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Are partners in an LLP workers for pension auto enrolment purposes?

23 May 2014

Last week's judgment in Clyde & Co LLP v Bates van Winkelhof confirms that members in a limited liability partnership (LLP) are 'workers' under whistleblowing legislation.

As a result, LLP members have protection from retaliation by the business because they raised concerns over perceived wrongdoing, and they will benefit from other protections that apply to 'workers' including: working time rights, no unlawful deduction from wages, the right to be accompanied at any disciplinary hearing and the minimum wage.

One issue which may be of immediate concern to LLPs is whether this also means that the business will have to automatically enrol their members into a qualifying workplace pension plan. This may be an urgent issue for LLPs which have already passed the staging date for auto enrolment of their employees, but have not yet extended this to the members (in reliance on the Court of Appeal's earlier decision on this case which has now been overturned by the Supreme Court).

The automatic enrolment legislation also imposes obligations in respect of "workers", but the definition, although using very similar wording, is in the Pensions Act 2008, rather than the Employment Rights Act 1996 which was considered by the Supreme Court. There are some differences in the two statutory definitions.

Notably, the automatic enrolment legislation expressly excludes a director who is not an employee from being a worker, whereas no such distinction arises under the Employment Rights Act. A court considering the automatic enrolment provisions might therefore be able to reach a different conclusion from that reached by the Supreme Court in the Clyde &Co case. 

It can certainly be said that the public policy arguments are different. While there is clear benefit to having a wide interpretation of legislation for the protection of whistleblowers, the primary purpose of the auto enrolment legislation is to ensure retirement savings provision is made for lower paid and less financially aware members of the workforce. Well paid partners in hedge funds and professional advice firms were not at the forefront of the legislator's mind.

The Supreme Court considered whether it is possible for a partner or member of an LLP to be an employee (as opposed to a worker), but did not think it necessary to reach any conclusion on the point. In view of the recent change in practice by HMRC under which members of an LLP who do not meet certain conditions will fall to be treated for income tax and NIC purposes as employed regardless of the underlying legal position, we can only note that this is an evolving area in which further case law is likely.

Even if a member of an LLP did have to be treated as a worker for auto enrolment purposes, the obligation to enrol them into a pension scheme will only apply if they have qualifying earnings.  The definition refers to "salary, wages, commission, bonuses and overtime", and may not cover the income received by a partner in an LLP (depending on the terms of the membership agreement and how the payments work in practice).

Most of the commentary we have seen assumes that LLP members will now have to be automatically enrolled. Although we believe that there are good arguments against this, unless and until either the legislation is amended to clarify the extent of the auto enrolment duties or a test case is brought, there will be uncertainty on the issue. This could last some time; the Clyde & Co LLP decision finally resolved legal proceedings which began in February 2011. 

In practice therefore, LLPs may prefer to take a conservative approach, assume that the automatic enrolment obligations will apply and make adjustments to their partner profit share allocation arrangements to reflect that. 

If so, they will have to take care that they do not inadvertently fall foul of the prohibition on inducements to opt out.  There is also a possible risk that members who have registered for protection in relation to the lifetime allowance may fail to opt out in time and so lose the protection. We do not consider that warnings from the LLP to its members about the need to opt out swiftly to preserve protection would amount to an inducement to opt out.

We would also advise that great care is taken in communications with the LLP members. If it subsequently emerges that the auto enrolment obligations do not apply, the organisation will not want to find that it has inadvertently created a contractual right to continued pension provision, or a reasonable expectation which could prevent it from undoing the arrangements.

We can provide detailed advice on how an LLP should treat its members and deal with the Pensions Regulator if an auto enrolment staging date has already passed.

This article was written by Jane Wolstenholme. For more information, please contact Jane on +44 (0)20 7427 6430 or jane.wolstenholme@crsblaw.com