Published in the Scottish Law Journal.

[The UK Supreme Court’s decision that LLP members remain “workers” has various implications that their firms need to address, but leaves open the question of the status of partners in traditional partnerships, as Sarah Chilton explains]

The much anticipated Supreme Court judgment of [2014] UKSC 32 was issued on 21 May 2014. The case raised the question whether Ms Bates van Winkelhof, an equity member of Clyde & Co LLP whose remuneration was a fixed share but calculated by reference to profit, was a “worker” and therefore entitled to bring a claim for detriment under the whistleblowing legislation. The Supreme Court allowed her appeal and found that as an LLP member she was a worker.

Following the decision, LLP members are now protected from suffering a detriment when making a protected disclosure. Detriment might include receiving a reduced profit share, being demoted, being forced to retire or being denied other privileges.

This significantly widens the rights LLP members will now enjoy. Previously, members were protected from unlawful discrimination; some had the benefit of the duty of good faith, and any other protections afforded to them in the members’ agreement. Now the net has been cast much wider, with the Supreme Court’s decision having significant consequences beyond just whistleblowing.

Workers – beyond employment

The test for worker status is in the Employment Rights Act 1996 (“ERA 1996”) at s 230(3), which defines “worker” as “an individual who has entered into or works under–… (a) a contract of employment, or (b) any other contract, whether express or 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”.

The Supreme Court held that Ms Bates van Winkelhof satisfied this test. Its reasoning can be summarised as follows.

Section 4(4) of the Limited Liability Partnership Act 2000 (“LLPA”) was acknowledged to have caused confusion. This provides: “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.”

The leading case on the matter had been [2012] IRLR 391. Here the Court of Appeal said the effect of s 4(4) was that you assume the business of the LLP was carried on as a traditional partnership, then you ask whether the person whose status is in question would have been a partner in that partnership. If they would have been a partner, it followed that they could not have been an employee, because one cannot be an employee of oneself. If they would not have been a partner, it should be examined whether the relationship is that of employee-employer.

The Supreme Court described that construction as “strained”, and that the proper question to be asked is not, would that person be a partner, but just, what would the position be if the LLP was a traditional partnership?

It then asked whether “employed by” in s 4(4) of the LLPA had to mean only employed under a contract of service, and concluded that it did. Worker status is wider than that, and the Supreme Court went on to describe two kinds of self-employed people:

1. those who “carry on a profession or a business undertaking on their own account and enter into contracts with clients or customers to provide work or services for them”; and

2. “self-employed people who provide their services as part of a profession or business undertaking carried on by someone else” – described in the judgment as the “limb (b)” test.

The Supreme Court said that had Parliament wished to include these “limb (b)” workers in s 4(4) of the LLPA, it would have done so, and therefore s 4(4) could not assist in this case.

The court then considered the idea that a worker requires to be in a subordinate relationship to the other party. It commented that this test can sometimes assist to distinguish workers from other self-employed people, but said “it is not a freestanding and universal characteristic of being a worker”.

Returning to s 230(3)(b) of ERA 1996, the Supreme Court concluded that Ms Bates van Winkelhof fell within the express words of this section – she provided services personally for another party, namely, Clyde & Co LLP. She could not market her services as a solicitor to anyone other than Clyde & Co LLP and was an integral part of their business. They were not her client or customer. She was a worker.

Wider implications

There are some, perhaps unintended, consequences of this decision, with which the Supreme Court did not trouble itself. Worker status brings with it additional protections for those LLP members and we look at some of these below.

Working Time Regulations 1998

These regulations apply to all workers and include: a minimum number of weeks’ paid holiday (currently 5.6 weeks per annum); rights to certain daily (usually overnight) and weekly rest breaks; breaks during the working day (lunch or otherwise); and protection from working more than 48 hours each week (calculated as an average over a 17 week reference period). It is likely that many LLP members would have limited rights under this legislation, by virtue of an exclusion contained in reg 20 for “managers”. This could mean that daily and weekly rest breaks, rests during the working day, and the 48 hour working week, would not apply to them (but annual leave would). The persons exempt are those where “the duration of [their] working time is not measured or predetermined or can be determined by the worker himself”, as may be the case for “managing executives or other persons with autonomous decision-taking powers” (reg 20).

It is likely that many LLP members could fall into this category. Nevertheless, LLPs would be advised to consider asking members to opt out of the 48 hour working week if members are likely to work, on average, in excess of 48 hours per week, and in respect of junior members who may not be exempt under reg 20.

National minimum wage

What constitutes wages? Profit share is unlikely to satisfy the definition of wages in the National Minimum Wage Act 1998, which includes salary, commission, bonus, incentive payments, accommodation and other allowances but does not include true profit share. In most cases, the earnings drawn by LLP members are payments on account of profit. The Supreme Court’s decision could result in a strange situation where LLP members who receive drawings in respect of their profit share become entitled to the national minimum wage as well as profit share. Or, LLPs may prefer to reduce profit share to allocate some profit to wages, which will be paid to members.

Protection from unauthorised deductions

Workers benefit from this protection in s 13 of ERA 1996, but, as above, only in relation to “wages” and not profit share. LLPs should ensure that their LLP agreements provide for deductions to be made when required. Such prior authorisation prevents those deductions forming the basis of a claim.

Part-time workers

The Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000, which extend to workers, protect part-time workers from being treated less favourably than their (actual as opposed to hypothetical) full-time colleagues. LLPs with part-time partners should be careful not to treat them in such a way that could be less favourable, for example in relation to entitlement to time off or selection for promotion. Part-time work is defined by reference to the LLP’s normal custom and practice.

Pension auto-enrolment

Introduced on 1 October 2012, all employers must auto-enrol “eligible job holders” into a “qualifying” pension scheme. The definition of “job-holder” in the Pensions Act 2008 is a worker who has qualifying earnings and is between 16 and 75 years old. The definition of “worker” is the same as in s 230(3) of ERA 1996. There is an exclusion for company directors who are not engaged under a contract of employment, but it may be a brave LLP which proceeds on the assumption that this exclusion will extend to LLP members without further clarification from the Pensions Regulator.

Qualifying earnings include salary, wages, commission and bonuses. Drawings by LLP members are arguably not qualifying earnings. However, if LLPs are required to allocate some payments to “wages” to satisfy the national minimum wage legislation, those earnings would be qualifying and LLPs would then have to assess whether members required to be auto-enrolled with reference to the applicable earnings limits. LLPs should weigh up the risks of non-compliance with the cost of compliance, especially given that many members may opt out if they have already established private pension arrangements.

Whistleblowing policies

LLPs should amend their policies so that they also apply to members, not just employees. Members who are contemplating making a disclosure should comply with the policy, even if it does not yet state that it is applicable to them.

What about traditional partnership?

This case only clarifies the law in relation to LLP members. So what effect, if any, will it have on the many businesses still operating as partnerships?

In English law, a traditional partnership does not have its own legal personality whereas in Scots law, it does – it can enter into contracts with its partners, hold property and assume obligations. The argument has been that a partner cannot contract with himself and, therefore, cannot be an employee or a worker. Whether that may mean that a partner in a Scottish partnership could be an employee or worker of that partnership remains to be seen, because the issue has not been tested. There is no clear authority that a partner in a traditional partnership cannot also be a worker, but there is authority in England that someone cannot simultaneously be a partner and an employee ( [1989] IRLR 392, and .) The Supreme Court in Ms van Winkelhof’s case did not consider the “dual status” point further, as it was dealing with an LLP member. It could be argued in Scotland, because a partnership can enter into a contract, that a partner could be both a partner and a worker or employee.

Until further case law, guidance or legislation from Parliament, partners, firms, and those advising them will have to work within an uncertain set of rules.

Sarah Chilton is a senior associate at Fox, a specialist employment and partnership firm in London, and is dual qualified in England & Wales and in Scotland