Salaried but not employed

Hot on the heels of the high profile “employment status” decisions involving the Uber drivers and Pimlico Plumbers (Uber BV v Aslam UKEAT/0056/17/DA; Pimlico Plumbers Ltd v Smith [2017] EWCA Civ 51), it is interesting to see the legal profession coming under similar scrutiny. The important case of Morrison v Aberdein Considine & Co UKEAT/0018/17/JW came before the Employment Appeal Tribunal in Edinburgh earlier this summer.

Background

Employment status is one of those legal concepts which is easier to understand and analyse in theory than in practice. In most cases, the question of whether someone is employed or self-employed is easily answered, either because the employment contract (in employment status cases often referred to as a contract of service) is clear and accurately depicts the relationship between the parties, or because the facts surrounding the relationship clearly point to one or other possibility. The label applied to the relationship is often correct. Unfortunately (or fortunately, depending on your perspective), relationships which cannot easily be categorised as one thing or the other often result in litigation and, as the adage goes, hard cases make bad law.

Over the years, several different tests have been used to identify a contract of service. However, it now seems settled law that the existence of a contract of service falls to be determined by consideration of a number of factors, often referred to as the “multiple” test, rather than by one single test. One of the earliest formulations of this approach, and the common judicial starting point, is Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497.

Both the Uber drivers and Pimlico plumbers were found to be “workers”, entitling them (amongst other things) to rights under the Working Time Regulations and national minimum/living wage legislation, including the right to paid annual holidays, the national minimum/living wage, rest breaks, maximum weekly hours and auto-enrolment pension contributions. In the case discussed below, the claimant argued that she was an “employee”. While there are various statuses within the employment law vernacular, “employee” status remains the gold standard in terms of the acquisition of employment law rights. It is no surprise therefore that, in this case, the claimant wished to demonstrate that notwithstanding her title of “salaried partner”, she was, in fact, an employee, entitling her, amongst other things, to the right not to be unfairly dismissed.

The facts

The claimant, Morrison, had been a solicitor for approximately 25 years, having trained and qualified with the respondent firm. She became a “salaried partner” in 1995 and remained at that level within the firm for the next 20-plus years. The term “salaried partner” has no legal meaning, but is commonly used to refer to individuals assumed as partners within the legal profession but whose earnings are set in advance each year. They will generally be paid via PAYE. One often also comes across the “fixed share partner” who, similarly, will have fixed earnings but whose income is taken from the profits of the firm. The terms “salaried partner” and “fixed share partner” are often used interchangeably and, as we shall see, the term “salaried partner” was used for the claimant in this case although her income came from the profits of the firm.

As part of the firm’s residential conveyancing team, the claimant had the standard responsibilities of a partner, namely she signed missives, correspondence and cheques on behalf of the firm, as well as having responsibility for supervising staff and developing business.

When her association with the firm came to an end in 2016, the claimant presented several claims to the employment tribunal, namely a claim for unfair dismissal, being unlawfully deprived of a redundancy payment, unlawful discrimination on the grounds of age and sex under the Equality Act 2010 and a claim of less favourable treatment as a result of her part-time status under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000. In all bar one of these claims (discrimination), the claimant required to be viewed by the tribunal as either an employee (right not to be unfairly dismissal, right to a redundancy payment) or a worker (rights in respect of less favourable treatment under the Part-Time Workers Regulations). Without these statuses, the tribunal had no jurisdiction to deal with the claims.

At first instance

The tribunal at first instance took a systematic approach to analysing the evidence before it regarding whether the claimant was or was not an employee. It started from the basis that she had signed successive partnership agreements and had not sought to argue that the agreement was a sham. She accepted that she identified herself as a partner in the firm both internally and externally and at no point challenged her status as a partner. On being assumed as a partner, the claimant transferred the ownership of her home from joint names to the name of her husband, expressly with a view to avoiding the risk of her share being included in any assessment of her assets in the event that she became liable for the debts of the partnership.

The claimant argued that her remuneration was, in reality, a salary, and akin to that of an employee rather than a partner. However, the tribunal found that her remuneration was taken out of the profits of the firm and, in fact, was reduced for a number of months during 2008-09 and 2009-10 as a result of a decrease in profits caused by the banking crisis. (It should be noted that the receipt by a person of a share of the profits of a business is prima facie evidence that he or she is a partner in the business – s 2(3) of the Partnership Act 1890.) She was also classed as self-employed for income tax and national insurance purposes.

On the flip side, the claimant had not required to pay any capital towards the partnership, unusual when one is assumed as a partner, and was not entitled to attend equity partnership meetings. She claimed that she could not refuse work, had no one to delegate work to and did not generate business for the firm; however, the respondent’s evidence challenged these assertions.

The issue of personal service, while generally relevant to the question of employment status, was not determinative, since personal service was equally expected of a partner.

With regard to mutuality of obligation, the tribunal considered there to be a degree of mutuality but viewed the extent of the claimant’s autonomy as being more akin to a partner than an employee: she had the ability to determine and create her own workload to a greater degree than she sought to represent in her evidence.

Regarding the financial benefits the claimant received, the tribunal took the view that she was entitled to certain specific benefits, such as costs associated with her car, not given to employees of the firm.

In all the circumstances, the tribunal considered that the fundamental question was whether the partnership agreement truly reflected the relationship between the parties. If it did, the tribunal considered that this would be inconsistent with the claimant’s claim that she had been an employee of the respondent.

Ultimately, at first instance, the employment judge determined that, while the evidence demonstrated that there were some features of the claimant’s work which suggested that she was in a similar position to that of the associates in the firm, there were sufficient differences in their positions to allow the distinction between salaried partner and associate to be made. Those differences were the claimant’s supervisory duties and her responsibility for the management of staff in her department, as well as the financial benefits granted to her but not to employees. In all the circumstances, the tribunal at first instance determined that the claimant’s relationship with the respondent was clearly that of a partner in a partnership, not that of an employee.

On appeal

The case came before Lady Wise in the Employment Appeal Tribunal in July this year. The claimant’s appeal was restricted to a contention that the tribunal had erred by adopting the wrong approach to consideration of the nature of the relationship between the claimant and the respondent. The claimant’s position was that, while the tribunal judgment was carefully prepared, it had not addressed the issue of whether the claimant was an employee in the way required by the authorities and so had drifted from the proper course that it had set itself.

Her counsel placed the tribunal’s findings into three categories, namely those which tended to negate a conclusion of partner status, those which tended to negate a finding of employee status, and finally those which tended to be neutral. He placed substantial emphasis on the tribunal determining that it “must first look” at the partnership agreement. There was no reference in the tribunal’s reasoning to the absence of any capital contribution being made by the claimant nor to the absence of any right to a distribution on dissolution of the partnership, both of which were, he suggested, material factors. Further, there was no analysis in the reasoning of the distinction between salaried partners and equity partners in the respondent firm.

In summary, the claimant’s counsel suggested to the EAT that the tribunal, in stating that it “must first look at the partnership agreement”, had effectively then determined, at least on a prima facie basis, on the agreement alone that the claimant was a partner. He stated that what that had amounted to was the setting up of a presumption against which the tribunal tested a number of factors, rather than applying the multiple test as to whether someone was an employee, as initially set out in Ready Mixed Concrete.

Lady Wise, referring to Williamson & Soden v Briars UKEAT/0611/10, stated that the tribunal in this case “must have had in mind that labels can be misleading, standing that it embarked upon an analysis of the various adminicles of evidence militating for and against employee status outside of the written agreement”. However, she accepted, as per Williamson & Soden, that it was for the tribunal to determine the order in which it considered that evidence and what weight to give to each of the factors identified.

The label given to the claimant in the partnership agreement could not be regarded as an end to the matter, as the term “salaried partner” had no status in law but, taken as a whole, she was satisfied that the tribunal was entitled to take the partnership agreement as a starting point against which it could test consistent and inconsistent factors. The tribunal’s use of the word “must” in the context of considering the partnership agreement first could be viewed simply as a statement of intent and did not set up a presumption of partner status. In all the circumstances, the tribunal looked at all the important issues and reached a permissible conclusion that the claimant’s status had been that of partner not employee, and the appeal was dismissed.

Worker status

While the question of whether a partner is a “worker” was not in issue in the present case, this issue was addressed, at least insofar as partners in a limited liability partnership (LLP) are concerned, by the Supreme Court in Clyde & Co LLP v Bates van Winkelhof [2014] UKSC 32. In that case the court found that an equity member of Clyde & Co LLP was clearly a worker and therefore eligible to bring a whistleblowing claim against the firm. Overturning the decision of the Court of Appeal, the court found that the LLP member fell within the definition of worker contained in the Employment Rights Act 1996 under s 230(3)(b). This was found to be the case even though it was accepted that the member would have been a partner under a general partnership had the firm not been incorporated as an LLP. It did, however, leave unanswered the question of whether partners in general partnerships can also be workers.

Partnership Act 1890

Although the law relating to partnerships is largely codified by the Partnership Act 1890, the relations and mutual rights and duties of partners can be defined by their partnership agreement. As such, while s 24 of the Act states that all partners are entitled to share equally in the capital and profits of the business, this can be varied by agreement, as was done in the present case.

Duty of good faith

What is often forgotten, particularly when focusing on whether an individual may have employment law rights, is the importance of the duty of good faith owed by all partners in a general partnership (as opposed to an LLP, wherein a duty of good faith does not automatically arise between members). In appropriate circumstances, this duty can be used to hold partnerships and individual partners accountable for their conduct against one another. Particularly in circumstances where a partner, salaried or otherwise, is unlikely to be able to demonstrate that they are an employee (or perhaps even a worker), a breach of the duty of good faith can provide a (usually outgoing) partner with a legal remedy.

If in any doubt about its validity or importance, the following quote may be of assistance: “If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between partners. The mutual confidence is the lifeblood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust each other that the business goes on” (Bacon VC in Helmore v Smith (1887) 45 Ch D 436).

Concluding remarks

This case is important for all solicitors in private practice, whether as true owners of a law firm or as junior partners. It highlights the relative insecurity of salaried and fixed share partners compared to the lower ranks of qualified staff, who attain the right not to be unfairly dismissed after two years’ employment.

The case also highlights the extent to which the legal profession remains rooted in the past. Without knowing the specifics of the claimant and the respondent firm, is this another example of the glass ceiling? With demand for in-house positions at an all-time high and examples aplenty of partners choosing demotion over risk, does the legal profession need to take a look at itself and consider whether the rewards are keeping up with the risks, and whether law firms should continue to trade as partnerships or should operate under an alternative business structure?