A High Court ruling in Clyde & Co v Van Winkelhof, reported on 22 March, has highlighted how, even though a member of an LLP or partner may not be an employee, they can still avail themselves of rights traditionally regarded as employment rights.

Most LLP agreements and partnership deeds provide for arbitration.

However, in certain circumstances the arbitration clause will be unenforceable, giving dissatisfied former partners some considerable leverage.

It is often assumed that partners are not employees and as a consequence do not have employment rights.

That assumption is incorrect.

In traditional partnerships, the typical structure is to have full equity partners and sometimes salaried partners.

Salaried partners are often, in reality, employees who are given the title ‘partner’ to denote seniority or to give them credibility with clients.

Unfortunately this means that they often take all of the downside of partnership with none of the up.

They are exposed to the debts of the partnership in the same way as full equity partners are, without the benefit that comes from an entitlement to a share in the profits or a say in the running of the business.

In a well organised partnership, the status of a salaried partner will be evident from the written agreement with the partner.

However, it is not uncommon in smaller practices for there to be no written agreement, or for the terms of the agreement to be contradictory.

Since 2001 there has been an alternative structure for partners.

Under the Limited Liability Partnerships Act, two or more persons wishing to carry on business together can do so as an LLP.

Typically in an LLP structure there are those members who are ‘variable’ share members, the equivalent of an equity partner, and those who are ‘fixed share’.

Fixed shared members are self-employed and taxed and NI-ed on a self employed basis.

They contribute to the capital of the LLP (usually a nominal amount) and sign up to the members’ agreement.

However in reality fixed share partners generally have very little (if any) say in how the LLP is run or managed.

They get the tax advantages of self employment, but to a casual observer may look more like employees.

Generally their drawings are fixed and the opportunity for further profit share limited.

Often no one gives much thought to the status of partner/employee until the relationship starts to go wrong.

It is not untypical for fixed share partners to happily treat themselves as self employed, right up to the point of their expulsion, when it then becomes clear that they would be better placed if they could identify themselves as an employee rather than as self-employed.

Tiffin v Aldridge LLP [UKEAT/0255/10] is a case in point.

Mr Tiffin was a fixed share partner in an LLP.

He was required to contribute a small amount of capital; he was paid drawings on the basis of annual fixed share of profits and was entitled to a small additional share of the profits on a point basis.

He had very little say in the management of the LLP and generally had to work to deadlines of partners and clients who gave him work.

The EAT agreed with the employment tribunal that Mr Tiffin was a partner, not an employee.

It found that there was no minimum threshold that has to be reached in relation to a person's rights to (a) profits or (b) involvement in management before he can be regarded as a partner.

Other factors taken into account by the tribunal in deciding that Mr Tiffin was not an employee were that he enjoyed some voting rights, he had entered into a membership agreement with other partners, he was happy to be taxed as a non-employee and he did not receive typical employee benefits given to other employees of the LLP.

Even if a partner is a genuine partner, this does not mean to say they cannot avail themselves of certain rights which are traditionally viewed as employment rights.

Whilst partners do not have (for example) unfair dismissal rights, they do have the right not to be discriminated against on the grounds of their sex, race, disability etc. (see Equality Act 2010).

This can be problematic for partnerships and LLPs when considering issues of expulsion.

In the eyes of a partnership, a partner may be underperforming, but what if the partner is suffering from depression and that is impacting on their work, or has recently been away from their practice due to maternity leave?

Suddenly, sticking to the terms of the deed or membership agreement looks like a considerably riskier proposal.

Any well-drafted partnership or LLP agreement will deal with what happens in the event of a dispute between the partners.

Typically the partnership or LLP agreement will contain provision for mediation and arbitration.

Unfortunately, such clauses are of little use where the provisions potentially impinge on a partner’s or member’s right to bring a discrimination claim.

Any clause that purports to exclude or limit a partner’s right to bring a discrimination claim will be unenforceable.

In Clyde & Co LLP v Van Winkelhof [2001] EWHC 668 (QB), Clyde & Co unsuccessfully applied for a mandatory injunction against its former member Ms Van Winkelhof, requiring her to apply for, or to consent to, a stay of her employment tribunal claims in relation to sex/pregnancy discrimination and whistle blowing.

Clyde & Co sought to rely upon the dispute resolution procedure set out in the members’ agreement which required members to refer their disputes to the management board, and thereafter to mediation and then arbitration.

In rejecting the application for the injunction, the court observed that the Equality Act 2010 and the Employment Rights Act 1996 provide that an agreement is unenforceable or void if it seeks to preclude or limit a claim before an Employment Tribunal under those Acts.

Therefore the application for an injunction failed.

The case also suggests that even if the parties did apply the dispute resolution under the members’ agreement, the arbitration decision would be unenforceable anyway, because arbitration is a final resolution of a dispute, and that would have had the effect of then preventing Ms Winkelhof continuing with an employment tribunal claim.

It is understood that Clyde & Co are appealing the decision.

The case highlights the difficulties that arise where employment-type rights and partnership law overlap.

Regardless of the merits of any dispute, there is undoubtedly a tactical advantage in forcing a partnership into a potentially open hearing of a dispute.

The last thing a partnership or an LLP wants is to be embarrassed by a public slanging match with one of its former partners.

Such disputes tend to be highly personal, frequently reported and very messy.

The other clear advantage from the partner’s perspective is that typically partners tend to be high earning individuals.

There is no limit on the amount of damages a tribunal can award in a discrimination claim.

Add to this the fact that, in a traditional partnership, the partners are on the hook to pay any award if the partnership cannot make good on the liability and the stakes suddenly look very high indeed.

The partnership could be looking at paying the equivalent of several years’ drawings if a claim is successful, without of course having the advantage of the income from the departed partner’s practice.

Sarah Rushton is an employment partner at Payne Hicks Beach