In the recent case of Clyde & Co LLP and another v Bates van Winkelhof [2012] EWCA Civ 1207, the UK Supreme Court held that LLP members can be “workers” for the purpose of whistleblowing legislation. This means that members of a limited liability partnership in the UK (and not just employees) can now claim whistleblowing rights, in addition to certain other rights available to “workers.” One important practical implication of this decision is that private equity and investment firms that engage their investment professionals in the UK as members of limited liability partnerships will now need to keep these additional protections in mind when removing members. In addition, there may be other far-reaching implications to consider as well. 

  1. Whistleblowing Rights

If an employer subjects one of its workers to a detriment because the worker has made a protected disclosure, then that worker may be able to sue the employer for compensation which is not capped in the way that it is for, say, ordinary unfair dismissal. LLP members will therefore be entitled to uncapped compensation based on their actual and future losses, if they are able to show at an Employment Tribunal that they have been subjected to detrimental treatment by their firm on the grounds of the member having blown the whistle on wrongdoing. Detriment could mean dismissal or something else that falls short of dismissal, e.g. a reduction in pay or demotion. In order for a disclosure to be “protected,” it must relate to one of the following: a criminal offence, a breach of a legal obligation, a miscarriage of justice, danger to health and safety of an individual, damage to the environment or the deliberate concealment of information about any of the above.

It will be obvious to most employers that a complaint concerning such matters as financial irregularities or unsafe working practices will be sufficient to give a worker protection under the whistleblowing legislation in the UK. However, a breach of any legal obligation, such as an alleged breach of the worker’s own contract, could also be sufficient to give the worker such protection. All that workers need to do is show that (a) they had a reasonable belief that (i) the breach occurred (or is likely to occur) and (ii) the disclosure is in the public interest and (b) they were subject to a detriment because of the disclosure. Furthermore, departing workers have shown themselves creative in the way that they have tried to afford themselves of such protection. This can come as a nasty surprise to employers.

For private equity firms and other investment firms, this issue is most likely to occur in the context of acrimonious exit negotiations where a departing employee or LLP member tries to claim that they are being removed as a result of having “blown the whistle,” either because the individual genuinely believes this to be the case or as tactic to lever a better termination package.

  1. Other Rights

If LLP members are “workers” for the purposes of the whistleblowing legislation, then they will also have certain other statutory rights enjoyed by workers. These include the following rights:

  1. Part-Time Workers Regulations

Part-time LLP members will now have the right not to be treated less favourably than their firm treats comparable full-time LLP members, unless the treatment can be objectively justified by the firm. Objective justification means that an LLP must be able to show that the treatment achieves a legitimate business objective of the firm and is a proportionate way to achieve that objective. 

Justification based on cost alone is unlikely to be sufficient. The less favourable treatment has to relate to the terms of the worker’s contract or from the worker being subjected to some other detriment. The right does not give LLP members a right to work part-time, just protection from less favourable treatment if the member is a part-time worker.

  1. National Minimum Wage

Members will now be covered by the National Minimum Wage Act 1998. This provides for a statutory minimum level of pay for everyone who works legally in the UK. Although this is unlikely to cause many issues for LLPs, they may still need to review their current policies and practices and consider how they structure their drawings (and any “claw-back” provisions) in a way that ensures compliance with this legislation.

  1. The Working Time Regulations 1998

These Regulations govern the hours most workers can be required to work and, amongst other things, set out limits on the average working week and statutory entitlements to paid leave.

  1. Unlawful Deductions from Pay

The Employment Rights Act 1996 gives workers the right not to suffer unauthorised deductions from wages. Therefore, LLPs will have to ensure that any “claw-back” provisions in their LLP agreements are carefully drafted so as not to infringe this principle.

  1. Pension Auto-Enrolment

There is a continuing debate as to whether LLP members will have to be enroled automatically into a qualifying pension scheme with mandatory, minimum employer pension contributions, under the auto-enrolment regime. In order to determine this question, it would appear that one will need to decide first whether the LLP member is a “worker” for these purposes and then whether the LLP member receives “qualifying earnings” (i.e. salary, wages and commission but not genuine profit share). It remains to be seen whether any guidance on these points will be forthcoming from the UK Pensions Regulator.

  1. Partners in Traditional Partnerships

The decision in this case does not, however, deal with the question as to whether partners in traditional partnerships could ever claim these “worker” rights.

  1. Practical Steps for LLPs to Consider

In response to the decision in the Clyde & Co LLP case, those who operate LLP structures should review their LLP agreements and related policies and practices in order to assess the impact on their businesses. In short, they should:

  1. ensure that there is a whistleblowing policy in place setting out procedures by which LLP members can report concerns about illegal, unethical or otherwise unacceptable conduct;
  2. ​ensure that they do not subject any LLP members to any detriment if they “blow the whistle” (and consider taking legal advice before taking steps to remove an LLP member in order to establish whether the member might be able to bring a successful whistleblowing claim);
  3. carefully document genuine business reasons for any negative or otherwise detrimental actions taken against LLP members (e.g. compulsory retirement or reductions in profit share) so as to be able to show that the LLP has not taken any retaliatory action against LLP members for any alleged wrongdoing;
  4. ensure that they are in compliance with the Working Time Regulations (most notably regarding rest breaks and paid annual leave) and the regulations prohibiting less favourable treatment of part-timers in respect of their LLP members;
  5. ensure that the way that profits are drawn by LLP members and how this is drafted in the LLP agreement accords with national minimum wage legislation; and
  6. consider whether LLP members may need to be enroled into a suitable occupational pension scheme under the auto-enrolment regime and, if necessary, plan for such enrolment.