A recent case has highlighted how tribunals and courts may look at the substance and not just the form of commercial arrangements.  Here the court decided that a former partner, although given employee status in a shareholders’ agreement in relation to the incorporated partnership, was not actually an employee.  The arrangement was held to be a partnership even though the agreement stated expressly that it wasn’t one.

The facts related to the common scenario of a professional services firm, in this case an accountancy practice, that had previously carried on business as a traditional partnership, choosing to adopt a corporate structure. The business was then operated through a group of limited companies and the former partners of the accountancy firm became shareholders and directors. The shareholders’ agreement governing the relationship between the interested parties contained standard provisions providing that the former partners were employees, to be paid a salary (which was taxed through the PAYE system); requiring them to devote all their time to the business; giving them a fixed holiday entitlement; and expressly stating that the arrangements would not constitute a partnership.

One of the shareholders, Mr Train, resigned as a director and employee and subsequently claimed that he had been unfairly constructively dismissed and subjected to unlawful age discrimination. He brought a claim in the employment tribunal and the EAT upheld the tribunal’s decision that, on the facts, Mr Train was a partner, not an employee. So Mr Train was not entitled to claim unfair constructive dismissal, or any other employee right.

The EAT decided that the shareholders’ agreement was a profit sharing agreement, which in reality constituted a partnership under the Partnership Act 1890.  It appears that the main reasons for this decision were that Mr Train’s remuneration was variable depending on the actual profits of the business and that he had no separate employment contract.

Not only is this case of concern to incorporated partnerships, but it is also of particular concern to former partners of those partnerships, which have incorporated into private companies and are treating former partners as employees.  An individual who thinks that he has employee rights may find that he is unable to enforce them.  In addition there may be a danger that he has obligations and potential liabilities as a partner, such as unlimited liability, that he didn’t know he had. 

This and other recent cases have shown that the law is not completely certain in this area.  

You can read the transcript of the EAT judgment here: Train v DTE Business Advisory Services Ltd and others [Appeal No. UKEAT/0201/08/LA, Employment Appeal Tribunal, 6 January 2009]

For more information on these issues please contact

Fergus Payne

or your usual Lewis Silkin contact