It has always been possible for a member of an LLP (or for want of a better description, a partner of an LLP) to be considered an employee. However, Employment Tribunals have historically been reluctant to make such a ruling when a member brings a claim.
The new tax changes, which came into effect on 6 April, could now change the position taken by tribunals.
HMRC have pushed through the changes, which it says "…makes the tax system fairer by ensuring that employment taxes are paid by LLP members who are essentially employees…".
The new rules means that if a member meets three criteria, then they will be taxed as an employee. The criteria deal with the amount of 'variable' remuneration the member receives, the lack of management influence they have over an LLP and the amount of capital the member pays into the LLP.
This change also means that the LLP has to pay employers national insurance for those members who meet the criteria.
Many LLPs have had to address these issues in some haste.
In a good number of cases they have asked the members to make capital contributions amounting to at least 25 per cent of their fixed pay. This then satisfies the new test and the member is not then taxed as an employee. This is not the only solution (the others being in relation to the amount of variable remuneration or the amount of management influence), but it is seen as the easiest one to deal with.
While those members that fall foul of the new HMRC tests will be taxed by HMRC as employees, that does not make them employees in all other senses – that still falls to the Employment Tribunals to decide.
The Employment Tribunals test for whether a member is an employee comes from an assessment of (a) if they contribute some capital, (b) if they have a share in the profits/ assets of the LLP and (c) do they have a voice in the management of the affairs of the LLP.
The Employment Tribunal's test looks all too similar to the new HMRC test – will this mean that the Employment Tribunal will now focus on how the member is being taxed in deciding if they are in fact employees in all senses?
If members become employees there is a raft of additional employment protection they receive.
The most obvious is the right not to be unfairly dismissed, but it runs on from there to include maternity and paternity rights, protection for making a protected disclosure ('whistleblowing'), as well as pension contributions from the LLP under the auto-enrolment scheme.
Indeed, if a member becomes an employee, a failure by the LLP to auto-enrol them will be an offence.
When an LLP and its members are considering how to comply with these tax changes, either by remaining a member or becoming taxed as an employee, it is worth considering the many additional responsibilities the LLP will have towards employees as compared to members.
To avoid later arguments and confusion about their employee status and potential litigation, members of LLPs or LLPs themselves on behalf of members, must decide now how they are going to deal with these issues.
David Israel is a partner at law firm Wedlake Bell and leads its employment practice