Our Employment team recently circulated an alerter on the potential impact of the Clyde & Co v. Bates van Winkelhof  UKSC 32 case on limited liability partnerships (LLPs). In that decision the Supreme Court held that members of LLPs are workers who can benefit from whistleblower protections.
In the second part of the alerter, our Pensions team considers the impact on LLP pension provision.
Why does it matter that an LLP member is a "worker"?
The short answer to this is that the auto-enrolment legislation uses the concept of "worker" to decide whether a person falls within the auto-enrolment requirements.
Given that the Supreme Court has decided that a former equity partner was a "worker" this calls into question the general view of the pensions industry that the auto-enrolment requirements do not apply to LLP members.
Does this mean I will have to auto-enrol all the partners in my firm?
In our view it is very unlikely that the Pensions Regulator, which is the enforcement agency for auto-enrolment, will go against a Supreme Court decision when deciding whether LLP members are "workers" for auto-enrolment purposes. Apart from the bare fact that legislation should be read consistently, there is the additional point that the reasoning of the Court in the Clyde case is germane to auto-enrolment.
The auto-enrolment definition of "worker" under the Pensions Act 2008 (the Act) contains a very similar two-tier structure, covering people who are "employees" and those who are not clearly independent contractors. It would take a very brave employer to try to argue that the basic intentions of the auto-enrolment legislation are sufficiently different from those relating to whistleblowing to warrant a different interpretation of the term. (Incidentally if you feel you are this employer please do contact us!)
The reason we have suggested that the answer to the heading of this section is only "possibly" is equally simple. Even if you assess that an individual is a "worker" for auto-enrolment purposes you then need to confirm what duties apply in respect of that individual under the legislation.
In order to be subject to the full auto-enrolment obligations, an individual needs to be a "worker", and also:
- Be between 22 and State Pension Age.
- Be in receipt of qualifying earnings.
- Work in the UK.
Looking at your average LLP member, points 1 and 3 appear to cause few issues. However, the next question has to be "does an LLP member have 'qualifying earnings'?"
What are qualifying earnings?
In one of the few parts of the auto-enrolment legislation that is relatively clear, "qualifying earnings" are defined in the Act as earnings between a lower limit and an upper limit. For the tax year 2014/15 these limits are the equivalent of £5,772 p/a and £41,865 p/a in any given pay period. In order to actually be auto-enrolled an individual needs to earn more than £10,000 p/a in a given pay period.
So what are "earnings"? This is where things become interesting when considering LLP members.
- salary, wages, commission, bonuses and overtime;
- statutory sick pay, statutory maternity pay, ordinary statutory paternity pay or additional statutory paternity pay and statutory adoption pay under Part 12ZB of the Act; and
- other sums prescribed as earnings.
Currently there are no "other sums" prescribed.
LLP members receive drawings on account of their share of profit. These are not treated in the same way as salary or wages etc for the purposes of income tax. Members are not, usually, paid overtime. They may receive bonuses on occasion, but even this can be characterised as an internal division of distributable profits on merit rather than a conventional bonus related to a salary. These are likely to be one-off payments which could be dealt with by using the option to postpone auto-enrolment assessment till three months later, when it is unlikely that another bonus payment would be due and payable. (This would require serving a notice on the affected LLP member.)
On that basis it is arguable that, although an LLP member is a "worker" for the purposes of auto-enrolment, they should be treated in the same way as any other "worker" who does not have qualifying earnings. Under the legislation they would be an "entitled worker", and their entitlement is simply to be offered membership of a pension scheme, but without any requirement for their "employer" to pay contributions.
Do I have to do anything?
The Clyde judgment has only just come out and the legal waters are very murky at the moment. We would strongly advise that you take legal advice on your exact situation, which can also take into account any information provided by the DWP or the Regulator following up on the Clyde judgment in a way that this note cannot.
However, the following considerations may be appropriate.
First you will need to "assess your workforce". As part of this, you should consider whether your LLP members are in receipt of "earnings". This question is intertwined with the recent legislative changes affecting salaried members of an LLP and the conditions needed to avoid HMRC treating such members as employees subject to deduction of income tax at source and NIC. Such LLP members are likely to be in receipt of "earnings" and will need to be offered membership of a pension scheme with "employer" contributions.
Other members who are not caught by the new tax legislation, which became effective in April 2014, will not be in receipt of "earnings" but, as "workers", it may be necessary to offer them membership of the pension scheme but without any entitlement to contributions.
As a further complication, it may be that your existing provider does not currently accept contributions from LLP members. You may need to consider changing provider if they are unwilling to change this.
You will also need to make sure your position is "Regulator proofed" to avoid potential fines for non-compliance with the auto-enrolment legislation. In our experience the best option with the Regulator, where there has been a technical breach that has not actually caused any loss (there are no contributions payable in respect of an entitled employee), is simply to come clean. After all, this is not a situation that was easily foreseen and most members of an LLP will not exactly be the auto-enrolment legislation's target audience of low to middle income workers!