Partnership Law for
Employment Lawyers
Clare Murray
CM Murray LLP
CM Murray LLP: Specialists in Employment and Partnership Law
Partnership Spoilers
• General Partnerships and LLPs covered by separate
bodies of law
• In the absence of a partnership or LLP agreement
certain default rules regulate individuals’ rights & duties
• Fiduciary duties always apply to general partners but do
not automatically apply to LLP Members or LLPs
• Partner status requires assessment of parties’ intention
and factual assessment against certain factors
• There is no minimum threshold requirement for
management involvement or profit sharing to be partner.
CM Murray LLP: Specialists in Employment and Partnership Law
Partnership Spoilers
• LLP Members are not “workers”
• Partner restrictive covenants are far more likely to
be enforceable than employee restrictions
• Arbitration clauses in Partnership Agreements are
not effective to override tribunal jurisdiction
• The concept of constructive dismissal is not
available to partners in general partnerships, and is
untested (and risky) in relation to LLPs
CM Murray LLP: Specialists in Employment and Partnership Law
General Partnerships Overview
General Partnerships are regulated by:
• Partnership Act 1890
• Express partnership agreement
“Partnership is the relation which subsists between
persons carrying on a business in common with a
view of profit” s1(1) PA
• No separate corporate entity, just a collection of
two or more individuals in business together to
make a profit
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Each partner:
–acts as agent for firm & other partners
–owes fiduciary duties to the others
–has joint and several personal liability
–does not assume responsibility for pre-admission liabilities
But an exiting partner remains responsible:
– for liabilities incurred whilst a partner (subject to certain
rights of indemnity)
– for post-retirement liabilities until notice of change given
to third parties who deal with firm, & in London Gazette
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Duty of Good Faith is owed by each partner to the
others in all partnership dealings and transactions
Core fiduciary obligations of a partner are
loyalty (fidelity) and good faith, incorporating:
–The “Non-Conflict Duty” and
–The “Not to Profit Duty”.
“If fiduciary relation means anything I cannot conceive a
stronger case of fiduciary relation that that which exists
between partners.”
V-C Bacon, Helmore v Smith (1887)
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Common Law duty of Good faith is reinforced by PA 1890:
–Each partner is bound to render true accounts and full
information of all things affecting the firm to any partner or
his legal adviser
–Each partner is accountable to the firm for any benefit
derived without other partners’ consent from any
transaction concerning firm, its property, name or business
connection
–Each partner must not compete without the consent of
firm whilst a partner, otherwise he is account for all
unlawfully earned profits
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Default rules which apply, in absence of agreement otherwise:
• All partners share equally in capital and profits and contribute
equally to losses of firm
• Every partner can participate in management of firm
• Changes to nature of business require unanimity; ordinary
matters regarding firm business need a majority decision only
• Every partner is entitled to have full access to, inspect and copy
any of the partnership books
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Right to dissolve a partnership at will by giving notice of dissolution to the
other partners; no advance notice required.
Partnership at will arises:
– when no fixed term is agreed for partnership, or
– it continues beyond expiry of fixed term, with no express new
agreement or evidence of continuation on previous terms
In practice they tend to occur where:
• Partnership is set up without express written agreement; or
• A new partner is admitted without agreeing to the partnership terms
Dissolution can trigger winding up of the business
CM Murray LLP: Specialists in Employment and Partnership Law
General Partners’ Rights & Duties
Right to petition Court for dissolution of Partnership under s35:
•
Partner is permanently incapable of performing partnership contract
•
Partner is guilty of conduct calculated to prejudicially affect the
carrying on of the business
•
Partner wilfully / persistently commits a breach of partnership
agreement, or otherwise conducts himself re partnership business so
that it is not reasonably practicable to carry on in business with him
•
The business can only be carried on at a loss
•
Circumstances have arisen which, in opinion of the Court, render it
just and equitable that the partnership be dissolved.
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Overview
An LLP is a corporate entity with its own separate legal
existence
Flexible internal ownership and governance structure
LLP usually carries the duties and liabilities, contracts with
third parties and usually owns the assets of the business
LLPs are regulated, not by general partnership law (except in
limited circumstances), but by:
–Limited Liability Partnerships Act 2000, Limited Liability Partnerships
Regulations 2001, and related LLP regulations
–Certain parts of Companies Act 2006 and Insolvency Act 1986
(amongst other legislation)
–The Members Agreement
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Overview
Designated Members:
Responsibilities set out in CA and IA
Ensure LLP disclosure/compliance obligations are fulfilled
e.g.
• filing of annual accounts,
• appointing/removing auditors,
• notification of changes in membership etc
If in default Designated Members may be found guilty of
an offence and liable to a fine.
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Members’ Rights & Duties
Default rules which apply in the absence of agreement otherwise, include
•
All Members share equally in capital and profits of firm
•
LLP must indemnify each Member regarding payments made and
personal liabilities incurred:
• In the ordinary and proper conduct of business
• In or about anything necessarily done for preservation of
LLP property or business.
•
Every Member can participate in the management of the LLP
•
Changes to nature of LLP business require unanimity; differences
arising regarding ordinary matters in LLP business need majority
decision only
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Members’ Rights & Duties
Key Default Rules (cont’d)
• Every LLP Member is entitled to have full access to, inspect and
copy any of the LLP books (Reg 7(7))
• Every Member must render true accounts and full information of all
things affecting LLP to any Member or legal adviser (Reg 7(8))
• If any Member competes without the consent of the LLP whilst a
Member, he must account for all unlawfully earned profits
• Each Member is accountable to the LLP for any benefit derived
without the LLP consent from any transaction concerning the LLP,
or use of its property, name or business connection
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Members’ Rights & Duties
Expulsion, Resignation and Dissolution:
No majority of Members can expel any Member unless power to do
so has been conferred by express agreement (Reg 8)
Voluntary retirement:
•
•
in accordance with express provision or
(in absence of agreement), by giving reasonable notice to
other Members
(NB. Legislation is silent on financial consequences of exit)
Right to petition the Court to exercise its power to order winding up:
•
•
under Court’s just and equitable discretion (s122(1)(e) IA 1986); or
on basis LLP is unable to pay its debts (s122(1)(d).
CM Murray LLP: Specialists in Employment and Partnership Law
LLP Members’ Rights & Duties
Are fiduciary duties owed between Members, to the LLP and
by Senior Management to the LLP?
Every Member is the agent of the LLP (s6(1) LLPA)
His acts are attributed to and bind the LLP (except in certain circumstances
or as otherwise agreed)
When does he owe fiduciary duties to the LLP (beyond those set out in the
Regulations - not compete without consent and not make secret profit)?
CM Murray LLP: Specialists in Employment and Partnership Law
F&C Alternative Investments (Holdings) Ltd v
Barthelemy & Ors (2011)
Contractual duty of utmost good faith – analogous to but not same as fiduciary
duties.
Extent of contractual duty of good faith depends on factual and contractual
context
Must have regard to legitimate interests of the LLP, but not obliged to act in
interests of the LLP or subordinate/defer own legitimate interests to them
Contractual duty of good faith embraces:
• obligation to co-operate in achieving the contractual objectives;
• Compliance with honest standards of conduct
• Compliance with standards of conduct which are reasonable
having regard to the interest of the parties
“Dividing line” regarding duty to disclose in contractual duty of good faith
CM Murray LLP: Specialists in Employment and Partnership Law
F&C Alternative Investments (Holdings) Ltd v
Barthelemy & Ors (2011)
No automatic fiduciary duties owed between LLP Members
“Fiduciary duties arise from particular circumstances, where a person
assumes responsibility for the management of another’s property or affairs”
Therefore where one has assumed to act in relation to the property or
affairs of another, he comes under fiduciary duties to that other person
The extent of the duties will depend on the particular case.
CM Murray LLP: Specialists in Employment and Partnership Law
F&C Alternative Investments (Holdings) Ltd v
Barthelemy & Ors (2011)
No general fiduciary duties automatically owed by Members to LLP beyond
statutory duties of no competition without consent & no secret profit
s.6 LLPA does not mean that members owe fiduciary duties to the LLP in
everything they do.
Look at “the specific roles and responsibilities arising in the particular
context in question in order to assess whether and what fiduciary
obligations may arise”
None of the Members (in that capacity), had direct control over the affairs
and property of the LLP or of each other in a manner which could to give
rise to fiduciary duties
CM Murray LLP: Specialists in Employment and Partnership Law
F&C Alternative Investments (Holdings) Ltd v
Barthelemy & Ors (2011)
Fiduciary obligations of LLP Board Members/ Management etc to LLP?
“ask what obligations of a fiduciary character may reasonably be expected
to apply in the particular context, where the contract between the parties
wil usually provide the major part of the contextual framework in which that
questions arises”
Consider the precise nature of the relation in question to determine the
type of fiduciary oblations which apply.
Contractual context may mean the parties could not reasonably expect
fiduciary obligations should apply.
When assessing Board member decisions, the Court will have regard to
what Board Members genuinely thought to be in the best interests of the
LLP
CM Murray LLP: Specialists in Employment and Partnership Law
Partner Status – Why status is
important
• A Fixed Share Partner (FS Partner) may in reality be an
employee and have employment rights, resulting in the need to
adopt formal consultation and grievance procedures
• A genuine partner/Member will have rights to seek dissolution
and participation in winding up of the business
• Determining whether subject to duty of good faith or mutual trust
and confidence
• Restrictive covenants more likely to be enforceable against
genuine partners than employees
• Appropriate assessment for tax and NI
CM Murray LLP: Specialists in Employment and Partnership Law
Partner Status
Measure the entire business relationship against s.1 PA 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
Partner Status
“..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
v.
Guaranteed pay
Sharing in liabilities
v.
Indemnity against liabilities from Partners
Capital Investment
v.
No capital requirement
Participation in management
v.
Subject to control
Ability to hire, fire & sign cheques
v.
No such rights
Participation in assets on winding up of the Firm
v.
Held out as a partner, inc name on firm notepaper
v.
No participation
Not held out as Partner
CM Murray LLP: Specialists in Employment and Partnership Law
Partner Status
• 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
LLP Members
• 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 he have been regarded as a partner?
• If not, on the facts would he have been an employee ?
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 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 employee
Appealed to EAT on basis he believed he was in reality an
employee as:
•
•
•
He was not involved in management of the firm, as FS
Partners’ voting rights were “minimal”
His share of profits and capital was 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 partnership, 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”
CM Murray LLP: Specialists in Employment and Partnership Law
Tiffin v Lester Aldridge LLP (2012)
Court of Appeal: He was a Partner, not an employee
•
No suggestion by Mr Tiffin that Members’ Agreement was a sham
•
Members’ Agreement reflected the parties’ intention to set up a partnership
•
There is no minimum threshold requirement for managerial involvement or
amount of profit share
•
In fact FSPs did have a real voice in material aspects of the firm’s
management by their (more limited) voting rights
•
Mr Tiffin contributed to the capital of the firm, took a share of the profits and
had a voice in the management of the firm
•
He participated in surplus assets on a winding up
CM Murray LLP: Specialists in Employment and Partnership Law
Key Points to Remember
• Each case turns on its own facts
• Written terms not necessarily determinative - court will look at
the whole picture and the reality of the relationship
• Check whether written agreement is an accurate reflection of
the relationship and intention of the parties, otherwise it runs
the risk of being held to be a sham
• When determining partner/employee status, certain key
indicators will need to be present, and one factor alone is not
determinative
• Take tax advice
• If there is doubt about whether an individual is an employee,
be cautious and follow objective and fully documented
selection and consultation processes before expulsion
CM Murray LLP: Specialists in Employment and Partnership Law
Other Protections for Partners
Remember:
• Partners and LLP Members are covered by
discrimination protections
• LLP Members are no longer covered by
Whistle blowing protections (Court of Appeal Clyde & Co & Morris v Bates Van Winkelhof )
CM Murray LLP: Specialists in Employment and Partnership Law
Clyde & Co & Morris v Bates Van Winkelhof
ET: Claimant not a worker & could not pursue whistle blowing claim
S230 (3) ERA: Worker means an individual who entered into or works/worked
under :
“a) a contract of employment, or
b) any other contract, whether express of implied and (if it is express) whether
oral or in writing, 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”
ET: Claimant was in business in her own right, receiving a share of profit for
work carried out and did not satisfy limb b) of definition
The LLP as other party to contract, was a client or customer of the
business/profession carried on by her
CM Murray LLP: Specialists in Employment and Partnership Law
Clyde & Co & Morris v Bates Van Winkelhof
EAT: ET decision overturned - Claimant was a worker & could pursue
whistle blowing claim
Claimant was in a subordinate position within the Firm
It was impossible to describe the LLP as her client or customer
She therefore fell within limb b) definition of worker
Firm appealed:
1) Claimant was not in a subordinate position
2) She could not have been a worker because of s4(4) LLPA 2000
regarding employment status or otherwise of Members
CM Murray LLP: Specialists in Employment and Partnership Law
Clyde & Co & Morris v Bates Van Winkelhof
Court of Appeal: Claimant not a worker & could not pursue whistle blowing claim
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”. S4(4) LLPA 2000:
CoA: Claimant would have been a partner if this had been a partnership
Court preferred wider view that “employed by the limited liability partnership” meant
both employees and limb b) workers
Central question then - whether gen. partnership partners could be limb b) workers
Clear authority that such a partner could not be a worker:
• traditional partnership is not a separate legal entity
• No subordinate relationship in a general partnership – service and control
lacking
CM Murray LLP: Specialists in Employment and Partnership Law
Partner Restrictive Covenants
As with employees, partner restrictive covenants are void
unless they are:
•
reasonable in the interests of the parties
•
reasonable in the interests of the public
•
necessary to protect a legitimate business interest
•
no more than is reasonably necessary between the
parties to protect that interest
But separate body of law has developed regarding partnership
restrictive covenants
CM Murray LLP: Specialists in Employment and Partnership Law
Partner Restrictive Covenants
Bridge v Deacons [1984] Judicial Committee of Privy Council
• Capital Partner with 5% interest in business and assets of firm
• Little exposure to clients outside IP and TM dept
• Prohibition on acting as a solicitor in HK for 5 years for any client
of the firm or any client within 3 years prior to departure
• On departure, he received substantial payment (though only
nominal amount for good will), set up in competition and acted for
prohibited clients
• Firm sought injunction to enforce restrictive covenant
CM Murray LLP: Specialists in Employment and Partnership Law
Bridge v Deacons [1984]
Bridge argued:
1) Scope unreasonable as it prevented him acting
for 90% of firm’s clients with whom he had no
connection/dealings
2) He received only a nominal amount for goodwill
and therefore firm not entitled to protect it by a
restrictive covenant
3) 5 year duration was unreasonable.
CM Murray LLP: Specialists in Employment and Partnership Law
Bridge v Deacons [1984]
Held:
1)
Having regard to value of business and defendant’s position,
scope and duration were not unreasonable.
2)
Firm was a single practice in which all partners had an interest,
shared profits and losses, and owned the assets.
3)
The restrictive covenant was mutual – all partners were bound
by and benefited from it.
4)
He had benefit of the goodwill whilst a partner, which firm now
sought to protect; transfer of goodwill was not by way of a
cash sale but under partnership terms under which he had only
paid a nominal amount when he first joined the firm.
5)
The partners were of equal bargaining power (and also
lawyers!)
CM Murray LLP: Specialists in Employment and Partnership Law
Clare Murray
CM Murray LLP
37th Floor
Canary Wharf,
London, E14 5AA
England
DD:
0207 718 0090
FAX:
0207 718 0091
E: clare.murray@cm-murray.com
@cmmurrayllp @ClareMary
CM Murray LLP: Specialists in Employment and Partnership Law