Employment Law for Partners and Professionals

LLPs are used in a variety of sectors but are most commonly used by professional service firms and certain financial and investment businesses.

LLPs are best considered as ‘corporatised partnerships’. Critically they limit the financial liability of a member of the LLP, usually up to the amount of that member’s capital contribution.

Key considerations for an incoming member include:

• Rights of members – Often there are different categories or ‘classes’ of member, with each class having different entitlements to vote, to a share of profits and to capital if the LLP is wound up
• Liabilities and responsibilities of members – What are the financial liabilities of members, both during and after their membership comes to an end?  For instance, is a capital contribution to be made by the incoming member? What other obligations does the member have? Will they be a ‘designated member’ having day to day executive responsibility or authority in respect of the LLP?
• Conflicts of interest – To what extent can a member hold external interests in other entities, including other LLPs?  What are a member’s obligations to avoid or report potential conflicts of interest with those of the LLP?
• The assets of the LLP – Will the LLP have the means to meet its liabilities to third parties and to its members on an ongoing basis?  Does the LLP itself run and control the core business which is to receive income and profit from the activities the new member will be performing?
• Duty of good faith – While most LLPs will provide for an express duty of good faith from the new member to the LLP itself, it is less common for this to be provided for between members. One consideration is whether a new member feels confident that they know the existing members, their mindset and approach well enough to be comfortable being in business with them.  As a member there will be fewer employment-type protections (see below – insert link to next question), so this may be an important consideration should the relationships turn sour.

Most members of LLPs are treated as self-employed for tax purposes, and unless there’s a specific provision to the contrary in their agreement with the LLP members will also be treated as not being employees in the context of employment law and associated protected rights.

The main employment rights that will not be enjoyed by members of an LLP will be rights in respect of:

• Unfair dismissal
• Redundancy pay
• Notice pay
• Certain ‘family friendly’ rights, including statutory maternity pay and leave, adoption leave and parental leave.  However, in respect of adoption and parental leave, many (but not all) LLPs will seek to provide broadly equivalent rights, though maternity leave is often slightly shorter at 6-9 months compared to a full year enjoyed by most employees.

However, many rights enjoyed by employees may also be available to members of an LLP, including rights not to be:

• Discriminated against on the basis of a protected characteristic (sex, race, disability, age etc.) falling within the Equality Act 2010
• Subjected to an unlawful deduction from pay. This is an area often overlooked by LLPs when seeking to vary the profit share of members
• Treated negatively in the context of protected disclosures (whistleblowing)

Generally, most LLPs draw a distinction between ‘expulsion’ (that is when a member is required to leave against their will, usually due to some serious incident) and ‘retirement’. In the LLP context retirement covers both ending one’s career altogether in the traditional sense, and a more ordinary resignation or withdrawal from the LLP.

Subject to the terms of any retirement, which will in part be influenced by what is provided for in the LLP agreement, an individual can then take up another role elsewhere and continue their career.

However, such retiring members should make sure that there are clear provisions in the LLP Agreement which deal with matters such as:

• Ongoing liability to the LLP
• Repayment of any current account balance due to the member, including profit share for trading up to the date of retirement
• Repayment of monies in any capital account held in the LLP (particularly where this has been borrowed from a third party)
• Repayment of any tax reserve

This is an area where you should exercise considerable caution.

Historically employers have sought to rely on post-termination restrictions to prevent an employee from competing (or not pursuing customers or staff) for a period after the employment has ended. In recent years however there has been much more of a focus on taking action where employees have misappropriated or misused confidential information as they prepare to leave a firm or after they have left.

The courts have shown that they are much more willing to grant injunctions where this kind of misuse of confidential information has occurred, compared to seeking to enforce an obligation not to work for a competitor. The legal view is that such information is similar to a property right, and therefore one which the courts will protect.

All employees owe a duty of confidence to their current employer.  The more senior the employee, the more extensive the obligation.

Many contracts of employment place a specific obligation on an employee to report an offer, and in some cases even an approach, from a prospective employer. Talking to a prospective employer (or even a recruitment consultant) about matters which are confidential to the current employer is likely to be a breach of such obligations. Sharing pricing or other sensitive information about customers or clients or other commercial relationships will similarly be off limits.

Even after an employee has moved businesses, care must be taken in terms of what is shared with a new employer.