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Tiffin v Lester Aldridge LLP: Defining the status of your members

If your organisation is a limited liability partnership (LLP), or you’re thinking of converting to LLP status, you need to consider a recent Court of Appeal decision on employment status. The case has held that where carefully designed arrangements exist for members of the firm, underpinned by a robust members’ agreement, an attempt by a member to claim employment rights will fail.  This has important tax as well as legal implications.

In Tiffin v Lester Aldridge LLP, the Court of Appeal found that Mr Tiffin, a former fixed share partner of law firm Lester Aldridge LLP, was a member despite his attempts to establish himself as an employee. Mr Tiffin wanted to be viewed as an employee so he could bring an unfair dismissal claim.

Mr Tiffin’s argument was that he was a member in name only and that the arrangements put into place by the LLP (the members’ agreement, his remuneration, management rights etc.) didn’t reflect the reality of the situation – his claim was that he remained an employee. This argument was rejected. The decision has perhaps not shifted the legal position but it has given greater clarity as to which tests will be applied when assessing the status of members, particularly those who are more junior or on a fixed share.

The facts in this case pointed strongly to membership rather than employment status. But the case doesn’t mean that the same decision will be reached in all circumstances. There’s still a need for careful planning of the commercial and written arrangements, plus a real focus on both the legal and tax issues involved when businesses move to an LLP model. 

The main factors that support member status

There isn’t one particular factor which determines membership status.  But it’s important to consider the entire package of member rights and obligations, particularly if your organisation is considering a move to LLP status. These are some of the factors you need to think about:

• What capital contribution has been made?
• Is the partner entitled to anything on a winding up of the business?
• What voting and management rights exist?
• What are the income and benefit rights and are they distinct from those offered to employed staff?

Avoiding the pitfalls

You’re at a greater risk of challenge from individuals or HM Revenue & Customs (HMRC) where these factors indicate that no real differences exist between members and employees. This can happen when a commercial decision has been taken to replicate all existing employment rights in the LLP context – a deciding factor in the Court’s decision in Tiffin v Lester Aldridge LLP was the presence of benefits which were different to those awarded to employees.

Helping you assess the risks

You may find yourself being challenged around the status of members in your organisation. If so, you’ll need to be aware of the risks your business is exposed to. Running a healthcheck on your level of risk will allow you to get far greater clarity around the potential issues and is an area where we can help. We can work with you to assess the potential risks and overcome the related challenges.

If you’d like to talk to us about the impact of the case on your organisation, please contact Nick Willis on o20 7212 1659, or Craig Stevenson on 020 7212 1612.