When is a partner deemed to be an employee?

The Court of Appeal in Tiffin v Lester Aldridge LLP, in a decision published on 1 February 2012, found that a fixed share partner was not an employee.  This is positive news for employers who face a level of uncertainty when considering the status of a salaried or fixed share partner – i.e. in determining whether the partnership is operating PAYE correctly and so that the partners make correct self-assessment returns.

The Court of Appeal upheld the Employment Tribunal’s decision that a fixed share partner of a law firm, Mr Tiffin, was a partner of that firm and not an employee, despite the fact that he was not involved in the management of the firm and his share of the profits was small.  Mr Tiffin, was not therefore able to claim unfair dismissal

Whether or not a fixed share partner is treated as a bona fide partner or is deemed to be an employee will depend on the facts.   The key factors taken into account by the tribunal in Mr Tiffin’s case were that:

  • He was able to vote in relation to certain matters.
  • He was entitled to a share of the profits.
  • He was allowed to sign cheques on behalf of the company.
  • He was required to make a capital contribution.  In contrast salaried partners did not have to do this.
  • He had some discretion as to where and when he worked.
  • He did not receive the benefits he was once entitled to as an employee.
  • He was happy to be taxed as a ‘partner’ rather than employee.

It is generally accepted that where equity partners carry on the partnership business with a view to profit, they should not be treated as employees.  In contrast, salaried partners of a general partnership who are remunerated with a fixed or variable salary may be deemed to be employees.  Firms should be aware that it is not sufficient that an individual is called “a fixed share partner” or “self-employed” and they must look beyond the label as to the reality of the situation. Where an individual is deemed to be an employee, both the firm and the individual involved may need to review their tax position.

For further information of whether an individual may be deemed to be an employee and the resultant tax implications please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.