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LLP partners have whistle blowing protection

21 May 2012

It has long been thought that members of LLPs do not have regular employment rights (unfair dismissal, redundancy, sick pay, wages, holiday, maternity, paternity, transfer protection etc under the Employment Rights Act) apart from discrimination protection extended to LLP partners under the Equality Act.

The Employment Appeal Tribunal has now decided that LLP members can be workers who, like self-employed consultants, have workplace protection from harm should they blow a whistle on the LLP.

Van Winkelhof v Clyde & Co LLP

The judge in the case, saying that he was not afraid to make new law, was satisfied that an equity partner in the law firm was a 'worker' within the definition of the Employment Rights Act. He considered that it was 'plain and obvious' that the partners, including equity partners, were working for the firm and not working only for themselves or working as if the firm was somehow their client. This is especially the case where, in this case, the contract required full commitment to the LLP and the partner had fixed profit share.

This was a claim that, as a result of making a protected disclosure (ie blowing a whistle) about bribery allegations in Tanzania, Van Winkelhof alleged that she was disciplined and expelled as a member of the partnership. It is also a sex discrimination claim that she was removed as a result of announcing her pregnancy. Van Winkelhof has also succeed in persuading the Tribunal that it had jurisdiction to hear the case when her work was in an overseas office and when the partnership agreement had a clause requiring a confidential arbitration of all partnership disputes.

There are unanswered questions including:

  • Will partners get termination protection?
  • Will protection extend to, say, full equity partners, as well as fixed share equity?
  • What other worker protection is out there and how far will compensation for detriment extend?

The test for workers (unlike employees who have clear termination protection) is compensation for any detriment where whistle blowing has materially influenced (meaning less than trivial influence) the LLP's treatment of the partner.

The question of whether or not Ms Winkelhof has suffered detriment and if that includes compensation for being expelled from the LLP has now been sent back to the Tribunal for trial along with her discrimination claim. The firm is appealing the decision about whether or not the Tribunal has jurisdiction to hear the claim to the Court of Appeal.

Significance for LLPs

Whistle blowing protection now clearly extends to many LLP partners. As a result, there is likely to be an increase in such claims so LLP policies, decision making and management techniques need to adjust to this risk. 

Whistle blowing policies require increasing rigour and application these days especially in regulated business and those with cross border business. Policies now need to more clearly include the partners.

There are a colourful variety of accusations and claims flying around LLPs these days. They often arise from the classic scenarios where the views of the disaffected partner, group or JV partner differ from the LLP or from other partners on: removal, demotion, strategic change, restructuring, refinancing, profit share distribution or structuring, etc. There is now a new kid on the block to add to the armoury of such partners.

This could have more significance for some LLPs than might at first be obvious for two reasons. First, whistles can be blown about partner treatment by the LLP based on partner beliefs in the likely breach by the LLP of obligations to them as an individual partner. Second, it is well known that the nature of obligations of LLPs to partners (as well as partner to partner) is uncharted and hotly debated legal territory. 

Whistle blowing protection for employees includes uncapped lost earnings compensation for automatic unfair dismissal if the principal reason was the whistle blowing. There has been a tendency to include whistle blowing in many Tribunal claims where otherwise there might be capped compensation for regular unfair dismissal. This has led many to predict that a new appeal decision or legislation will close off such claims.

Indeed Vince Cable announced in November 2011 that as part of the government's reforms they would "close a whistle blowing case law loophole which allows employees to blow the whistle about their own personal work contract". But this did not appear in the Queen's speech in May and there is a desire in some quarters to see more encouragement and protection for those who come forward to expose their organizations.

For example, the FSA's acting director of enforcement and financial crime indicated, in February 2012, that the Financial Conduct Authority, which is to replace the FSA, will pursue those who fail to whistle blow by not reporting regulatory wrongdoing. The SFO, OFT and HMRC are all considering something akin to the US Dodd-Frank Reform that incentivises whistleblowers with both payment and immunity.

Managing difficult decisions

So where does this leave LLPs where partners are making allegations that LLP decisions are breaching obligations to them? Currently a classic route for disgruntled partners is repudiation. This can involve a hunt for an obligation (eg in the agreement or implied)  which is both fundamental to the relationship and breached to the point that the LLP agreement falls away. This either releases a departing  partner from obligations or recasts the relationship as equal partners under the LLP default Regulations.

Now, partners who can't get to a negotiating position under the LLP agreement, who have suffered no discrimination and who have not got enough for repudiation may well go down the whistle blowing line of argument or add it to the mix.

It might be quite possible for partners to make a stand on obligations to them that they believe have been breached despite the shifting sands over what those obligations are. The reality is that, given the high level of discretion partnerships require, almost all the disputes are being settled, arbitrated or mediated behind the scenes. In the absence of many legal decisions it seems likely that leading commentators in these areas will be referenced as authority for the existence of legal obligations that have been breached.

Many commentators consider that good faith obligations exist impliedly within LLPs. In the recent case of Barthelemy v F+C the court ruled that, although they might arise and are often contracted for, they do not arise as a matter of course. The same case confirmed that fiduciary and agency obligations in respect of decision making do exist within LLPs. That case pointed towards duties of the LLP and of decision making management teams or corporate members to make decisions by striking a fair balance between competing interests within the business. 

Good faith concepts can also be approached from the implied relationships of trust and confidence (akin to employment terms) especially for junior partners. It is telling that this is the first case in over 10 years to rule on LLP obligations.

Considering the wide range of possible obligations that might exist, it isn't that hard to see that partners might argue passionately that decisions that might, say, demote, underpay, sideline or remove them are reneging on what they felt was an understanding that they had bought into.

In this way good faith breaches or decision making fiduciary breaches might well be one of the sources of whistle blowing claims for those partners who feel that decisions did not balance their interests sufficiently.  

These allegations may not be so far fetched. Compare this to decision making on bankers' bonuses where signposts have been provided for high bonus if certain targets are met only to end in disappointment when, despite meeting targets, banks hide behind discretions not to pay. The recent high profile Commerzbank case decided that bonus pool promises were legal obligations not just non-binding pledges or indications. This is a reminder that binding commitments are often made by management pronouncements and discretions are rarely free from liability.

Arguably the decision making in LLPs requires a higher level of integrity than in limited companies as, by their very nature, the controls over decision making within companies don't exist for LLPs. Companies have a clear separation between shareholders and directors, ownership and control, that in the LLP model is melded in the form of partners with ownership. Unlike companies, unfair prejudice protection for minor owners can and often are written out of LLP agreements to be replaced by bespoke decision making and voting arrangements.

LLPs should adjust their policies, decision making process and management style to the emerging shape of partner rights.

For more information please contact William Granger, Partner

T: +44 (0)20 7427 1073