Since LLPs were created in 2000 their members have been viewed as self-employed. Following HMRC’s challenge in relation to members’ remuneration, this began to change and, consequently, from this tax year onwards they have treated members who receive salaries as employees for tax and NI contributions. This move has been reinforced by a recent decision of the Supreme Court in relation to the status of members as ‘workers’ for the purposes of the Employment Rights Act 1996 (ERA 1996), which may have wider implications for LLPs, who will need to assess whether they need to automatically enrol their members.
Clyde & Co LLP -v- Bates van Winkelhof
The Supreme Court’s recent judgment in this case held that Ms Bates van Winkelhof was a ‘worker’ as defined in the ERA 1996. Ms Bates van Winkelhof had been removed from an LLP following an alleged whistleblowing incident whereby she had reported possible criminal activity of the managing partner of a Tanzanian firm for which she was temporarily working. Clyde & Co were successful at the Court of Appeal in arguing that she was not entitled to the whistleblowing protections under the ERA 1996 because she was not a ‘worker’. However, this decision has been overturned by The Supreme Court.
The Supreme Court’s reasoning was based upon Ms Bates van Winkelhof receiving a guaranteed level of salary together with a share of profits; her undertaking to personally perform services for the LLP; she could not be said to be a customer or client of Clyde & Co; and because she could not promote her services as a solicitor to any other firm. This decision will have wider employment implications for members of LLPs - for example, they will now have a right to paid annual leave; be subject to the working time restrictions; be caught by the national minimum wage rules; and will be protected from less favourable treatment if they work part time. LLPs should therefore ensure that their internal whistleblowing policies also apply to LLP members and that they treat members in accordance with their rights as ‘workers’ under the ERA 1996.
Impact for member’s pension arrangements
The Pensions Act 2008 (PA 2008) contains a different definition of ‘worker’ to the ERA 1996 (crucially the auto enrolment legislation in the PA 2008, unlike in the ERA 1996, excludes a director who is not an employee from being a worker) and therefore it is still undecided whether subsequent courts will judge the same principles to apply, and consequently whether the auto enrolment duties will be deemed applicable to members of LLPs. This will remain undecided until there is a test case or definitive guidance is issued by the Pensions Regulator (tPR) and therefore LLPs will need to consider whether to automatically enrol their members in a qualifying workplace pension scheme. Below are some of the issues which LLPs will need to consider:
Depending upon the size of the LLP, it may have passed its staging date for auto enrolment purposes. This means that if an LLP decides that its members are classed as ‘workers’, then they should be enrolled in the LLP’s qualifying scheme as soon as possible, however with the members’ contributions being backdated to the staging date, clearly it would then be open for the member to opt out immediately following enrolment. If the LLP has not yet reached its staging date, this will give more opportunity for a considered reaction and to await any guidance from tPR or comment from the Department for Work and Pensions.
For some LLPs, the management committee may be comprised of the members, whereas the employees are employed by a service company. In such a situation, if the LLP is not PAYE registered, it may not have to comply with auto enrolment duties because they will not have been set a staging date, with this being based upon the LLP's PAYE group.
Assess the profile of members
Deciding whether an LLP’s members are ‘workers’ will need to be done on an individual basis, depending upon the make-up of the LLP and the agreements in place with members. Consideration must be given to the relevant factors in the Supreme Court’s decision, for example: whether the members provide their services personally to the LLP; if they must provide their services solely to the LLP; would they be classed as the LLP’s client or customer; or whether they are integral to the running of the LLP?
Auto enrolment: eligible jobholder? Qualifying earnings?
Qualifying earnings are used to determine whether an employee is an eligible jobholder for auto enrolment purposes. Qualifying earnings are defined to include salary, wages, commission, bonuses, overtime and various statutory payments, but importantly not genuine profit share. Our view is that, for many LLPs where the members’ drawings are not treated as salary, they will not be classed as qualifying earnings and therefore the members will not be either eligible or non-eligible jobholders. Thus there would be no requirement to comply with auto enrolment duties in respect of them. If members are ‘workers’, but not in receipt of qualifying earnings, then they may still request to be enrolled and to be provided with the prescribed information. This interpretation will depend, however, upon future court decisions and whether HMRC begin to treat drawings as salary.
Members may have HMRC protections
LLP members who are higher earners/with substantial pensions savings may have registered for HMRC protections (fixed or enhanced protection) when the lifetime allowances were introduced on 6 April 2006. Automatically enrolling such members in a qualifying workplace pension scheme may result in these members losing their protection and so the LLP should communicate very clearly with all individuals and give them the opportunity to opt out within the legislative period (if appropriate). LLPs should, however, avoid any possible suggestion that they have induced members to opt out and be careful that any communications do not inadvertently create a contractual right to continued pension provision. Interestingly, regulations are expected which will exempt anyone with fixed or enhanced protection from auto enrolment, however such individuals will have to be enrolled until any regulations come into force.
What should an LLP do?
The steps that an LLP should take will depend upon how its board interprets the Clyde & Co decision; the composition of its members; and how its members are remunerated. We would advise reviewing all members and automatically enrolling where appropriate, being mindful of the staging date and any HMRC protections. However, we do not consider there will be a great impact where members are simply remunerated in drawings, which are not classed as qualifying earnings. Given the financial and administrative consequences, it may be worthwhile for LLPs to await the outcome of the anticipated case law and any guidance published by the tPR.
As a matter of policy, it is important to remember that the primary purpose of the auto enrolment legislation is to ensure retirement savings provision is made for lower paid individuals in the workforce. It is our opinion that members in professional service firms were not in the legislator’s contemplation.