Introduction
Facts
Claims
Court of Appeal decision
Territorial effect
Comment


Introduction

The Supreme Court's decision in Clyde & Co v Bates van Winkelhof(1) is eagerly awaited by partnerships, limited liability partnerships (LLPs) and those who advise them on their internal procedures.

The appeal(2) concerned two preliminary points of importance to UK-based partnerships and LLPs: the scope of whistleblowing protection(3) for partners and members of LLPs, and whether such protection can extend to an individual who principally works outside the United Kingdom (given the territorial limits of the underlying legislation).

This update examines the decision of the Court of Appeal and highlights the issues which the Supreme Court will need to resolve in its judgment and the factors which may influence its decision. It also discusses what changes might be made to existing legislation.

Facts

The claimant was an English qualified solicitor. She joined Shadbolt & Co (an English registered LLP) in 2005 to move to Tanzania and work on secondment with a Tanzanian law firm, PK Law, which also employed her. Subsequently, Shadbolt set up a joint venture with a different Tanzanian law firm, Ako Law, and the claimant joined that firm on the same basis on which she had worked for PK Law. She later became a member of Clyde & Co (the first defendant), signing a deed of adherence on February 1 2010, and Clyde & Co acquired part of Shadbolt's business. She was paid:

  • a £103,000 profit share from Clyde & Co;
  • $85,000 (as a continuation of a payment she had received from Shadbolt for her employment relationship with Ako Law); and
  • 20% of the profits of the joint venture with Ako Law.

She worked principally in Tanzania. She paid national insurance in England and tax in Tanzania, and from February 1 2010 to January 1 2011 she spent 100 days in London (78 of them at work); the rest of the time she was in Tanzania.

The claimant alleged that on November 23 2010 she reported to Clyde & Co that the managing partner of Ako Law had paid bribes and was involved in money laundering. She was dismissed by Ako Law on November 25 2010 and suspended by Clyde & Co on November 26 2010. Following a Clyde & Co investigation, she was expelled as a member on January 13 2011.

Claims

She brought the following claims:

  • a whistleblowing complaint pursuant to Section 47B of the Employment Rights Act 1996, alleging that she had suffered a number of detriments, the most serious of which was expulsion from the LLP and that one of the grounds for her expulsion was her revelation about Ako Law. She said that this was a protected disclosure under the act; and
  • a claim that her expulsion was pregnancy related and she had therefore been subject to unlawful sex discrimination under Section 45 of the Equality Act 2010.

The defendants took two preliminary points which have taken nearly three years to reach the Supreme Court:

  • that the claimant could not take advantage of the whistleblowing protection because she was not a 'worker' as defined by Section 230(3) of the Employment Rights Act (this did not affect her discrimination claim, as that legislation extends to partners and LLP members); and
  • that all of her claims were barred because her work was mainly in Tanzania.

Section 230(3) of the Employment Rights Act provides:

"In this Act 'worker'… means an individual who has entered into, works under (or where the employment has ceased, worked under):

(a) a contract of employment [a 'limb (a) worker']; or

(b) any other contract whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not, by virtue of the contract, that of a client or customer of any profession or business undertaken carried on by the individual [a 'limb (b) worker']."

Many employment rights are conferred only on employees (limb (a)). However, some rights, such as the minimum wage, apply to both employees and workers (limb (b)). Additionally, EU legislation applies a broad definition of 'worker'.

Lord Justice Elias examined the different tests used by the court to distinguish between workers akin to limb (b) workers and others who personally perform services for other parties, but who are not workers. One test was the degree of integration of the individual into the business – for example:

"does the worker actively market his services as an independent person to the world in general… or [is he or she] recruited by the principal as an integral part of the principal's operations[?]"(4)

The second test to which he referred was the degree of dependence:

"Thus the essence of the intended distinction must be between on the one hand workers whose degree of dependence is essentially the same as that of employees and on the other contractors who have the sufficiently arm's length and independent position to be treated as being able to look after themselves in the relevant respects."(5)

One further test, adopted by the European Union, was to consider whether an individual was subordinated to the person with whom he or she has contracted – for example, did he or she "perform services for and under the direction of another person in return for which he [or she] receive[d] remuneration"?

Many equity partners would satisfy one or more of these tests if their particular circumstances were examined by a court.

Some of the tests cited with approval had been used in the lower instance courts in this case. For example, the employment judge had held that the claimant was not a limb (b) worker because she was "in business in her own right receiving a share of the profits in relation to the work carried out". Attempting to fit that judgment into the strict wording of Section 230(3)(b) of the Employment Rights Act, it was held that the employment judge must have implicitly concluded that Clyde & Co was a client or customer of the claimant's business.

The Employment Appeal Tribunal disagreed. It held that the claimant was an "integral part" of the defendant's operation because she was a full equity partner and therefore, it was plain and obvious that Clyde & Co was not her client. It found that she was in a subordinate position to the LLP.(6)

In the Court of Appeal, Clyde & Co also disagreed. It submitted that the fact that the deed of adherence obliged the claimant to devote her time and attention to the business of the LLP – and not work for anyone else – had (wrongly) been the sole focus of the lower instance court. Given that the claimant could take an active part in running Clyde & Co's business, this could not be seen as a subordinate relationship.

In examining whether the claimant was a limb (b) worker, the Court of Appeal judge accepted that Clyde & Co, with whom the claimant had a contract, could not be the "client or customer" of the claimant. If he had stopped there, the claimant would almost certainly have been considered a limb (b) worker. However, he went on to say that the analysis had "to be more subtle". He also commented that the issue of subordination was considered in the Employment Appeal Tribunal only in the context of whether the LLP was a client or customer of the claimant – not separately or independently, as it should have been.

A new ground for appeal was raised for the first time: that the claimant could not be a worker because of Section 4(4) of the Limited Liability Partnership Act 2000. This act states that:

"A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless if he and the other members were partners in a partnership he would be regarded for that purpose as employed by the partnership."

While allowing this ground to be argued at this stage of the process (despite the claimant's argument to the contrary), the judge considered the effect of Section 4(4) of the Limited Liability Partnership Act and the employment status of partners in traditional partnerships.

Court of Appeal decision

Having initially clearly indicated that he would incline towards a broad construction of Section 230 of the Employment Rights Act, the Court of Appeal judge then focused on two reasons why partners simply cannot be workers:

  • since a traditional partnership is not a separate legal entity, the parties are in a relationship with each other and each partner cannot be employed by himself or herself; and
  • for what the judge described as a "sociological reason" – that is, that the partnership relationship is not a hierarchical one: "there is lacking a relationship of service and control which is inherent in both concepts of employee and a worker. The partnership concept is the antithesis of subordination." The judge therefore asserted that membership of an LLP did not lie in the field of employment at all because "underlying the statutory definition is the notion of a subordinate relationship".

He justified his decision by stating that if it were instead a question of degree, there could easily exist a factual situation whereby a member of an LLP would also be considered a limb (a) worker (an employee), depending on how integrated into the organisation he or she was, which must be wrong.

Territorial effect

The previous leading authority(7) regarding the territorial effect of the Employment Rights Act involved unfair dismissal claims. Lord Hoffman stated(8) that "it requires an inquiry to be made [as to]… who it is to be asked is within the legislative grasp or intendment of the statute under consideration". He distinguished between three categories of employee:

  • those recruited in the United Kingdom and posted abroad, but who work throughout for the UK business (eg, the foreign correspondent of a UK newspaper);
  • expatriate employees operating in a UK enclave abroad (eg, a UK military base); and
  • employees working overseas, but who have a "similarly strong connection" to the United Kingdom and its employment law.

Relevant factors for the purposes of territoriality identified by the employment judge included that:

  • the claimant had worked at least partly in the United Kingdom;
  • she was held out by Clyde & Co to be a member; and
  • she remained on the Law Society list of solicitors.

By the time of the Employment Appeal Tribunal hearing, there had been two further cases in this area.(9) Clyde & Co argued that the tribunal must compare the factors which pointed towards a connection to the United Kingdom with those which pointed towards a connection to the other jurisdiction, and that the tribunal should hear the case only if the former outweighed the latter. This argument failed.

The comparative exercise would be appropriate only if the claimant was wholly employed abroad. However, if the applicant lived or worked for at least part of the time in the United Kingdom, all that was required was that the connection was "sufficiently strong to enable it to be said that Parliament would have regarded it as appropriate for the tribunal to deal with the claim".

Comment

The examination of Section 4(4) of the Limited Liability Partnership Act, while interesting, was an unnecessary diversion from the need to consider the statutory test for what constitutes a limb (b) worker.

Although the wording of Section 4(4) is unclear, the way in which it has been interpreted consistently is to the effect that some people may be held out as partners to the outside world, but are not truly partners, because they do not carry on business together with a view of profit.(10) Similarly, a person can be admitted to the membership of an LLP and may be called 'partner', but paid a salary or a fixed share of profits. Such a person may not have sufficient partner attributes to be treated as a self-employed member.

The Supreme Court is likely to focus on how to construe the definition of 'worker' for the purposes of the whistleblowing provisions, with due regard to the public interest which they were designed to protect.

The Public Interest Disclosure Act 1998, which brought in protection for whistleblowers, was supported as a necessary means of protecting workers who speak out against wrongdoing in their organisations. While it was aimed at protecting relatively junior people in the workplace who might find it difficult to speak up, particularly in large organisations, there is no reason in principle(11) why any person should not be entitled to be protected against retaliation for speaking up. The potential to air a private grievance against an employer was put to bed by the changes made in 2013; the complainant must now have a "reasonable belief that [his or her] disclosure is in the public interest" in order to gain protection.

Second, and perhaps more importantly, if the Supreme Court again finds for the LLP and against the claimant in whole or in part, Parliament may intervene. The report of the Parliamentary Commission on Banking Standards(12) devoted a number of paragraphs to whistleblowing and its importance in ensuring good governance of financial institutions – and ultimately, in saving the public from disaster while also saving costs for and the reputations of the institutions themselves.(13) Among its recommendations were that companies should monitor their whistleblowing events and report them – and the effectiveness of their schemes – in their annual reports. Moreover, the appropriate industry regulator should consider imposing penalties on organisations which do not follow a valid whistleblowing regime or have one at all.

The Whistleblowing Commission(14) recommended that partners and members of LLPs should be expressly added to the list of protected persons, just as National Health Service contract workers were added in 2013.(15) It also suggested that it would be in the public interest to extend protection to workers who raise concerns about their UK employers, wherever the workers operate. This is in line with the Bribery Act 2010, which allows claims to be made against English companies even if the acts complained of have taken place overseas.

In any event, in order to drive regulatory and business efficacy, organisations should have a carefully considered whistleblowing code in place, appropriate for their business and for all categories of person operating in the workplace. For it to yield results, they should ensure that these workers understand the code and know that they will be supported if they speak up.

For further information on this topic please contact Abigail Silver or Geraldine Elliott at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (abigail.silver@rpc.co.uk or geraldine.elliott@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Heard on March 24 and 25 2014; Clyde & Co LLP v Bates van Winkelhof.

(2) From the decision of Judge Peter Clark in the Employment Appeal Tribunal (2012 WL 1684753) and the decision of the Court of Appeal ([2012] EWCA Civ 1207).

(3) Formally known as protected disclosure under the Public Interest Disclosure Act 1998, which was incorporated into the Employment Rights Act in 1999.

(4) Cotswold Developments Construction Limited v Williams [2006] IRLR 18 p 33.

(5) Byrne Bros (Formwork) Limited v Baird [2002] ICR 667.

(6) As referred to in Baird; supra note 5.

(7) Lawson v Serco [2006] ICR 250 2006 UKHL3.

(8) Citing Lord Wilberforce in Clarke v Oceanic Contractors Inc [1983] 2 AC 130, 152.

(9) Where Serco had been considered in the Supreme Court: Duncombe v Secretary of State for Children Schools and Families No 2 [2011] UKSC 36; [2011] ICR 1312 and Ravat v Halliburton Manufacturing Services Limited [2012] UKSC 1; 2012 ICR 389.

(10) Section 1(1) of the Partnership Act 1890 – definition of 'partnership'.

(11) Except possibly where disclosures may include state secrets and/or may affect national security.

(12) Published on June 19 2013.

(13) See Paragraphs 743ff on "standards and culture" and 789 on "what firms' whistleblowing regimes should contain".

(14) Set up by the charity Public Concern at Work (PCAW), which reported its results in November 2013. PCAW intervened in the Supreme Court appeal.

(15) Section 20 of the Enterprise Regulatory Reform Act 2013 provides further categories of person to be added easily in any event.