Do Partners Sometimes Retain Employment Rights?

The recent Employment Appeal Tribunal case of Williamson & Soden v Briars delivers a useful reminder that employers need to consider carefully their intentions when creating quasi-employment relationships such as profit share partnerships. The situation occurs, often in professional partnerships but also other types of businesses, when equity partners want to reward senior employees with a promotion and offer incentives to stay with the business.

In this case, Mr Briars was first promoted to salaried partner, during which time it was accepted that he remained an employee. He later agreed to be remunerated by a fixed, guaranteed sum which was expressed as being a ‘profit share' rather than a salary. He was also paid a small percentage of net profits. In such situations there can be a risk of litigation if the relationship breaks down, if there has been no unequivocal understanding about whether the individual remains an employee or not.

In this case, Mr Briars remained subject to control by the equity partners. He was given targets which he was expected to meet and had no capital stake in the business, having not injected any cash into it. He therefore had no expectation of losses if the business was to fail, and was not taking the risks normally associated with self employment. The EAT agreed with the Tribunal that he remained an employee until the time of his dismissal, which was on grounds of redundancy.

This case can be distinguished from others on the same point, and it is important to note that a Fixed Profit Partner will not always remain an employee. It is not the title which matters, but the amount of control and real stake in the business attributed to the Fixed Profit Partner which is important. Had Mr Briars contributed to capital and therefore held a stake in the equity, and if he had been given more extensive voting rights over the way in which the business was run, the decision may well have been that he was no longer an ‘employee'.

The issue becomes very important if the relationship breaks down, for example if the individual's performance deteriorates. At the point of offering partnership in any form, the equity partners should consider carefully whether they want the individual to remain an employee, and the expressions used in the written agreement should be tailored accordingly. Generally, the greater the amount of control over the individual which is exercised by the equity partners, the more likely it is that he remains an employee. Conversely, an actual stake in the equity of the business, so that the individual is taking a risk related to the performance of the business, will indicate true partnership status and not employment. As with most matters, these are questions to be addressed when the partnership status is offered, rather than the point at which the parties want to go their separate ways.

For more information on the above or for advice on any other employment issue please contact our employment department on 020 7354 3000 or e-mail employment@colmancoyle.com

Author Profile: Linda Quinn 
Date published: 20th July 2011

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