Changing status: employees of law “firms”

There is an old saying that the cobbler’s children have no shoes. The cobbler has been so busy looking after their customers that they have forgotten to shoe their own family. So it can sometimes be with lawyers; we are so busy dealing with our clients affairs that we overlook the need to ensure that our own businesses are run in accordance with the advice that we give to our clients.  

This short article highlights certain employment law issues that may arise in solicitors’ practices. In particular, in light of the frequent changes in recent years in the structure of such practices from traditional partnerships to limited liability partnerships (LLPs) to limited companies. 

According to data from the Solicitors Regulation Authority, of a total of 10,383 “firms”, only 15.9% were traditional partnerships, with 22.5% set up as LLPs. Many practices are now incorporated. The employment rights and obligations of senior persons within practices will vary depending on their status; they may be employees, directors, members or self-employed partners.  

Traditionally, solicitors’ firms were structured as partnerships governed by the terms of the partnership agreement and the Partnership Act 1890. A partner in a traditional partnership could not be an employee of the firm. A traditional firm is not a separate legal entity so a partner could not be an employee of the firm as the partner is, with the other partners, the firm. A partner could not therefore bring a claim for unfair dismissal. To protect the goodwill of the firm and its legitimate business interests, a well-drafted partnership agreement should have restrictive covenants. Generally, the courts have been more generous towards enforcing partnership agreement restrictive covenants as they are entered into by the joint owners of the business rather than by employees of a business.  

Arguments over employee status can arise in relation to traditional firms when considering whether a salaried or fixed share partner is a partner within the meaning of the Partnership Act 1890. The fact that the person may be held out to the public as a partner is not determinative of the issue so far as that individuals employment status vis a vis the other partners is concerned. Whether the salaried partner is a partner in the true sense will depend on the particular facts including the intention of the parties (see Stekel v Ellice [1973] 1 W.L.R. 191). However, the traditional position remains that a person cannot be both partner and an employee, see Reinhard v Ondra [2015] EWHC 26 (Ch), [42]; Altus Group v Baker Tilly [2015] EWHC 12 (Ch), [161]-[163]. 

LLPs were introduced in 2000 and immediately became popular with solicitors’ firms. The Limited Liability Partnerships Act 2000 (LLP Act 2000) and the Limited Liability Partnerships Regulations 2001 contain the most important statutory provisions concerning LLPs. However, again it will be the LLP agreement that will have to contain any restrictive covenants to limit post departure poaching or competition.  

While an LLP has a separate legal personality, a member of an LLP will not be an employee (section 4(4) of the LLP Act 2000, see below) but members can be workers within the meaning of section 230(3)(b) of the Employment Rights Act 1996 (see Supreme Court decision in Bates van Winkelhof v Clyde & Co LLP [2014] 1 W.L.R. 2047). While a member of an LLP will be unable to claim unfair dismissal, there are numerous rights that a member may enjoy as a worker, such as paid annual leave, whistleblowing protection, and the right to be accompanied to a disciplinary hearing. Furthermore, sections 44 to 46 Equality Act 2010 give partners in a traditional firm and members of an LLP, protection from discrimination regarding protected characteristics.  

Section 4(4) of the LLP Act 2000 provides: 

“A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.” 

In effect, the position remains as it was in a traditional partnership; if the person would not have been an employee in a traditional firm they will not be regarded as an employee of the LLP.  

Where the firm has incorporated, a director of the company, even if the director is a controlling shareholder, may also be an employee of the company under a contract of employment (see Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] EWCA Civ 280). A director may therefore have all the rights of and as an employee. 

Why does any of this matter?  

First, the status of people who work in a solicitor’s practice will be very relevant to that persons rights if things go wrong and they are terminated. Their status will affect what rights they have and what possible claims the practice may face. If a practice moves from a traditional partnership to an LLP and then to a limited company, the director, who may now be an employee, will not have sufficient continuity of employment to bring a claim for unfair dismissal unless they have been in that position as director or employee for two years because periods when they were a partner and member but not an employee, will not count.  

Second, care must be taken to ensure that any restrictive covenants actually apply to the individual concerned.  

Third, firms must review their contracts of employment and partnership agreements whenever the status of the firm changes to ensure that the necessary restrictive covenants apply to the new form of the business.  

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