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Owner or Employee? LLP Legal Challenges

written by: •edited by: Ronda Bowen•updated: 5/11/2011

There are specific legal requirements that must be met in order to classify someone as an owner with a vested interest in a company. While employees have specific legal rights, owners generally have different rights.

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    Are Limited Liability Partners Also Employees?

    Whether a member of a limited liability partnership (LLP) can be an employee was decided by the case of Kovats vs. TFO Management in April of 2009. The case questioned the Employment Appeal Tribunal (EAT) if whether a member of a LLP could also claim all employment rights that would be normally due to an employee. This issue was raised when the executive’s membership was ended and he claimed that he was still an employee. Once this claim was made, he then put forth the argument that he was fired without the proper procedures being used.

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    Caselaw: Kovats vs. TFO Management

    Mr. Kovat (the appellant) appealed against the decision made by TFO Management (the defendant) regarding its decision about his employment status in the LLP. The appellant joined the defendant in 2004 as a member to manage the HR team in London and Bahrain. Two years later, he signed a modified partnership agreement that contained new profit sharing ratios. The profit was to be equally distributed among eleven members of the LLP. The agreement also contained a condition that membership of any partner could be terminated if majority of the members agreed.

    The following year in 2007, many issues were raised by the management regarding the performance of the appellant. The management collectively decided to send a retirement notice to Mr. Kovat. The appellant wrote back to the LLP regarding his compensation package in regards to his contract of employment to which the defendant wrote baPartnership ck saying that he was not an employee of the LLP. There are of course different compensation packages for partners and for employees.

    The appellant took the case to the EAT and claimed for unfair dismissal. He claimed that the LLP did not give him any written reasons for dismissing him from employment. The LLP argued that he was not an employee of the LLP and according to the terms of the agreement, he could be dismissed without cause.

    The EAT then carried out some tests in regard with employment status. These are different from partnership tests and analysed the result to determine if Mr. Kovats was really an employee. The EAT concluded that the appellant was not an employee of the LLP because

    • He had signed agreements that only members signed;
    • He received a share in profit and not a salary;
    • He never referred to himself as an employee until he retired from membership;
    • He had full freedom/autonomy in his work profile;
    • He accounted for his income tax by himself.

    In regards to the facts of the case, if they were different it is possible that a member can also be an employee. This is a very important and popular case, as it was a deciding case for employee and member status in LLPs. It is important to know if a member is also an employee there are various rights, responsibilities, and liabilities are only available for employees and vice-versa.

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    The Limited Liability Partnership Act provides that a member of a limited liability partnership will not be regarded as an employee unless he would also regarded as an employee by a general partnership.

    The deciding party would first have to decide if the member of the LLP would have been a partner in the partnership and then apply common employment status tests to the case. If the case concludes that the person is not a partner, it does not necessarily mean that the person is an employee. The next step is to apply the common law employment test.

    The factors that would be normally considered would be:

    • The individual’s role in the management in regards to voting at the meeting, decision-making, etc.;
    • The individual’s profit or loss sharing status; (e.g., in most cases a partner who is given a salary would be an employee);
    • The individual’s capital contribution to the LLP;
    • The individual’s tax treatment of their remuneration.

    When forming a business relationship, it is critical that the overall business structure be reviewed to determine if a limited liability partnership is the proper form of business. Understanding the drawbacks and the legal issues can help prevent problems from developing in the future.

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    1. Nolo Law For All - Pakroo, JD, Peri; Limited Partnerships and Limited Liability Partnerships
    2. United Kingdom Employment Appeal Tribunal Kovats v TFO Management LLP & Anor

    Image Credit

    Limited Liability Partnership via