An LLP can bring employment law troubles
JOANNA BLACKBURN
MISCHON DE REYA
LIMITED liability partnerships are traditionally associated with law firms, but the LLP structure is increasingly the structure of choice for private equity firms, hedge funds, or other partnerships. An LLP can seem the best way for the business to structure itself. There’s better tax status, limitations of liability, and the ability to avoid employment obligations to senior staff, (who instead become members of the LLP), to name but a few.
But businesses often don’t realise the risk they’re taking with LLPs. they can be a minefield when a partner leaves – whether they choose to go, or are pushed. If you are tempted by this structure, then getting a proper LLP deed in place and careful preparation for termination is the key to ensuring an effective exit strategy.
The termination of an LLP member is governed mainly by the terms of the LLP
agreement, but many LLP deeds fail to take account of the quasi-employment status of
their members and so don’t include the contractual protections which would be standard in employment contracts.
An LLP agreement must provide a notice period, regardless of whether there is any particular reason for termination. It should also include terms covering when termination can occur without any notice. It should give the LLP the ability to garden leave a member once notice has been given, and provide post-termination restrictive covenants as well as allowing for the ability to pay in lieu of notice. And it should have clauses dealing with profit sharing arrangements and outline what the entitlements will be when there are separate sources of remuneration, such as carried interest schemes.
It’s often thought that LLPs do not have liability for unfair dismissal. This is too simplistic. As with partners in unlimited liability partnerships, the test of whether a member is genuinely self-employed is not a question of titles. An LLP cannot evade liability for unfair dismissal claims simply by pointing to the fact that the person concerned was a member of the LLP.
Instead, an employment tribunal will look at considerations such as whether the member genuinely shares in the risk and reward of self-employment, whether they invested their money in the business, whether they share in the proceeds if the business is sold, and whether they lose any money invested, should the business fail.
It would also consider whether the member works autonomously, shares profits on a year-on-year basis, whether the member can bind the LLP in third-party agreements, and whether the member pays their own tax. The answers to these questions will provide the clues to whether the member is still an employee, and therefore has unfair dismissal rights, along with the right to statutory redundancy payments, statutory maternity pay, statutory sick pay or parental leave.
Regardless of whether members are genuinely self-employed, they will continue to be protected by all of the discrimination laws: sex, race, disability, age, sexual orientation, and religion and belief. Given that it tends to be the more senior (and higher paid) personnel who are members of the LLP, the applicability of discrimination laws can have very significant consequences for LLPs.
One of the key issues is retirement. Members of LLPs are not subject to the retirement age of 65. If an LLP forcibly retires a member when they reach a certain age, they may face a claim of age discrimination unless they can justify it. This is regardless of whether the departing member has signed up to an LLP agreement with a specified retirement age. The member may struggle to find another job which pays them the same level of money, and so the risk of significant damages payments is one which any LLP needs to consider. With LLPs becoming more popular, those who are tempted by them should be aware of the potential pitfalls.