Compensation orders against company directors: a new way around Limited Liability?
The Supreme Court’s decision in Bates van Winklehof v Clyde & Co is good news for both LLPs and their members. All LLP members, whatever their level of seniority, who seek in good faith to expose potential wrongdoing, will now be protected from detrimental treatment.
As a point of principle, LLPs should encourage a culture of compliance and transparency in which members are valued for doing the right thing and for bringing wrongdoing to the firm’s attention. It is in the firm’s best interests for misconduct to be brought to its attention first, rather than being reported directly to the relevant authority without prior notice.
Partners should be role models for staff. Many firms’ appraisal systems rate partners’ leadership skills in line with the degree to which they act in accordance with their firm’s values. Partners should lead by example and set the firm’s culture. They should be seen to be praised and even rewarded in terms of career progression and remuneration for exposing wrongdoing, rather than risk being subjected to detrimental treatment as a result.
LLP members are potentially more likely to be aware of wrongdoing than junior employees, since they have better access to financial documentation and management information than most employees would not see.
Bounty payments have been introduced in the US to encourage genuine whistleblowers to come forward. The sad reality, however, is that blowing the whistle usually spells the end of a whistleblower’s career which, for law firm partners who are usually high earners, can lead to a significant loss of future income.
While LLP members in England will not have unfair dismissal protection as a result of this judgment, they will be protected from detrimental treatment such as dismissal, reduced profit shares or drawings and lower-than-anticipated bonus payments. In fact, detrimental treatment protection is, in practice, worth far more to them financially than unfair dismissal rights (for which compensation
is capped at just over £76,000). Whistleblowing compensation is based on uncapped actual and future financial losses, plus an award of up to £30,000 for injury to feelings.
Impact on members
The Supreme Court ruling is very important for LLP members. HMRC recently challenged the self-employed status of fixed-share equity partners, now taxed as employees rather than self-employed individuals, unless they fail one of the three conditions imposed by HMRC. Those LLP members now taxed as employees will be relieved that they can at least benefit from more of the statutory employment protections enjoyed by employees.
As partners will now be deemed ‘workers’, they will acquire a number of other employment rights relating to part-time workers: the national minimum wage, working time directives and protection against unlawful deductions from pay.
However, the most significant right, and the most expensive for law firms, is the right to be automatically enrolled into the firm’s occupational pension scheme, with the obligation on the firm to contribute to the member’s pension pot. Firms should seek specialist pensions advice, particularly if they have already passed their staging date, as LLP members may well be classed as eligible ‘job holders’ under the Pensions Act 2011.
In the absence of discriminatory treatment, members often had very limited protections, other than those to which they were contractually entitled under the terms of their LLP members’ agreement on their retirement from the firm, even if they were being compulsorily retired or expelled from their firm without cause. LLP members can now raise whistleblowing arguments, which could significantly increase the amount of any retirement package they would otherwise have received from their former firm.
However, last summer the whistleblowing legislation changed so that any protected disclosure now has to be ‘in the public interest’, an additional hurdle to clear. If a member can prove that the disclosure is in the public interest, it will be a significant weapon in his negotiating armoury.
There is now a discrepancy between the protection afforded to LLP members and partners in traditional partnerships who whistleblow. Morally and ethically, this cannot be justified and lobbying on this issue is currently taking place. Expect the law to eventually be amended to address this discrepancy.
This article first appeared in Managing Partner in June 2014.
Skip to content Home About Us Insights Services Contact Accessibility