Partner or Employee?

The concept of ‘partnership’ is, in theory, simple. A partnership is an undertaking carried on with a view to profit in which the partners share profits and losses.

Regrettably, in reality, things are often not so straightforward and the existence of arrangements such as the ‘salaried partnership’ means that disputes about whether someone is a ‘real’ partner or not are legion.

A recent case heard in the Court of Appeal shows the sort of problems that can arise. It involved a solicitor who had entered into a partnership agreement in a law firm. The firm converted to a Limited Liability Partnership (LLP), under which the partners became members of the LLP. He signed the members’ agreement and contributed capital to the firm. He also had some involvement in the decision-making of the firm and part of his remuneration was based on a profit share.

It was clear, it would seem, that he was a partner. In the event, he was unable to build a big enough client base and left the firm. He then argued that his relationship with the firm was not one of partnership and that he was in fact an employee. His argument was based on the grounds that he was not involved in the management of the firm and his profit share was minuscule.

He sued for breach of contract and unfair dismissal and claimed statutory redundancy pay.

The success of his claim turned on whether he was an employee or a partner. The Employment Appeal Tribunal concluded that his arrangement with the firm was not consistent with an employer/employee relationship. In addition, neither the size of his profit share nor the degree of his participation in the firm’s management was relevant.

The Court of Appeal upheld the decision.

“Whether a person is an employee or a partner is ultimately a matter of fact,” says DFA Law employment specialist Gary Lee, “and having agreements in place that make the position unarguable is a wise precaution for firms that wish to avoid the potential for later disputes.”