought by Ms Bates van Winkelhof, a former solicitor in an international law firm. In 2011 she was fired from the firm, but argued that the sacking was a result of her threatening to blow the whistle on alleged illegal actions by the managing partner of the firm’s Tanzanian operation.

Previously members of LLPs were not considered workers, which meant they would not qualify for whistle-blower protection. But the Supreme Court has over-ruled this. The ruling has in the process given LLP members greater rights, creating new opportunities for them to challenge any expulsion or other detrimental treatment and seek higher sums of redress.

What this means for accountant members of LLPs

From now on where there is a dispute, whether over the management of the business or an individual’s performance (which frequently happens at accountancy practices), it is going to be harder and more expensive to get rid of partners. 

Joining the ranks of senior executives and highly paid bankers, LLP members can now use whistle-blowing claims to negotiate higher compensation. It is particularly favoured because if a member is successful in a whistleblowing claim they will be entitled to uncapped compensation based on their future loses - encouraging firms to avoid this by settling.

For instance, a partner may not be bringing in sufficient funds or their work may be giving grounds for concern so the LLP decides it is time for them to go. They could find a claim from the individual partner that the reason for the expulsion was, in fact, that a disclosure was made that the firm's anti-money laundering procedures were weak or that a report should have been made but this was ignored by the remaining partners. The firm doesn't fancy disputing this (perhaps it has some truth) and so settles generously. There are countless other examples which could be given in the context of financial standards and reporting practices.

Other claims which could be raised include the right for a part time worker not to be treated less favourably than a full time worker. Now any perceived detrimental treatment of a part time LLP member could lead to arguments over whether the reason for this treatment is part time status. Another problem is pension auto enrolment. As this applies to workers, how will the LLP deal with it?

What this means for the LLP

While it is good news for individual partners, who are now in a stronger position, the LLP loses out as the members collectively may have to pay more to conclude disputes or provide additional benefits. 

There are a number of steps LLPs should now take to ensure problems don't arise as a result of the changes this ruling from the Supreme Court will bring.

While most members will not be regarded as employees (and so still do not have the same legal protection as employees such as the right not to be unfairly dismissed), they do now have a range of protections given to workers against certain types of unlawful treatment by their firms and can use employment tribunal claims to enforce them.

LLPs at the very least will need to make sure that they treat their members in accordance with these new rights and that their policy surrounding whistleblowing is amended to reflect this change.

The 48 hour working limit could be a big problem, as this has previously not applied to LLP members. To avoid any difficulties, gain opt-out agreements if required from members. Review how part timers are treated over drawings, profit share, and benefits. 

Accountancy firms should also take specific legal advice on the application of pension auto enrolment obligations and check any claw back requirements in their LLP agreements to make sure they are wide enough to cover overpayments or adjustments in drawings, profit share, or other payments.

We must in conjunction with this wait and see if the new HMRC rules on disguised employment in LLPs will have some impact on whether Employment Tribunals consider members as employees.

What does it mean for traditional partnerships?

Having resolved this issue for LLP members, albeit in an unexpected way, the Supreme Court has left the question wide open for partners in an unlimited partnership. We can anticipate that at some point this issue will be dealt with.

This article, written by Peter Doyle, was originally published in Economia at  http://economia.icaew.com/opinion/june-2014/good-news-for-llp-members-bad-news-for-llps?utm_source=economianews&utm_medium=articles&utm_content=headlines&utm_campaign=june06