United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR EDWARD LEGARD (of Counsel) Instructed by: Messrs Archers Law LLP Solicitors Lakeside House Kingfisher Way Stockton on Tees TS18 3NB
For the Respondents	MR THOMAS KIBLING (of Counsel) Instructed by: Messrs DLA Piper UK LLP Solicitors Bridgewater House 101 Barbirolli Square Manchester M2 3DL


 


SUMMARY

JURISDICTIONAL POINTS: Worker, employee or neither

Whether an accountant was a partner or employee in circumstances where a former partnership traded through limited companies under the terms of a Shareholders Agreement, itself said not to constitute a partnership.

On the particular facts the Employment Tribunal were entitled to find that he was a partner and not an employee. Thus his Age Discrimination claim could proceed (see reg. 17 Employment Equality (Age) Regulations 2006) but not that of Unfair Dismissal.

HIS HONOUR JUDGE PETER CLARK

1. The parties to this matter, which is proceeding before the Manchester Employment Tribunal, are Mr Keith Train, the Claimant, and (1) DTE Business Advisory Services Ltd (BAS) and Associated Companies and (2) Mr Stephen Rosen, Respondents.
2. The issue which arose for determination at a Pre-Hearing Review held before Employment Judge Porter sitting alone on 30 November 2007 and 30 January 2008 was whether the Claimant was an employee of "the First Respondent", that is BAS or any associated company. By a Judgment with reasons dated 11 March 2008 the Judge held that he was not an employee so the Tribunal had no jurisdiction to consider his claim of constructive unfair dismissal. However, she went on to hold that he was a partner with the shareholders named in a Shareholders Agreement dated 1 May 2005 (the agreement) and that his claim of unlawful age discrimination could proceed. Regulation 17 of the Employment Equality (Age) Regulations 2006 (the 2006 Regulations) extends the protection of the regulations to partners. Mr Rosen, the Second Respondent, is a shareholder and party to the agreement.
3. The Claimant's appeal against that Judgment was permitted to proceed to a full hearing. The case was first listed before Mrs Justice Cox on 18 July 2008. On that occasion the hearing was adjourned for questions to be answered by the Employment Judge under the Burns/Barke procedure. Those answers were provided under cover of a letter dated 18 August. The matter is now restored for hearing before me.

Background

4. The Claimant is a chartered accountant. Following articles commencing in 1964 he became an equity partner in Downham & Co in 1971. From 1983 he traded in a partnership with Gerald Epstein as Downham, Train & Epstein (DTE). In 1990, the Judge found, he was formally appointed Managing Partner.
5. In April 2001 four main trading companies, including BAS, were formed. The then five equity partners in DTE became shareholders in all the companies. In 2002 a London accountancy practice, Kramers, was acquired, thereby increasing the number of shareholders to seven. The number had risen to eleven by the date of the agreement.
6. The agreement was made between the eleven shareholders and the companies, including BAS. Under the agreement, which was said by Clause 27 not to constitute a partnership between the shareholders (and I note that draft Clause 1.24 which referred to an undated partnership agreement was deleted in the final signed deed) provision was made for the distribution of net profits between the shareholders in varying proportions. Thus, by Clause 7.6 Mr Train and three others would receive 17.12 per cent of profits in excess of £1.1 million. Other shareholders received a smaller proportion.
7. Under Clause 8(1) Drawings, provision was made for payment to each shareholder a fixed amount net of tax, as employee remuneration and/or dividend and/or benefits and/or repayment of loans. The monthly figure for the Claimant was £10,000. However, that amount could be varied up or down, according to the needs of the companies following a vote of the shareholders (Clause 8(2)).
8. The Judge found (Reasons, paragraph 4.14) that the Claimant's share of profits was paid by BAS by means of a salary which was taxed through the PAYE system under schedule E. He paid National Insurance and received a form P60 on an annual basis, and a form P11D was also submitted annually. BAS paid his business expenses and provided him with a company mobile phone and BlackBerry. The company also credited him for use of part of his home as an office. It also paid for home telephone, broadband and computer support.
9. The agreement makes reference to employee status, although no written contract of service was entered into by any of the shareholders in the companies. The Claimant was a director of BAS and other associated companies. I have earlier referred to Clause 8(1). Clause 14 is headed "Removal of directors or employees who are also shareholders". Clause 14(1) provides that no shareholder may be removed from office as a director and/or have his employment with the companies terminated other than in accordance with the provisions of Clause 14. Clause 14(2) reads:

"Any shareholder may be removed from office as a director and have his employment terminated without notice or payment in lieu of notice for gross misconduct, provided that the unanimous written consent of all the other shareholders is first obtained."

10. Clause 14(3) made provision for removal from office and termination of employment in the event of a material breach of the agreement as defined. By Clause 14(5) it was agreed that if, following removal of a director or an employee who was also a shareholder, under the preceding provisions of Clause 14 that person brought a successful claim for wrongful or unfair dismissal against one or more of the companies the prescribed price for the value of his shares in the companies, calculated in accordance with Clause 19, should be reduced by the value of any compensation awarded to him.
11. By Clause 24 the shareholders agreed to procure that the companies provided life insurance cover for the individual shareholders. The Judge noted that BAS included the Claimant in a document headed "Employee Information", stating his salary as £100,000 per annum and an entitlement to 48 days annual leave (at Reasons, paragraph 4.17). She also found as fact (paragraph 4.18) that throughout the relevant period the Claimant devoted his time to and worked exclusively for the group of companies. Further she found (paragraph 4.19) that all directors/shareholders were required to submit timesheets referred to as "staff timesheets". However, the Claimant made his own personal pension arrangements; his motorcar was held within a separate property-owning partnership agreement which also included business premises; he claimed a mileage allowance. The Judge found that the Claimant was not subject to any control in how or when he did his work (paragraph 4.20).
12. I note that Clause 25 of the agreement contained certain restrictive covenants, limiting competition and the poaching of employees for two years after ceasing to be a shareholder.
13. Following a grievance presented by the Claimant to a shareholders meeting held on 22 November 2006 he, together with a fellow shareholder Mervyn MacDonald, in due course gave 12 months notice under Clause 19.16(1) of the agreement of his intention to resign as a director, company secretary and employee. That resignation was accepted and his association with the business then duly terminated.

The Pleaded Cases

14. By his form ET1 the Claimant contended that he was employed from 1964 until 2 May 2004, that he was unfairly constructively dismissed and subjected to unlawful age discrimination. In the course of discussion Mr Legard limits the period of continuous employment contended for to a period starting in 2001.
15. By their response the Respondents contended (a) that he was not an employee of any relevant company and (b) that he was not a partner for the purposes of regulation 17 of the 2006 Regulations. They further denied the Claimant's substantive complaints. The Respondents' position later changed, as appears from the Judge's response to Mrs Justice Cox's Burns/Barke questions. The Respondents subsequently accepted that the Claimant was at any rate a quasi-partner for the purposes of the 2006 Regulations. Thus the issues at the PHR were whether he was an employee of the First Respondent for the purposes of his unfair dismissal claim. If he was then he would be covered for the age discrimination claim. If not, was he a partner for the purposes of regulation 17?

The Tribunal's Reasoning

16. In concluding that the Claimant was not an employee of BAS or any other relevant company the Judge expressed her conclusions at paragraph 9, having directed herself as to the law at paragraphs 5 to 8. Paragraph 9 reads as follows:

"I have examined all the circumstances and looked at the picture as a whole to decide whether the claimant was an employee. In reality the contractual relationship between the owners of the business operated by the group of companies remained one of partnership as set out, in the main, by the terms of the Shareholders' Agreement. The reference in that Agreement to the directors being employees, the reference to claims of wrongful and unfair dismissal, do not reflect any agreement that the shareholders were employees. There was no such agreement. In reality the use of limited companies, the payment to directors of a salary, payment of National Insurance contributions was purely a device used to run the businesses of the old partnership with the benefit of limited liability and in the most tax-efficient manner. There was no control over the claimant's function other than that set out in the Shareholders' Agreement. There was no mutuality of obligation other than that set out in the Shareholders Agreement. It was clearly the intention of all the former equity partners, the Shareholders, that the Shareholders' Agreement formed the totality of any Agreement between them. The references in that Agreement, to Directors being employees, are not enough, when viewing the whole picture, to show that the Directors were employees. There was no discussion on that point in negotiations between the shareholders. It is more than likely that these clauses were included by the lawyers to cover every eventuality: they do not, on their own, out of context, provide conclusive evidence that the claimant was an employee. On balance, looking at all the circumstances, I find that the claimant was not an employee of the first respondent."

The Appeal

17. Mr Legard puts the appeal in a number of ways. First, he submits that the Judge was wrong to find that the Claimant was a partner as opposed to an employee; secondly, that she failed to take account of the fact that from 2001 the original DTE partnership was replaced by a corporate structure; thirdly, that to find that the Claimant was not an employee of BAS or some other company or companies of which he was a director was legally perverse; and finally there was a challenge to the Judge's approach to the question of mutuality of obligations.
18. After some wavering in the past, the Respondents' case on appeal is put with admirable clarity and succinctness by Mr Kibling. It is that the Judge was entitled to find that the Claimant was a partner, in business on his account together with his fellow named shareholders and the companies, parties to the agreement. He was not an employee of any of the companies.
19. Having considered the rival submissions, I prefer those of Mr Kibling. I start from the uncontroversial premise that a full equity partner cannot be an employee of a business. See Cowell v Quilter Goodison Co Ltd [1989] IRLR 393, paragraph 7, per Lord Donaldson M.R. The question in this case is whether the true relationship between the Claimant and the "business" was that of partner or employee of one or more of the relevant companies. The point is material both to the unfair dismissal claim, which depends on employee status as defined by section 230(3) of the Employment Rights Act 1996, and to the definition of partner for the purposes of regulation 17 of the 2006 Regulations.
20. Mr Legard rightly points to Clause 27 of the shareholder agreement as being a significant, albeit not conclusive or determinative, factor in deciding whether or not the agreement falls within the definition of a partnership under the Partnership Act of 1890. However, it seems to me that the Judge was entitled to conclude, notwithstanding that provision, that the agreement was in truth a partnership as defined by section 1(1). The fact of the agreement took the matter outside section 1(2) of the 1890 Act; her reasons are now explained in answer to the second Burns/Barke question posed by Mrs Justice Cox. In short, the agreement regulated the affairs of the shareholders and the companies through which the partnership quite legitimately traded. It was a profit-sharing agreement.
21. But for the agreement, I accept that in ordinary corporate life the Claimant can point to many of the indicia of a contract of service. He was paid through the PAYE system, had a fixed holiday entitlement, devoted the whole of his time to the business and was plainly integrated into the business and was held out as being an employee. However, he had no written contract of service and his "salary" was liable to variation according to how well or badly the business as a whole fared. Whilst the agreement stated that its provisions should not be deemed to constitute a partnership and it raised the possibility of employment by the companies of the shareholders it was, as a matter of fact and law, open to the Judge to find that it was a partnership with the consequences to the Claimant's employment rights which she determined.
22. Accordingly, this appeal fails and is dismissed.