Please note: this post is now out of date following subsequent tax legislation and case law.
“… At the outset he has been lulled into a false sense of security, and may consider himself to be the victim of a scam …”
Lawyers and accountants have been very creative in their use of LLPs. But sometimes our good work may be hijacked and applied creatively by others for purposes that we did not intend. Here’s a disturbing example I’ve come across. Employment and partnership lawyers may wish to take note.
A businessman wants to engage a skilled workforce, pay them as little as possible with no employment rights, and avoid paying employer’s NI or accounting under PAYE. (HMRC may be watching this one from the wings.)
Prospective workers are invited to apply for a job. The “scheme” works particularly well for the businessman in sectors in which a large proportion of workers’ remuneration is paid as commission or year end bonus, such as in sales or recruitment, and even better if all of the workers will work from home, will never meet one another, and thus will never compare notes.
On sign-up, rather than being asked to sign an employment contract, each worker is presented with an inch-thick LLP members’ agreement. There is also a short side letter in comforting terms, which sets out the “initial” profit share, commission and/or bonus structure and other benefits of the job, which are attractive. The worker may only read (or understand) the side letter.
The worker has signed employment contracts before, but he does not appreciate the full ramifications of LLP membership. It may be sold to him on the basis of the tax advantages of self-employment. He may not take legal advice.
Deep inside the members’ agreement are provisions under which the businessman determines from time to time what the profit share of each member including himself will be. Only he can vote or benefit from capital profits of the LLP. Holidays are in his discretion. Unfair prejudice rights and any duty of good faith between members are excluded. Only the businessman has to approve and sign the accounts.
After a while, possibly up to a year, the businessman may notify a worker that the worker’s profit share and/or bonus are not going to be as large as originally envisaged. At the same time the worker may be summarily “retired” with no notice or pay in lieu. Under the members’ agreement, which the worker signed, all of this is permitted.
The worker is now unemployed and considerably out of pocket. At the outset he has been lulled into a false sense of security, and may consider himself to be the victim of a scam. He asks for your advice. He may well have employment rights – see section 4(4) of the Limited Liability Partnerships Act 2000 and Kovats v TFO Management LLP (EAT) – or other rights arising out of what may have been said to him a year before. But you have to tell him that his case is not run-of-the-mill, and that the outcome may be uncertain.
While you consider the best way to deal with the matter, the businessman is busy recruiting your client’s replacement, once more muddying the waters with LLP membership.
