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Recent judgment confirms that members in a limited liability partnership (LLP) are 'workers' under whistleblowing legislation

14 July 2014

The recent judgment in Clyde & Co LLP v Bates van Winkelhof has confirmed that members in a limited liability partnership (LLP) are 'workers' under whistle blowing legislation.

Not obvious immediately from the initial press exposure is the question as to whether partners in an LLP are likely also to be "workers" for the purposes of the auto enrolment legislation.

If partners are "workers" then this would raise the delicate question as to whether the LLP is then under an obligation to automatically enrol all partners into an auto enrolment scheme from the LLPs "staging date". This question could itself be particularly pressing if the LLP has already passed its staging date for of its non-partners.

The automatic enrolment legislation does use a defined term of a "worker". While this definition is not drafted exactly like that contained within the Employment Rights Act, which was the legislation being contemplated in the Clyde case, it would appear that the safest conclusion to reach from the case at present is that LLPs should operate on the basis that its partners are "workers" for the purposes of auto enrolment legislation.

This conclusion could be challenged by a future court decision looking specifically at auto enrolment. However, there is no immediate prospect of such a case arising.

So if partners in an LLP are workers, what type of "worker" are they? This will determine the extent of the employer's pension obligations. The auto enrolment legislation has three categories of "worker": eligible jobholder, non-eligible jobholder and entitled worker.

If the worker aged over 22 and under State Pension Age is receiving over £10,000 in earnings then he must be automatically enrolled and receive the current 1% employer contribution on their "qualifying earnings".

If he is receiving earnings of over £5,772 but below £10,000, and is in the same age bracket, then he will be a non-eligible jobholder, and have a right to elect to join the auto enrolment scheme, but not be required to join.

If his earnings are below £5,777 then he is an entitled worker and there are still communication obligations on the employer.

The legislation defines "qualifying earnings" as the "worker’s" gross earnings payable in a 12 month period between £5,772 and £41,865. "Earnings" are made up of: salary, wages, commission, bonuses and overtime; statutory sick pay; statutory maternity pay; ordinary statutory paternity pay or additional statutory paternity pay/statutory adoption pay and other pay prescribed.

So, if a partner does not have earnings above £5,772 he is only an entitled worker and there is no obligation to auto enrol him.

All LLPs will therefore need to review their governing documentation to establish if their partners' income falls within this "earnings" definition. In many cases this will mean that full equity partners, who are paid purely out of profit, with no bonuses etc will have no earnings.

It also means that salaried partners income is very likely to fall within the definition of "earnings", so would trigger auto enrolment obligations. Less clear is the treatment of any partner who have a mix of fixed/prior share drawings and equity points. 

Whether the fixed/prior share is "earnings" will be a matter for each employer to assess. The Pensions Regulator has stated that employers should use dictionary definitions when assessing what salary and wages mean in their particular case.

If you are taking a cautious view, any fixed-share or guaranteed portion of a worker’s income could be seen as potentially falling within the "qualifying earnings" definition.

Employers should consider whether the wording in their partnership agreements contractually obliges them to pay a set amount and even it not, whether such payments could be classified as salary or wages. 

Even if an LLP establishes that all its partners fall within the entitled worker category, the LLP will still need to comply with its obligation to notify the partners of this categorisation in the same way as they would any other "worker".

If some or all of the partners have "qualifying earnings" then they must be auto enrolled from the employer’s staging date. If the staging date has already passed, backdated contributions would be required to take effect from the first date on or after the staging date when the worker first had "qualifying earnings" from his current LLP.

The Pensions Regulator has indicated that if a staging date has not passed then partners should be listed on the LLP's auto enrolment registration form. If that form was already submitted to the Pensions Regulator because the LLP’s staging date has passed, the Regulator has indicated that there is no obligation to update the registration at this time.

Where a staging date has already passed, LLPs will also need to think about whether they need to notify the Pensions Regulator of their failure to meet their auto enrolment obligations from the staging date. In reality, the need to notify will depend on the process being adopted to remedy the initial failure to comply.

Finally, where an LLP does decide that it needs to auto enrol some or all of its partners, it should make clear that any payments are being made in order to fulfil a legal obligation. Any such wording should avoid the creation of a contractual commitment should the law subsequently change.

This article was written by Michael Jones.

For more information please contact Michael on +44 (0)20 7203 8917 or michael.jones@crsblaw.com