Under par: Managing the departure of partners

It is becoming clear that some partnerships, particularly those in the professional services sector, are close to an inflection point. 

Forward looking firms have done surprisingly well through 2020, but for others, many problems that ought to have been addressed long ago have been brought to a head by the stresses of the pandemic. 

These may include poor performance or behaviours, inadequate investment in technology, poor staff engagement, badly drafted or non-existent policies and procedures or a succession issue. Leadership failings and strengths have also been laid bare in this context.

Significant changes are therefore inevitable; and those firms willing to grasp the nettle and take tough decisions will be better placed to thrive this year.

A fair and proper evaluation of performance is far from easy in the context of the pandemic, virtual working and a preponderance of suboptimal experiences.

Addressing poor partner performance can be particularly difficult. Harder still is the development of a strategy that strengthens workplace culture and takes care of valued partners.

Virtual performance management 

There is much to be gained from dealing with poor partner performance now, rather than when ‘normality’ returns later in the year. In the long term, delay risks a deteriorating situation, resentment and the eventual escalation of hostilities.

Unchecked performance concerns raised in the context of unchanged, albeit poor, performance can also set hares running that there is an ulterior motive. This can give rise to claims of bad faith and or discrimination or, in the case of limited liability partnerships (LLPs), whistleblowing claims. 

Partner management in a virtual world has its challenges. For more serious discussions, telephone is unlikely to be appropriate.

If a video platform is to be used, the partnership should ensure to choose a platform that works with the partner’s technology set up. In a virtual world, far more partner communications are by email and occasionally, by text messages or WhatsApp. This can present real risks.

Managing partners and those involved in the evaluation of the partner’s performance need to avoid unguarded commentary or communications giving the appearance that a decision has already been made.

If comments are recorded on workplace devices or on the firm’s IT system, the partner may request copies by way of a data subject access request pursuant to regulation 15 of the General Data Protection Regulation (GDPR). These are documents that will also need to be preserved, if litigation is contemplated. 

Effective leadership in a performance situation means, first, being properly informed; and then being clear with the partner as to where the performance issues lie. 

It will be important to collate performance statistics and evidence before speaking with the partner; and for the firm to choose a senior figure to have that discussion.

Communicating in a way which clearly indicates the leadership is aware of the partner’s concerns and perspective will reduce the risk of conflict. Having a plan for dealing with conflict, should that arise, is also important. 

If the firm has told the partner what is going wrong; has given them support such as mentoring or coaching, and they are still failing; or where there are more serious doubts, a different route may be taken. 

Partnership agreement deficiencies

It is important to review the partnership agreement and understand what powers the firm has in such circumstances. It is can be surprising just how often partnership agreements are simply not fit for purpose. A defective agreement can pose serious challenges to the partnership taking the action it wishes to take. 

For example, in order to expel a partner, there must be an express power to do so in the partnership agreement. If there is no power to expel, the firm will need to secure agreement of the partnership to add one.

The firm ought to be wary of the partner complaining such an amendment was not done in the best interests of the firm, rather merely as a way of removing them.

Without an express power, the firm will need to negotiate retirement on agreed terms or contemplate the highly unattractive option of dissolution and reformation of the partnership. 

Even if there are expulsion powers, the firm may be tripped up by the absence of a ‘no fault’ compulsory retirement power (usually on six months’ notice), in addition to termination for cause (such as a serious breach of the partnership agreement or misbehaviour similar to gross misconduct).

In the case of an underperforming partner, exercise of a compulsory retirement power is often the safer solution, even if it aggrieves the firm to make a payment of profit share for a notice period.

A poorly performing partner may become difficult when performance issues are raised. If the partnership agreement is being renewed, the firm may wish to consider additional express powers to help deal with troublesome partners.

These may include an express power of suspension and a power to put the partner on garden leave. This can also help conserve and consolidate client relationships. 

It is usually sensible to carefully address, in the partnership agreement, what the partner may or may not do while on garden leave, particularly in relation to communications to third parties and on social media.

The firm may also wish to think about clauses that entitle them to make particular documents confidential and only available to management. 

The expulsion of a partner can create an unsettled mood within the partnership body and increase the risk of good performing partners leaving, along with valued clients.

Therefore, it can also be helpful to include a provision restricting the number of partner resignations within a certain period in the partnership agreement.

Other provisions permitting the delayed repayment of current and capital account balances can help mitigate the impact of the exiting partner on the firm’s cash flow and serve as an incentive for the partner to comply with their post-termination restrictions.

In the case of a traditional partnership, there is an implied restriction on solicitation or canvassing of clients, as long as they remain clients of the firm.

The firm should review the express post-termination covenants in the partnership agreement carefully and ensure they have the greatest chance of being enforceable.

For a restrictive covenant to be justifiable, the provision must be no more than is reasonably necessary to protect the legitimate interests of the partnership. 

It is more likely that an onerous restrictive covenant in a partnership agreement would be upheld against a partner than a similar covenant would be in an employee’s service agreement.

With that in mind, many firms assume that the restrictive covenants in the partnership agreement are enforceable. 

However, it is possible that due to defective drafting, the covenants provide little or even no protection at all. For example, a covenant may be drafted to restrict the partner from dealing with all persons who have been clients of the firm at any time when the departing partner was a partner.

In the case of a long-serving partner, such a clause could apply to a person who was once a client but has not been a client for many years and could be challenged as unreasonable, and therefore unenforceable on this basis. 

There is no substitute for a careful review of the partnership agreement to understand if it does what the firm needs it to – and the risks involved.

Litigation risks

Treating the performance management of a partner in the same way as a senior employee might be treated is usually a risky idea. The leadership of the firm should be mindful of the many traps that lie along the path that may result in retirement of a partner. 

The firm should first ensure they are dealing with a true partner and not an employee with enhanced employment rights. You cannot be both a partner and an employee of the same firm, nor a member and an employee of the same LLP.

Partners paid a guaranteed fixed sum, who don’t participate in management decision-making, should be carefully examined to determine their status as either an employee or partner.

If the partner is to be retired, thinking through the procedure that will be followed – and following it to the letter as set out in the partnership agreement – is the prudent approach. The firm should ensure that in the context of remote working, meetings are validly held and quorate and notice provisions carefully adhered to. 

If the firm chooses to go down the compulsory retirement route, even if no reason for the retirement must be given by the firm, the decision can still be challenged and struck down if it amounts unlawful discrimination.

The firm ought to be particularly alive to the risks of disability discrimination claims, or age discrimination claims where it is suggested there is a practice of partners being retired or encouraged to retire at a certain age. 

Some partners, previously managing a physical or mental impairment, may have become disabled for the purposes of equality law due to the effects of the pandemic on their ability to carry out normal day-to-day activities.

Or they may be disabled because they are suffering from so-called ‘long covid’. Care should be taken to understand the impact of certain conditions.

The firm ought also to be mindful that in the context of a long period of remote working, where bonds may have been eroded, partners may be emboldened to assert complaints of harassment or of an unsafe work environment, which amount to protected disclosures under the whistleblowing legislation. 

Whistleblower protection is extended to most LLP members. Management ought to be particularly sensitive to such claims being asserted, particularly as they give rise to potentially uncapped damages and can be pursued against individuals personally (for which the firm may be vicariously liable).

Like discrimination claims, whistleblowing claims are not resolved in the private forum of arbitration. Neutralising these claims early with a full body of evidence in support of the decisions made will be critical.

The firm should also be able to demonstrate it has implemented effective policies, provided training on the specific issues that are likely to arise and enforced its policies.

Even if statutory claims are not made, the partner may argue that the decision to compulsory retire was made in bad faith or is inconsistent with natural justice.

In particular, the partner may argue they have a right to be heard before the decision to retire is made. Whether or not this is strictly necessary, risks can be reduced in some circumstances by giving the partner this opportunity, perhaps even providing them with a copy of the information on which the decision will be made and inviting their responses.

This should be balanced with the potential destabilising impact on the firm of a disgruntled partner airing their gripes before the majority of the partnership.

Similarly, even if there is no express requirement in the partnership agreement to give reasons for the decision, given the absence of recorded reasons can make it harder to demonstrate a non-discriminatory, good faith and rational process and outcome, it may be sensible to do so with care and diligence.

A controversial issue which could provide the partner with an additional argument concerns the extent to which a decision to compulsory retire a partner might be subject to an implied Braganza duty (Braganza v BP Shipping Ltd [2015] 1 WLR 1661).

This focuses on the fairness of the decision-making process, what has been taken (or not taken) into account and the rationality of its outcome. The area is ripe for development and professional firms may find increased scrutiny of private decision-making as a result. 

Underperforming partners may lawfully be removed where the firm considers it to be in the business’ best interests to do so. To avoid unintended consequences, care and diligence should be taken to do it in the right way.

Ensuring the news of retirement does not come as a complete surprise, treating a departing partner with dignity and respect, and allowing them to participate in how their departure is presented internally and externally, can go a long way in reducing the risk of conflict and legal disputes. 
 

Ivor Adair is an employment partner at Fox & Partners