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‘No win, no fee’ - are clients being hoodwinked?
Dale Gibbons
There are numerous reasons why a Limited Liability Partnership (LLP) may wish to part ways with one or more of its partners (members) [1]. It could be due to misconduct on the part of the partner, a breakdown in their relationship with other partners or colleagues, or as part of a restructuring of the business, for example due to declining client demand in a particular service line or specialism (akin to redundancy in an employment context).
Whatever the reason, LLP partner exits should always be handled with care: not only to minimise the risk of legal disputes and liability, but also to avoid damaging relationships with clients and the remaining partners and employees of the firm, particularly at a time when positive culture, reputation and morale are more valuable than ever.
We consider below some common issues and practical tips regarding partner departures to avoid potential pitfalls.
1. The legal status of LLP members
Partners and LLP members are not employees in law, even though in practice the position of many partners at larger professional services firms can in many ways be akin to employment. They are therefore not protected under unfair dismissal legislation and cannot bring claims for unfair or constructive dismissal. However, this can be a trap for the unwary as LLP partners have other legal rights and claims available to them, as summarised below.
2. Beware of discrimination and whistleblowing
Partners whose profit share is cut and/or who are compulsorily retired or expelled by their firms may bring discrimination claims before an employment tribunal (on the grounds of disability, age or gender, for example). They can also bring whistleblowing claims if they are subjected to any detriment for raising concerns in the public interest regarding any legal or regulatory failures or wrongdoing.
Mandatory retirement ages remain common for LLP members, although these would be subject to scrutiny if challenged in an employment tribunal. In such cases, the firm would need to show that their mandatory retirement age is objectively justified. Case law to date indicates that, depending on the facts, this may be possible on the grounds (legitimate aims) of staff retention, workforce planning and maintaining a collegiate, congenial atmosphere.
The right of LLP partners to pursue claims in the employment tribunal can be a powerful weapon and can only be waived or settled in a statutory settlement agreement or ACAS COT3 agreement. The inclusion of an arbitration clause in the LLP Agreement cannot prevent partners from bringing statutory claims in the employment tribunal, although there are strict time limits that must be observed in order to do so (as shown in this case in 2022).
Settlement agreements on exit are therefore often a good idea, not only to ensure an effective waiver of any potential claims, but also to ensure the exit terms are clear, including (for example) in respect of the manner in which the exit will be communicated internally and to clients.
3. General principles to watch out for in the LLP agreement
The default legal position is that a partner can only be expelled from an LLP if the power to expel is granted by an express provision in the LLP agreement. The starting point when considering a partner’s departure is therefore the LLP agreement.
A well drafted LLP agreement will contain detailed provisions setting out how – and in what circumstances – an individual’s LLP membership may be terminated. It will also contain provisions relating to suspension (i.e. whether a partner can be suspended, in what circumstances, the process of doing so and whether suspension would be with or without full pay, etc).
On termination, there are generally separate provisions dealing with expulsion for cause on the one hand and without cause (confusingly often called “retirement”) on the other. In without cause cases, the notice period will often be six or 12 months, which raises questions about the partner’s duties and profit share in the meantime and potential garden leave.
Many firms prefer to rely on termination without cause provisions as far as possible, as in theory this should be less controversial. In reality, disputes and issues can still arise, for example in cases where firms are alleged to have acted in breach of natural justice, arbitrarily, capriciously and/or in bad faith. That said, the scope for disputes on the relevant process and threshold (such as bringing the firm into disrepute, material or fundamental breach) is at its highest in cases of serious alleged wrongdoing, which often also engage regulatory reporting rules.
In any event, the LLP agreement (ideally reinforced by a settlement agreement) should deal with key issues such as the leaving partner’s financial entitlements, confidentiality obligations and non-compete restrictive covenants. It is very important that the wording of the LLP agreement is carefully considered and followed to the letter, as the court will generally interpret its terms strictly, even if that results in a seemingly harsh or unfair outcome for the departing partner (the theory being that partners are of equal bargaining power when they enter into their partnership/LLP agreement and so they should be held strictly to the rules of the firm).
4. Post-termination restrictions
It is not unusual for the LLP agreements of professional services firms to impose restrictions of 12 months or more on partners post departure, including: not to work for a competitor; not to solicit from or conduct business with the firm’s clients; and not to solicit or engage other partners or employees of the firm.
The starting point when considering restrictive covenants in an employment context is that they are unenforceable unless it can be shown that they go no further than reasonably necessary in order to protect the employer’s legitimate business interests. Broadly speaking in employee/employer cases, the courts apply a high threshold for enforcement due to the imbalance of power in the employment relationship.
By contrast, the general rule in partnership cases (before the introduction of the LLP as a form of legal entity in the UK in 2001) was always that partners are treated as sophisticated, co-owners of the business, of equal bargaining power, who can reasonably be expected to have mutually agreed enforceable terms. On that basis, in the leading 1984 Privy Council case of Bridge v Deacons, the court was prepared to enforce a five-year restriction against a Hong Kong law firm partner on departure, which restricted him from providing any legal services to any of the firm’s clients (despite the fact that he had personally had no dealings with over 90% of them). It is inconceivable that such a clause would be enforceable in an ordinary employment case.
Whilst many partnership lawyers would agree that the facts in that case were extreme and unlikely to be repeated in the modern context of professional services LLP firms today, partners should be aware that they are at particularly high risk of being strictly held to their restrictive covenants in legal proceedings.
The stakes in team move cases are even higher as LLP partners who coordinate and lead team moves in breach of their fiduciary duties can be liable to forfeiture of their partnership profit share for the period of the applicable breach (provided the profit share can be characterised as remuneration for the provision of the partner’s services to the firm, as will usually be the case in modern professional services firms).
5. Are there any immigration issues to consider?
Some partners’ right to work in the UK is subject to them having valid immigration permission. It could be that a partner’s immigration status is not tied to their ongoing role, for example, if they hold a UK ancestry or family visa. Equally, they may already have indefinite leave to remain and so exiting the partnership is not an issue.
Where it is more of an issue is in relation to where a partner’s visa has been sponsored by the firm. This is often under the Skilled Worker scheme and means the partner can only work for the sponsoring firm in the role and with the remuneration stated in the application.
Within 10 working days of a partner’s exit, the firm should notify UK Visas and Immigration the sponsorship has ended. This is fairly straightforward to do and involves an online notification using the firm’s sponsor management system.
However, as mentioned above, partners are often subject to long notice periods of six or 12 months and could be put on garden leave. This can complicate the firm’s reporting obligations and leave the partner in limbo. So long as the partner remains with the firm, even if they are on a notice period or garden leave, the sponsorship can continue. In the same way, if a partner is suspended with or without pay, the sponsorship can continue. It is only when the partner has finally exited the firm that the notification needs to be made within 10 working days.
As well as dealing with any non-compete issues, some partners may need to navigate the rules around submitting a new sponsored worker application with a new firm. The Skilled Worker rules do allow for delays caused by working out a contractual notice period with a previous sponsor. But it is more unusual to have say a nine or 12 month notice period and this can lead to timing issues on submission of a new Skilled Worker application. It could be that the partner needs to wait until closer to the end of their notice period before the new application is submitted. The other option is for the current firm and partner to negotiate the length of the notice period on the basis that the partner could suffer a detriment as compared to other partners who do not have a visa issue.
In conclusion, LLP partner exits present various challenges with potential traps for the unwary, so specialist advice at an early stage is always a good idea.
[1] References to “partner” in this article are to LLP members and the focus of the article is on LLPs, as opposed to traditional partnerships.
Further information
If you have any questions or concerns about the topics raised in this blog, please contact Andreas White or Ilda de Sousa.
About the authors
Andreas White is a partner in our employment team. He has substantial litigation experience, with a particular focus on complex and high value employment and partnership disputes.
Ilda de Sousa is a partner in the immigration team at Kingsley Napley. She is a South African qualified attorney and a British qualified solicitor who joined the firm in January 2010. Ilda has more than ten years of UK corporate immigration law experience, managing large company clients as well as handling complex matters for individuals, British nationality applications, appeals, judicial reviews and applications under European Law including Brexit related advice.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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