Article posted in the Law Society Gazette, 20 November 2017
With the best will in the world, some relationships in professional partnerships do not work out. Well-managed firms take prompt action to identify and address underlying problems affecting specific partners – perhaps resulting from over-promising and under-delivering, inability to be a team player or simply seeing the world differently from other partners. Unfortunately, we often see a degree of reluctance to address the situation until there is clear evidence of serious damage to the firm’s business, staff morale or to the motivation of the individual concerned.
Most firms choose to try ‘softer’ options in the initial stages, for example coaching, mediation, de-equitisation or reduction of profit share, depending on the particular issues. When the writing is on the wall the way in which the firm goes about arranging a partner departure can have far-reaching unintended consequences.
The first step is to check the partnership deed or LLP agreement and ensure that the firm is on solid ground in terms of the termination provisions. Firms usually seek to avoid formal use of expulsion provisions, which often involve a vote by the whole partnership and can be perceived as overly aggressive (unless strictly necessary in situations of gross misconduct). Most larger firms now have a ‘compulsory retirement’ provision in their partnership or LLP agreement which allows partners to be dismissed on notice without involving the whole partnership. The partner managing a departure should be familiar with the mechanics of the notice period provisions (sometimes the LLP agreement will prescribe that notice may only expire at the end of a financial period) and precise powers delegated to a management committee as well as any possible appeal mechanism. Discretionary powers delegated to a management committee should be exercised with care.
The firm should also have a plan of action in mind in terms of whether it wishes the departing partner to work during their notice period or (as is more common) it would prefer the partner to be on garden leave for the duration of their notice period, or to have their termination date brought forward in exchange for a lump sum. The firm’s view on this will depend on the partner’s individual circumstances and preferences, the requirement for an adequate handover and completion of billings, and the need to preserve client relationships.
The firm should formulate a financial proposal ahead of time. A departing partner will usually be entitled to the balance of their current and capital accounts on termination, their drawings up to their cessation date and their profit-share entitlement for the relevant period. Some firms choose to pay an additional amount on top to recognise the impact of termination on the partner concerned. We normally advise firms to err on the generous side in the hope that the departing partner will feel fairly treated and to encourage the departing partner to appoint a solicitor to assist the partner objectively (and, one hopes, to recommend acceptance of the offer on the table). A swift and amicable settlement saves management time and a firm always has a direct economic interest in being well thought of – even by former partners. If an exit is handled badly the ex-partner may bear a grudge for the rest of their career and will not be slow to let others know about it.
In terms of communicating the message, most firms choose to give the partner formal written notice immediately before communicating its wish for an amicable parting of ways and discussing options for their departure on a without-prejudice basis. Actually delivering the written notice starts the clock ticking and tends to focus minds; both parties working to a prescribed timetable keeps matters on track. Treating the partner with dignity and respect and listening to what is really important to them in terms of their exit costs nothing and can go a long way in setting the tone for the exit discussions. If the lead-up to the delivery of notice has been handled properly with sufficient warnings given along the way, the actual written notice should not come as a complete shock to the partner in question. Keeping open the channels of informal communication is absolutely key to ensuring a swift and amicable settlement.
Our advice is usually that recording the detailed terms of a partner’s departure in a retirement deed or settlement agreement ensures that everyone is on the same page and that both the firm and the partner concerned have a measure of certainty and peace of mind going forward.
There are numerous respects in which terms can be offered to departing partners without adding materially to the cost of the settlement while helping to soften the blow:
- Arrangements for the notice period – listen to what the partner wants. They might prefer to be out of the office immediately or they might consider that obtaining a new job is easier if they are still working. Some firms offer departing partners an extended notice period to give them adequate time to find a new job. The route the firm decides to take will depend first on the business needs of the firm, but listening to what is important to the partner costs nothing and may simplify and shorten the process. A deal will often be done in relation to the timing of payments owed to the departing partner, particularly where they are being asked to contribute a capital sum to their new firm.
- A reference and positive announcements for internal use, for clients and for the market generally in terms agreed with the departing partner in advance can go a long way towards making the partner feel more secure about their future.
- Assistance from the firm’s tax advisers (at the cost of the firm) with the partner’s tax return for the following year can be important to the partner, particularly where they need extra help with presenting their departure terms in their self-assessment form.
- The firm should consider whether it is willing to agree to a release from some or all post-termination restrictive covenants in the firm’s partnership or LLP agreement as they relate to the departing partner – especially if the failure to generate business is a material factor in the decision to ask that partner to leave.
- Confidentiality around the reasons for and terms of the partner’s departure can be important for both parties, and an agreement that neither side will say anything derogatory or disparaging about the other may mean that the message about the departure can be more easily managed.
- Most firms now make a limited contribution to the departing partner’s legal fees in relation to advice on their departure. Involving lawyers for the firm and the partner usually helps to tie up arrangements more quickly and with less emotion.
- An offer of outplacement help is often welcomed by the departing partner.
Most firms will experience a tricky partner departure situation at some point; it is an inevitable consequence of practice within a partnership. How a firm chooses to deal with it can help to define the firm’s culture, market reputation and relationships with continuing staff.