A recent case has considered whether a member of an LLP can also be an employee of the LLP. The EAT has confirmed that it is possible for a member of an LLP to be an employee.

Facts of the case

The case involved the Chief Investment Officer (CIO) of an LLP in the asset management sector. He was asked to leave on the grounds of underperformance.

He had been admitted as a member of the LLP a few years before. He was paid an £80,000 fixed share of profits, was entitled to a discretionary share in the LLP’s additional profits and was given the right to acquire additional partnership shares in the LLP. After being told that he was required to leave, the CIO claimed he had been unfairly dismissed and brought a claim against the LLP. The Employment Tribunal ruled that it did not have jurisdiction to deal with the case because the claimant was self-employed and therefore was precluded from bringing a claim for unfair dismissal, an employment law right.

The EAT decision

The appeal was dismissed by the Employment Appeal Tribunal (EAT) because there was evidence which showed that the CIO was not an employee. Importantly, however, the EAT did confirm that it is possible for a member of an LLP to be an employee. In the case at hand, apart from not raising any concerns about his status at any time prior to his departure, the CIO could not be treated as an employee because he:

• had agreed to be bound by the LLP’s members’ agreement;
• was paid gross and he accounted for his own tax;
• was entitled to a discretionary distribution of surplus profit; and
• was entitled to share in the proceeds of a sale of the LLP or in its winding up.

What lessons can be learnt from this decision?

If you are thinking about admitting new members to your LLP, you should make it clear to your prospective members, particularly those who are existing employees, that they will be losing their employment status and associated rights. In addition, it is important that such members are given sufficient “self-employed” attributes in order to reduce the risk that a court in future years finds that the member is in actual fact an employee and seeks to apply employment legislation, to the detriment of the LLP.

Although HMRC currently treat all members of an LLP as self-employed from a tax perspective, it is possible they may adopt a similar test to determine the true status of an LLP member. Given that often the main reasons businesses choose an LLP as the vehicle through which to operate are its tax transparency and the scope to make substantial savings on employers’ national insurance contributions, it is important that a members’ agreement identifies the  “self-employed” attributes of the members accurately.