What’s your status? Fixed share partners take note

A recent case demonstrates that fixed share partners do not have the same rights as employees. Madeleine Thomson reports.

For businesses operating as a partnership, promotion and ownership of the business can be controlled by means of operating different levels of partnership.

Whereas salaried partners are sometimes regarded as glorified employees and will normally enjoy full employment rights, “fixed share” partners have limited voting rights in return for contributing a small share of the capital.

The Court of Appeal case of Tiffin v Lester Aldridge has provided clarification that a fixed share partner does not have employee status and therefore is not entitled to seek unfair dismissal compensation if they are levered out of the business against their will.

Mr Tiffin started with Lester Aldridge, a firm of solicitors, as an employee in 2001. In 2006 he became a fixed share partner and instead of salary, received monthly drawings based on a fixed share of the profits. He was obliged to make a £5,000 capital contribution to the partnership.

In 2007, the firm converted to an LLP and Mr Tiffin entered into a members’ agreement where, as a fixed share partner, he was described as a “member”, whereas salaried partners were referred to, in the members’ agreement, as “employees”. His voting rights were limited and the agreement provided that if the firm was wound up, he would receive less than 25 times the value than a full equity partner. His capital contribution increased by £1,250.

The partnership decided to terminate his membership of the LLP in February 2009. Mr Tiffin issued an unfair dismissal claim and other related claims in the employment tribunal. When his employment status was disputed, he failed to persuade the employment tribunal he was an employee.

Because the partnership was an LLP, Section 4(4) of the Limited Liability Partnerships Act 2000 also applied. This states that LLP members can enjoy employment status in certain circumstances but a member shall not be deemed as employed “unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership”.

Though salaried partners in the Lester Aldridge business made no capital contribution, enjoyed no share of the profits or share in surplus assets in a winding up and no say in management of the firm, the fixed share partners enjoyed all of these things, though to a lesser degree than the full equity partners. Therefore the features of the fixed share partners bore a much closer resemblance to the equity partners than their salaried partner colleagues. The Court of Appeal considered that the intention of the parties in signing up to the members’ agreement was to establish a relationship of partnership and not employment.
Mr Tiffin argued that he had no real say in the management of the firm. However, the court reviewed the fact that he had been entitled to speak at partners’ meetings and he had voted on 22 of 52 proposed resolutions.

The Court of Appeal found that because he did draw a share of the profits, albeit less than the equity partners, as well as the fact that in a winding up situation he would be entitled to a share of surplus assets and he had contributed capital to the business, this established him as a partner and not an employee.

Equity partners may, as a result of this decision, consider that they are best protected by having all their junior partners as fixed share partners. With a relatively minimal capital contribution and the granting of limited voting rights with fixed profit share as opposed to salary, it appears that the business may escape the employment relationship and the risk of unfair dismissal and employment related claims if the relationship goes sour.

Madeleine Thomson is head of employment law at Hamlins