Mixed blessing

Last week's Court of Appeal judgment in Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35 has brought more certainty to the perennial issue, 'When is a partner not a partner?'

Mr Tiffin was a fixed-share partner at Lester Aldridge LLP. He was served with a dismissal notice and subsequently he issued a claim in the employment tribunal, asserting that despite the label of 'partner', and though he was an LLP member, he was in reality an employee, who should be compensated as such.

As the convoluted law relating to LLPs requires an examination as to whether a person claiming to be an employee would have been a partner had the practice been a partnership rather than an LLP, the decision not only has an impact on the employment status of LLP members but also on the status of 'partners' in Partnership Act partnerships in general. As such, it has more far-reaching consequences than at first appears.

The unanimous verdict of the appeal court justices was that Tiffin was most assuredly not an employee, with the result that his employment tribunal claim failed. The Court of Appeal's conclusion was based on a number of undisputed findings of fact, principal among them being that Tiffin had a small amount of capital in the LLP, a minor role in decision making and a tiny share of profits on top of his fixed share. The common intention of the parties as expressed through the format of the agreement (LLP agreement rather than contract of employment) was also an important factor.

Appointment as a 'partner' (whether in an LLP or a partnership) at any level brings with it prestige and respect, a heightened ability to impress and attract clients, and usually (though not always) more money. It is also often a step on the ladder to the ultimate ambition of many: equity partnership. Therefore, in times of plenty any appointment labelled 'partner' is a considerable blessing.

Firing line

But in harder times the blessing of 'fixed-share' or 'salaried' partnership can be mixed. As the profitability of any business declines, often the most likely candidates for redundancy are the middle managers. Whether in a law firm or in any other business, the first the middle managers may hear about a redundancy exercise is after the proposal has been debated at a higher level and a decision reached. Unlike in the corporate sphere, in which the 'directors' (whether they are Companies Act directors or not) will usually be employees, the rights of true Partnership Act partners and non-employee LLP members are governed by different sets of rules, which offer much less protection compared to that afforded to employees.

Worse still, if a legal practice folds, anyone found to be a true partner of the firm will have unlimited personal liability to creditors of the firm. Although both fixed-share and salaried partners will have been held out as partners and are thus potentially liable to all creditors under section 14(1) of the Partnership Act, if they can establish that they are not true partners they will escape liability for the firm's arrears of VAT and PAYE (frequently the catalyst for law firm collapse), as crown debts are only recoverable from true partners. They will also have a fighting chance of avoiding liability to other creditors by pleading 'non-reliance', a defence to a holding out claim, which can defeat both statutory demands and summary judgment applications, often seeing off a claim for good. The certainty brought by the Court of Appeal's judgment in Tiffin will mean that these 'escape routes' will be that much harder for some fixed-share and salaried partners to pursue.

Thus the case has significance considerably beyond whether a person is entitled to compensation as an employee. The tests of true Partnership Act partnership explored and confirmed in Tiffin can, in a worst-case scenario, determine whether a 'partner' will or will not become insolvent. That was not, nor should it have been, a consideration for the Court of Appeal in Tiffin, but sometimes, as here, judicial decisions can have alarming consequences in other cases dealing with different issues.

Though the law following Tiffin is more or less the same as it was before the Court of Appeal's judgment, nonetheless advisers to partnerships and LLPs, and to individuals who have been offered partnership status in them, will welcome the decision as they will be able to advise more confidently as to the outcome for the individual in the event of redundancy or other calamity, and the exposure of the practice to claims from such 'partners'.