When are LLP Members also employees? Court of Appeal’s welcome guidance

The recent decision by the Court of Appeal in Tiffin v Lester Aldridge LLP – (2012) EWCA Civ 35 – is clarification of the principles to be applied in deciding whether members of a Limited Liability Partnership can also be employees of the LLP.

Since its introduction in 2000, Partnership Lawyers have been as one in agreeing that Section 4(4) of the Limited Liability Partnerships Act was badly drafted. The Court of Appeal’s decision provides welcome guidance as to how the section is intended to work.

The section provides that a member of an LLP shall not be regarded for any purpose as employed by the LLP 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 absurdity of the section arises because a Partner cannot be an employee of his own Partnership. Therefore, a literal interpretation must, inevitably, lead to the conclusion that a member of an LLP can never be an employee of the LLP. If that was the intention of the legislators, they need not have included the wording from “unless” onwards. The additional words must have an intended sensible meaning. As the Court of Appeal stated the presumption has to be that Parliament does not intend to enact legislation whose application leads to absurdities.

The Court decided that the way in which the section must work is that an assumption has to be made that the business of the LLP has been carried on, not in an LLP, but in a Partnership by two or more of its Members. Then, upon that assumption, an enquiry must be undertaken as to whether or not the member whose status is in issue would have been one of those Partners. If the answer is that he would have been a Partner, he cannot have been an employee. If the answer is that he would not have been a Partner, the further question arises as to whether or not he was an employee.

Any such enquiry will require consideration of the circumstances in which a person may become a Partner in a Partnership under the Partnership Act 1890. Section 1 of the Act defines a Partnership as the relation which subsists between persons carrying on a business in common with a view to profit. It is clear from the decision in M Young Legal Associates v Zahid that the sharing of profit is not an essential element of Partnership and the Act itself provides that the mere fact that an employee is remunerated by way of a share of profits does not of itself make the employee a Partner.

Mr Tiffin was a Fixed Share Partner who was remunerated by way of a small guaranteed fixed share of profit; he was entitled to extra profit by reference to a number of profit points; he contributed £5,000 as capital and had voting rights. He would share in any distribution of assets following a winding up of the business. He asserted employment rights and alleged unfair dismissal. The Employment Tribunal dismissed his claim. He appealed unsuccessfully to the Employment Appeal Tribunal. The Court of Appeal has now dismissed his appeal.

Had Mr Tiffin been remunerated by way of a fixed share of profit without contributing capital, without voting rights and without any right to share in a distribution on winding up the result may well have been different and it is clear that the status of individuals within a Partnership or LLP will depend upon what was intended at the time of joining as to whether or not a relationship of Partnership or akin to Partnership in an LLP was to be created. The starting point for any enquiry will be the Partnership Agreement or the Membership Agreement.

For further information on Partnership or Membership Agreements, please contact Peter Moore in our Professional Practices team on 0844 391 5848.

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