The Nature of Partnership

By some weird synchronicity, the Supreme Courts in both the United Kingdom and Canada in the last 24 hours have considered the nature of partnerships and the extent to which employment law protections also applied to partners.

Yesterday’s decision in Clyde & Co LLP and another (Respondents) v Bates van Winklehof (Appellant) [2014] UKSC 32 held that a junior partner (unhelpfully called an Equity Partner) in a London firm was protected by the whistle-blowing protections of the Employment Rights Act 1996. She had been involved in a rather dubious file in Tanzania and reported to the firm’s money laundering reporting officers that the managing partner of the Tanzanian law firm, with whom the London firm was doing business, had admitted paying bribes to secure work and to secure the outcome of cases. She claimed that these were “protected disclosures” within the meaning of section 43A of the 1996 Employment Rights Act.

Baroness Hale held that she was through a close reading of the applicable statutes. Because the law firm was a Limited Liability Partnership, the old law that held that one couldn’t be simultaneously a boss and an employee didn’t apply. LLPs are odd constructs and the UK decision discusses their nature at length.

The next day Justice Rosalie Abella held that an equity partner of a Canadian law firm, facing compulsory retirement at 65, could not invoke the protections of the Human Rights Code, since he lacked the elements of subordination in employment that characterized an employee, and had significant rights within the partnership and control over his employment. See McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39

Her judgment was likely drafted, coded and translated long before there was any hint that the Bates van Winklehof decision was coming down. But it’s fascinating that her analysis stems from the classic partnership law, that the UK Supreme Court side-stepped. And that she didn’t mention the nature of an LLP, despite the fact that major accounting firms (all of whom were LLPs) intervened.

I could argue that both decisions were correct since Bates van Winklehof was admittedly junior and her income was fixed. She didn’t share in the traditional risks and rewards of partnership. And that Lord Carnwath got it right – we’ll be back to the law of LLPs.

Here is the SCC’s headnote:

The Code is quasi-constitutional legislation that attracts a generous interpretation to permit the achievement of its broad public purposes. Those purposes include the prevention of arbitrary disadvantage or exclusion based on enumerated grounds, so that individuals deemed to be vulnerable by virtue of a group characteristic can be protected from discrimination. The Code achieves those purposes by prohibiting discrimination in specific contexts. One of these contexts is employment.

Deciding who is in an “employment relationship” for purposes of the Code means examining how two synergetic aspects function in an employment relationship: control exercised by an employer over working conditions and remuneration, and corresponding dependency on the part of a worker. The test is who is responsible for determining working conditions and financial benefits and to what extent does a worker have an influential say in those determinations? The more the work life of individuals is controlled, the greater their dependency and, consequently, their economic, social and psychological vulnerability in the workplace.

Control and dependency are a function not only of whether the worker receives immediate direction from, or is affected by the decisions of others, but also whether he or she has the ability to influence decisions that critically affect his or her working life. The answers to these questions represent the compass for determining the true nature of the relationship. Ultimately, the key is the degree of control and the extent to which the worker is subject and subordinate to someone else’s decision-making over working conditions and remuneration.

Applying the control/dependency test to this case, in addition to the right to participate in the management of the partnership, as an equity partner M benefited from other control mechanisms, including the right to vote for ― and stand for election to ― the firm’s Board; the duty that the other partners owed to him to render accounts; the right not to be subject to discipline or dismissal; the right, on leaving the firm, to his share of the firm’s capital account; and the protection that he could only be expelled from the partnership by a special resolution passed by a meeting of all equity partners and a regional resolution in his region.

As an equity partner, and based on his ownership, sharing of profits and losses, and the right to participate in management, M was part of the group that controlled the partnership, not a person vulnerable to its control, and, for over 30 years, benefited financially from the retirement of other partners. In no material way was M structurally or substantively ever in a subordinate relationship with the other equity partners. It is true that the law firm had certain administrative rules to which M was subject, but they did not transform the substance of the relationship into one of subordination or dependency. This is not to say that a partner in a firm can never be an employee under the Code, but in the absence of any genuine control of M in the significant decisions affecting the workplace, there was no employment relationship between him and the partnership under the provisions of the Code.

The Tribunal therefore had no jurisdiction over M’s relationship with the partnership

And the UK headnote:

The Court finds that there is no need to give such a strained construction to section 4(4). It is saying that, whatever the position would be if the LLP members were partners in a traditional partnership, then that position is the same in an LLP. The Court holds that that is how section 4(4) is to be construed.

 The phrase “employed by” in section 4(4) covers a person employed under a contract of service. The Court holds, however, that it does not also cover those who “undertake to do or perform personally any work or services for another party to the contract…”. Section 4(4) of the 2000 Act does not mean that members of an LLP can only be “workers” within the meaning of section 230(3) of the 1996 Act if they would also have been “workers” had the members of the LLP been partners in a traditional partnership.

 Next the Court considers the analysis of the Court of Appeal that “underlying the statutory definition of worker is the notion that one party has to be in a subordinate relationship to the other”. The Court of Appeal suggested that a member of a LLP would not by virtue of that status alone constitute either an employee or a worker. If by this, the Court of Appeal meant that those members who undertake personally to work for the LLP cannot be workers, then this Court does not agree. While subordination may sometimes be an aid to distinguishing workers from other self-employed people, it is not a freestanding and universal characteristic of being a worker.

 As the appellant has protection under the 1996 Act as interpreted in a conventional way, the Court does not find it necessary to decide whether her convention rights would require and permit it to interpret the Act compatibly.

 In a concurring judgment, Lord Clarke agrees with Lady Hale that by the terms of the appellant’s contract with the respondent LLP, she undertook to perform personally certain work or services for it and her status was not by virtue of the contract that of a client or customer. Lord Clarke adds that, in his opinion, the effect of the relevant provisions of the 1996 Act and the 2000 Act, read together, is that a person who is a limb (b) worker within section 230(3) is a person “regarded for any purpose as employed” by the LLP within the 2000 Act.

 In a concurring judgment, Lord Carnwath emphasises that, in his view, the conclusion in this case turns on the special characteristics of a LLP, which is something of a hybrid as between a conventional 1890 Act partnership and a limited company. It does not necessarily have any direct relevance to the resolution of equivalent issues in relation to other forms of partnership, under English or Scottish law. The main judgment leaves open the question of what the position would be in a traditional partnership.

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Comments

  1. While the SCC came to the right result in McCormick, Abella’s analysis is incoherent and a recipe for disaster down the road. The proper conclusion was that the BC human rights code does not apply to partners because a member of a partnership cannot, almost by definition, be an employee.

    The problem with Abella’s reasoning is that she seems to suggest that, in some circumstances, an equity partner might be an “employee” for BC human rights code purposes. The first observation is that, other than extending the definition of an employee to a master servant relationship, there’s nothing in the BC legislation to support such an extension of the ordinary meaning of an employee. Saying that the human rights code is “quasi-constitutional” (what does that even mean? The human rights code is a mere statute of the BC legislature. ) therefore meriting a broad interpretation is mere hand-waiving.

    The second observation is that, if she’s right (and I supose, we have to accept that she is) where do you draw that line? Is it conceivable that two equity partners in the same partnership might have a different status because one has substantively less control over his or her work than the other? Are tax lawyers (who often support their partners) employees, while the business lawyers who are brining in the business not employees? Given that Abella’s reasoning seems to make the analysis a wholly factual one, future disgruntled partners can rely on it to use the threat of protracted litigation with the human rights tribunals to shake down their former partners.

    To be sure, if all she was saying was that you have to look beyond the title, then it’s hard to disagree with that. Calling someone a partner shouldn’t get you around the human rights code if they are, in fact, an employee (for example, as a “service partner” or “non-equity partner”). But to the extent that someone is bona fide equity partner of a partnership, this should have been a one paragraph decision.

    Mind you, the more interesting question is how provincial human rights laws apply to national partnerships. Under the Ontario Human Rights code, mandatory retirement provisions in partnership agreements may well be illegal, given that the code prohibits age-based discrimination with respect to the right to contract. Partnerships aren’t an employment relatioship, but they’re certainly a contractual one. Faskens carries on business in Ontario, would he have standing to launch a complaint here?

  2. I would have thought that the Canadian laws on limited liability partnerships would not change the result in the Canadian case. They don’t turn an equity partner who helps run the partnership into anything less managerial or controlling; they just spare him or her personal liability for the negligence of his or her partners, beyond the assets of the partnershp.

    It may be that the lawyer in the English case could have fallen in the the class of partner contemplated by the SCC as not a real boss but more like an employee, but the laws of LLP would not get her there in Canada, it seems to me.

  3. Malcolm Mercer

    John: It is worth noting that Canadian and English LLPs are quite differently constructed. A Canadian LLP is a still a partnership while an English LLP is a corporation. A Canadian LLP is the partners while an English LLP is an entity separate from the partners. c.f. http://www.companieshouse.gov.uk/infoAndGuide/faq/llpFAQ.shtml

    Bob: As you may know, the US has gone down a similar path with United States Equal Employment Opportunity Comm’n v. Sidley Austin LLP

  4. Thanks, Malcolm. Your note confirms that there is no reason why the existence of the LLP form in Canada should make any difference to the SCC’s reasoning or results.

    When you say (to Bob) that the US has gone down ‘a similar path’, do you mean similar to Canada or similar to the UK? Did the EEOC or the courts there find that most partners were not employees but some might be, if their rights were sufficiently restricted?

  5. Malcolm,

    I think it Sidley Austin, it was ultiamtely resolved with a consent judgement, so I don’t know if the issue was actually tried. The decision cited by the SCC was merely a preliminary judgement and never landed on whether or not partners were employees, it just refused to rule that they were definitely not at that stage.

    In any event, my basic problem with Abella’s judgement is that it creates uncertainty and ambiguity where none was inherent or neccesary. An “employment” relationship has a well defined legal meaning. It does not include partners. Given that well defined legal meaning, had the BC legislature intended to give “employment” a broader meaning to include partnership relationships, presumably they would have done so (and indeed, in fact, they did provide an expansive definition of “employment” albeit not one that could possible include partnership relationships). I don’t see how any principled interpretation (i.e., without resort to the legal hocus pocus of characterizing the legislation as “quasi-constitutional”) of the BC Human Rights code definition of “employment” (which is, admitedly, broader than the common law meaning of that term) could possible be so interpreted. I can’t think of any principled rule of statutory interpretation which would allow one to interpret the word “employment” to include an equity partner under any circumstances.

    Her judgement has the effect of rendering the term “employment” more or less meaningless while introducing a rule of statutory interpretation (that so-called “quasi-constitutional” statutes – I’m not sure how the BC human rights code is more of a “quasi-constitutional” document than the BC Dog Leash Act, both have the same legal status, but that’s a separate issue – should be given interpretations which bear no ressemblance to what their text actually provides. And this opens a can of worms, if equity partners chould be “employees” for the purposes of the BC human rights code, what about the BC equivalent of the Employment Standards Act? The Employment Insurance Act? I doubt many partners would be keen to be characterized as “employees” for the purposes of the Income Tax Act (given the more favourable tax treatment generally accorded to partners).

    This is part of a broader trend in SCC jurisprudence where the court comes to more or less the right result on the facts, but through such convoluted (and often wholly unnecessary) analysis, that no one can figure out what the decision actually stands for. My suspicion is that these judgements are used by judges (and their clerks) more to showcase their intellectual prowess (or not, depending on what you think of the decision) than to provide clear legal guidance for legislators, lawyers and judges down the road. It’s a tendency made worse by the rise of word processing and the “cut and paste” function. If we made judges write their judgements long-hand, they’d be concise, pithy and about five pages long. Instead we end up with 33 pages of blather, citing obscure legislation from around the world (which legislation, while interesting, is typically wholly irrelevant to the point at issue), to come to a self-evident conclusion.

    The correct result here was a 3 or 4 page judgement saying that equity partners aren’t employees, and that if this is an injustice that must be corrected, the proper remedy is to have BC amend its human rights legislation to protect against age discrimination in contract or to amend the definition of “employment” to include partnership relationships.

  6. With non-employees and how they’re treated, I was reminded of this:

    http://www.slaw.ca/2014/05/08/supreme-court-of-canada-agrees-pregnant-women-have-the-right-to-refuse-unsafe-work-environments/

    That is, for some things “workers” as a broader category than “employees” have protection (e.g. some workplace safety legislation protects workers generally) and I do think it would be a good idea to give some more protections to dependent contractors (and maybe independent also), casual and temporary workers generally, partners with minimal control, etc.. I’d prefer it be done legislatively.

  7. Malcolm Mercer

    EEOC v Sidley was a consent decree c.f. http://www.eeoc.gov/eeoc/newsroom/release/10-5-07.cfm

    According to EEOC counsel at the time in 2007:

    “What the Sidley case says is that you have evidence that people are called partners, but in reality are not active in the governance of the firm and don’t control their own destiny in the firm, … You can call them whatever you want, but for the purposes of the Age Discrimination Act they are employees.”

    A relatively recent EEOC statement can be seen at http://www.eeoc.gov/eeoc/foia/letters/2013/adea_accounting_firm_coverage_7_25.html

    According to the EEOC:

    There is no legal presumption that an individual who holds the title of “partner” is never an employee. This determination depends on the actual working relationship between the individual and the partnership. The relevant question is whether the individual acts independently and participates in managing the organization (not an employee), or whether the individual is subject to the organization’s control (an employee). The EEOC has identified six non-exhaustive factors relevant to making this determination:
    •Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work;
    •Whether and, if so, to what extent the organization supervises the individual’s work;
    •Whether the individual reports to someone higher in the organization;
    •Whether and, if so, to what extent the individual is able to influence the organization;
    •Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and
    •Whether the individual shares in the profits, losses, and liabilities of the organization.

  8. Well, the EEOC takes that position, but then since that was the basis for their claim in Sidley, they’re not exactly an impartial source on the point. Whether their position is correct or not doesn’t appear to have been addressed in a contested dispute .

    I’d agree with them to the point that holding a title of “partner” doesn’t mean you’re not an employee (any more than calling yourself an “independent contractor” gets you out from being a legal employee) – and. But if you are actually a partner, i.e., a person who is carrying on business in common with a view to a profit (or whatever the variant is under the relevant provincial partnership law), you cannot be an employee, unless you radically expand the meaning of the word “employee” beyond any recognizable form.

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