Employment law status of LLP members
In our last issue we examined the tax status of fixed share LLP members. Our review highlighted that consideration should be given to the complexities of the so called ‘badges of trade’. Having advised on around 50 legal practice LLP conversions to date we are well placed to comment on this area.
When considering fixed share LLP members, in addition to the tax issues, care will be required regarding Employment Law. This is particularly relevant at the moment, with many fixed share members exiting LLPs. The latest case on this is M Kovats v (1) TFO Management LLP (2) The Family Group of Companies: EAT (Mr Justice Birtles, T Motture, D Welch): 21 April 2009.
When reviewing the employment (not tax) status of ‘members’ of an LLP, the starting point is section 4(4) of the Limited Liability Partnerships Act 2000. This provides that a member of an LLP will not be regarded as employed by the LLP unless he would have been regarded as employed by a general partnership. This will be based on whether an LLP member would have been a partner in the partnership and then the usual common law employment status tests applied.
In the above case, the tribunal thought there was enough evidence to support the conclusion that the member was not an employee, particularly considering the fact that he:
- agreed to be bound by a members' agreement;
- was paid gross and accounted for his own income tax;
- was entitled to a discretionary distribution of surplus profit and was entitled to a share of the proceeds upon any winding up or sale; and
- had not suggested at any point that he was an employee until he was voted out of the LLP.
It is difficult to draw definitive answers in respect of the employment status of fixed share partners for employment rights purely from this one case as the decision was based upon very specific facts. It does however highlight the importance of taking both tax and legal advice on this particular aspect of converting a practice to limited liability status at the start of any process.
For more information please contact Jon Cartwright on 01242 237661 or email jon.cartwright@hazlewoods.co.uk