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Fixed-share partners cannot 'have their cake and eat it'

Lester Aldridge partner not an employee, appeal judges decide

6 February 2012

A fixed-share partner in the law firm Lester Aldridge was not an ‘employee’ and could not claim unfair dismissal and redundancy rights, the Court of Appeal has ruled.

Michelle Chance, partner at Kingsley Napley, said LLPs could not “have their cake and eat it too” after the ruling (see below).

Martin Tiffin took Lester Aldridge to an employment tribunal in 2009, claiming unfair dismissal, breach of contract and redundancy on the grounds that he had been an employee of the LLP.

An employment tribunal agreed with Lester Aldridge that Tiffin had been a partner and not an employee and dismissed his claims in December 2009. The following year the EAT dismissed Tiffin’s appeal.

Giving the leading judgment in Tiffin v Aldridge [2012] EWCA Civ 35, Rimer LJ said an employment tribunal would only have jurisdiction to hear Tiffin’s claims, under section 230 of the Employment Rights Act 1996, if he had been an employee.

Rimer LJ said Tiffin became an associate of Lester Aldridge in August 2001, working in the property development team at its Bournemouth office. Although called an associate, his status within the firm was that of an employee.

Tiffin was promoted to salaried partner in 2004, which the firm accepted meant that his status remained as employee, before becoming a fixed-share partner in 2006.

“Instead of a salary, he was paid monthly drawings, calculated on the basis of an annual fixed share of profits of £62,500,” Rimer LJ said.

“He was also entitled to five ‘profit share points’, the value of which depended on LA’s [Lester Aldridge’s] actual profits for the financial year. He was required to, and did, make a capital contribution of £5,000 to LA.

“He became a signatory on LA’s client and office bank accounts. LA regarded him as no longer an employee, but as a partner, and issued him with a P45 confirming 30 April 2006 as his last day of employment. His national insurance contribution classes changed to classes two and four.

“LA paid for additional benefits of permanent health insurance and life assurance for him, being benefits differing from those he had previously enjoyed as an employee. He was required to make his own pension arrangements, could claim motor, other travel and also telephone expenses for his personal use and was responsible for dealing with his own income tax.”

Rimer LJ said that in 2007, when Lester Aldridge was considering conversion to an LLP, the full-equity and fixed-share partners signed a members’ agreement and Tiffin signed as a fixed-share partner.

“In October 2007, following the establishment of the LLP, Mr Tiffin made (in common with all other equity partners) the increased contribution to the LLP’s capital that was required of him, namely £1,250.”

Tiffin’s membership of the LLP was terminated in 2008, but he remained a member until February 2009. Lord Justice Rimer noted that, until he issued his unfair dismissal claim, he made no suggestion to the employment tribunal that he had been an employee.

Lord Justice Rimer said that, accepting that Tiffin’s fixed share was guaranteed and “can therefore perhaps be equated to a salary”, he nevertheless also had “a true profit share” represented by his points allocation.

“In addition, he also had a prospect of a share in the surplus assets of the LLP on a winding up.”

Rimer LJ dismissed Tiffin’s appeal. Lord Justice Jackson and Sir Nicholas Wall agreed.

Jonathan Exten-Wright, employment partner at DLA Piper, said the ruling was a reminder that “although there is often what may appear to be little material difference between fixed-share and salaried partners, relatively minor differences may be determinative of partner status.

“In particular there is no minimum level of capital contribution, profit share or involvement in management decisions required before an individual may be classed as a partner.

“It may be significant, however, that in Mr Tiffin’s case all three of those factors were present. It was not clear from the Court of Appeal’s decision whether profit share alone, or capital contribution alone, or management involvement alone would denote partner status.”

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Contracts & Rights Termination