Is a fixed share equity partner an employee? The Court of Appeal in Tiffin v Lester Aldridge LLP gives an emphatic “no”.
This case was an appeal from the Employment Appeals Tribunal to the Court of Appeal by the Claimant against a ruling that he was a partner, not an employee, and was therefore not entitled to bring his claims before the Employment Tribunal.
Under s.203(1) Employment Rights Act 1996 (“ERA 1996”) an employee is an individual who has entered into or works under a contract of employment. This can be a contract of service or apprenticeship, and can be express or implied, oral or in writing. If there is no express contract of employment (or contract of service) a contract can be implied if a number of conditions are present, predominantly mutuality of obligation and control.
Under the Partnership Act 1890 a partnership is the relationship which subsists between persons carrying on a business in common with a view of a profit. A person can be a partner even if he does not share in the profit of the firm. A partner in a limited partnership is not an employee (Kovats v TFO Management LLP) but a salaried partner can be an employee. Normally the relationship between a partner and a partnership resembles a contract for services rather than a contract of service. Evidence of the sharing of profits can lead to the conclusion that a person is a partner but doesn’t necessarily prove definitively that a partner-partnership relationship exists.
Whether a person is an employee or a partner is important as it determines whether they are entitled to employee-specific rights and duties (such as the right to claim unfair dismissal) or partner-specific rights (such as the right to receive a share of the profits). It also defines the scope of other rights and duties (such as whether the person is entitled to maternity leave and the nature of the good faith duty that they have to uphold).
Whether partners are employees has been a matter of prolonged legal debate and rests on the nuances of the situation. The important thing to bear in mind is that it is the nature of the particular relationship, and not the label applied to it, that is important in determining whether a person is an employee or a partner. A range of factors needs to be taken into account in determining whether a person is a partner or an employee, including:
- Whether a fixed remuneration is paid to the individual, irregardless of the firm’s profitability
- Whether the individual is expected to make a capital contribution
- Whether the individual is entitled to any share in the firm’s profit
- The degree to which the individual participates in the management of the firm (among others)
In Tifffin v Lester Aldridge LLP the EAT held that Mr Tiffin that Mr Tiffin had entered into a partnership agreement at Lester Aldridge as a fixed share equity partner and had remained so. He exercised control at the firm and was entitled to a share of the firm’s profits. The Court of Appeal upheld this reasoning and rejected Mr Tiffin’s contention that the relationship was a sham.