The Supreme Court ruling in the case of Clyde & Co LLP v Bates van Winkelhof means that members of limited liability partnerships ("LLPs") now have certain quasi-employment protections and may need to be automatically enrolled into a pension scheme.
When LLPs were established in 2000 HMRC operated on the basis that members of LLPs were self-employed and they were taxed on that basis. HMRC challenged this position and, from 6 April 2014, LLP members who receive a salary are required to be treated as employees for tax and NI purposes. The position regarding LLP members who are not salaried remained unchanged.
In the Clyde & Co LLP case, Ms Bates van Winkelhof was removed from an LLP partnership allegedly as a result of her "blowing the whistle" having reported alleged criminal activity. The case considered whether Ms Bates van Winkelhof was a 'worker' for the purposes of the Employment Rights Act 1996 ("ERA") and therefore able to bring claims for detriment under the whistleblowing regime and discrimination.
The Supreme Court overturned the earlier decision of the Court of Appeal and held that Ms Bates van Winkelhof was a worker under the ERA, since she undertook to personally perform services to the LLP in a relationship where the LLP could not be said to be her client or customer. Under the terms of her contract with the LLP she received a guaranteed level of salary alongside a share of the profits, and was restricted from working for anyone other than the LLP. Her role was therefore more akin to that of a worker than of someone who was self employed and carrying on their own business.
As a result of this decision, LLP members who come within the definition of worker will be entitled to a range of statutory rights. For example, the right to paid annual leave, limits on working time, national minimum wage rules and protection from less favourable treatment if they work part time, alongside the whistleblowing protection Ms Bates van Winkelhof is seeking.
This decision was based on the definition of worker contained in the ERA and not that in the Pensions Act 2008 which is slightly different. It is therefore not clear whether a subsequent court would also consider LLP members to be workers for Pensions Act (and therefore automatic enrolment) purposes. In light of the uncertainty, LLPs are advised to consider now whether or not their members should be automatically enrolled into a qualifying workplace pension scheme. A number of issues need to be taken into account.
Has the LLP passed its staging date? Indeed, does it even have a staging date?
If the LLP is the main employer, it may have passed its staging date (the date when its automatic enrolment duties commenced). If so, consider whether the LLP members should be enrolled as soon as possible (with their membership being backdated to that staging date). If, however, the staging date has not yet occurred, there will be more time to consider the implications.
A potential complication is where the LLP is not the main employer because the workforce is employed by a service company. The LLP may not therefore have a staging date. Staging dates have been set based on an employer's PAYE group. If the LLP is not PAYE registered as it has no employees, it will have no staging date.
Are your LLP members workers?
Consider the terms of the LLP structure? Are the members required to provide their services personally for the LLP? Are they restricted from providing their services to anyone else? Is it a relationship where the LLP can not be said to be the members' customer or client? Are the members integral to the LLP's business? 'Yes' answers to these questions indicate that the members are 'workers'.
Are the LLP members eligible jobholders? Do they have qualifying earnings?
To be an eligible or non-eligible jobholder an individual must have qualifying earnings above certain thresholds. Qualifying earnings include salary, wages, commission, bonuses, overtime and various parental statutory payments. Unless the drawings of LLP members are treated as salary, they would not fall within this definition. The LLP members would therefore have no qualifying earnings so could not be eligible or non-eligible jobholders. As a result, the LLP would not have a duty to automatically enrol them.
Having said this, however, it is not currently clear whether HMRC and future courts would treat drawings as salary (or as disguised salary for HMRC purposes) when taking a purposive approach to interpreting the legislation.
If LLP members are automatically enrolled, what about any HMRC protections?
LLP members may be higher earners who have registered for HMRC protections. Automatic enrolment might result in a loss of that protection. Clear communication with them about any enrolment before it occurs is essential to allow them to decide, if appropriate, to opt out within the set period permitted by the legislation. Whilst doing so, however, you must be careful not to 'induce' them to opt out!
So what next?
- Review and update internal whistleblowing policies to ensure that they apply to LLP Members;
- Review current practices relating to working time, minimum wage, and part time workers to ensure LLP Members are treated in accordance with their rights as workers;Train managers in light of any changes.
- Cautious approach - review all LLP members and automatically enrol where appropriate, backdating contributions to your staging date, if applicable;
- Wait and see - there may be further case law in the foreseeable future;Review your LLP documentation (and make sure any claw back provisions do not give rise to an unauthorised deduction).