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Partnership disputes and employment law

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Partnerships expert Andrew Cromby and employment law expert Sejal Raja talk about partners exiting professional practices, and look at how employment law can be applied in disputes between them and the firms that they are leaving.


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Andrew: Well, good morning, everybody, and welcome to this morning's podcast, which is all about partners exiting professional practices and looking at how employment law can be used to restore some equality of arms and disputes between them and the firms that they're leaving.

Andrew: I'm here today with my Partner, Sejal Raja. Sejal, introduce yourself and tell us what you do for a living.

Sejal: Thanks, Andrew. So my name is Sejal as Andrew said. I'm an employment specialist and I have been practicing employment law for over 20 years and I've got significant experience acting for individuals and organizations in all types of employment disputes, including discrimination and whistleblowing claims. So yeah, I love what I do. That's why I'm still here.

Andrew: Fantastic and I'm Andrew Cromby. I'm a commercial litigator. I've also got more than 20 years experience, but I've got to say Sejal is bearing her 20 years, a lot more lightly than I am. I'm listed in the directories as a leader in the field of partnership disputes and have been for the last 20 years or so. I've dealt with literally hundreds of disputes between partners and professional firms, including solicitors, accountants, stockbrokers and others.

Andrew: So today, Sejal and I thought it might be interesting just to have a chat about the position we're in the moment where firms are able to be quite prescriptive and the rules that apply to their members and that can be quite claustrophobic and create difficulties for partners sometimes who are treated badly and need to get out of those partnerships on terms which aren't disastrous for them. And just to set the scene then. Partnership law as a whole is some of the oldest law in the English system. It's a bit like contract law in that respect, and the current legislation dates back to 1890, if you can believe it, although there's more recent legislation in relation to limited liability partnerships which we'll come onto. Basically, partnership law is based on principles of trust and mutual obligations and partnerships that have been used right up to the present as one of the preferred vehicles for professional practices, including solicitors, accountants, amongst others. As I've said now in the past, professionals in business as partnerships have shared joint unlimited liability for each other's acts, and they've all owed each other duties to act in good faith, which is a rather nebulous concept, the nature of which has often been debated, but in its widest compass it comes down to treating each other honestly and not acting unfairly or in a way which impacts negatively on some of the times for the benefit of others.

Andrew: Sejal, I think you practice as a partnership lawyer, as well as an employment lawyer don’t you.

Sejal: Yeah, absolutely. Absolutely I advise partnerships, special partnerships and partners as well in any disputes that they have.

Andrew: I don't know if like me, you've noticed that as the world has become increasingly commercial and less cuddly and more cutthroat, it's easy to see why people in partnerships like to adopt a tougher line in business these days. Perhaps you might even call it a commercially predatory approach to the way they do business, and they want to protect themselves from unlimited personal liability. So they might find the idea of a partnership where they have to be true and faithful to everybody and share liability for everything that's done unattractive.

Sejal: No, I agree. I agree. I've seen an increase in disputes because of that.

Andrew: And of course, we've seen partnerships like accounting partnerships in solicitor’s firms double treble, quadruple in size in the last 20 years.

Sejal: Yeah.

Andrew: That means it's much harder to be responsible, to willingly be responsible for everything that's going on, I think.

Sejal: Yeah.

Andrew: And that paved the way for what has come more recently and by which I mean in 2001. Limited liability partnerships in some ways not very similar to partnerships at all. They have a separate corporate existence in the same way that the company does a separate personality, whereas those old fashioned partnerships are just a collection of individuals who will share responsibility. So already there is an advantage that because that separate corporate entity offers protection to the individuals, that practice within it, which is one of the reasons that people are so keen on them. But the other reason, and this became pretty clear early on when we started to see LLPs is that it's possible to get away from the default regime that exists. So both partnerships and LLPs have sets of rules enshrined in different places. And I won't go into now which set out how partners have to treat each other and how they're regarded by the rest of the world. Mostly, though, there's obligations as between the partners can be varied by agreement. And in LLPS, what I've seen and I’m sure you’ve seen it too Sejal, is most firms doing away altogether with this duty of good faith.

Sejal: Yeah, absolutely.

Andew: And that's really so that the interests of the LLP, the limited liability partnership, can be the main objective, which means everybody is acting together in the best interests of the business.

Sejal: Yes.

Andrew: But it also means, unfortunately for individual partners, that they no longer have the protection of all their partners being required to treat them honestly, truthfully and fairly. Well, honestly, I'd probably still require to be treated, but. But it's a lot less comforting than it used to be, for sure.

Sejal: Yeah no, I totally agree.

Andrew: So the consequence of that is that most modern partnerships are LLPs or even sometimes in corporate vehicles, but we're talking about limited liability partnerships mainly today. And there's typically a huge, huge, lengthy agreement. I have to say, we have one of those in our own partnership.

Andrew: Don’t we Sejal.

Sejal: We do.

Andrew: Not all the partners read, but they probably ought to because they usually contain provisions which give the LLP almost virtually unlimited control over the individuals, the members, which is another word for both, but it's the descriptor that the owners of the LLP. But they typically call partners as well. So I'll use that term interchangeably.

Andrew: So what that means is power can be concentrated in the hands of just a few people. Everybody in the LLP has to do what they can in the best interests of the LLP. Typically, there's even an agreement that they won't sue each other as individuals, which was something that happened all the time in the old-fashioned partnerships. So, it's a lot more flexible in terms of how you have to treat the individuals who are running the business with you.

Andrew: So, all of that makes you feel pretty good. If you're someone who's controlling an LLP because you've got this document that is effectively a handcuff in paper, it's been called sometimes and provided you operate the mechanisms within that, you make your decisions in the correct way. Often those decisions stick and the court takes the view if there's an arbitration as a dispute between the parties, well, partners, members and that organization saw what they were getting into. And if they’re professionals that doesn't help you get away from that at all. And if that's what they've agreed to, that's what they've got to stick to. So in the conversation we're about to have, I sort of regard myself as the bloated, controlling partner of a big, limited liability partnership. This is an entirely fictional situation, of course.

Andrew: And I'm sitting there and I'm we're going to talk about a situation where someone has legitimate complaints and asking what they can do about that when they're faced with all these awful controls and restrictions.

Andrew: So should we set the scene? Do you want to do that? Sejal or should I?

Sejal: No why don't you do that? Because you've got the you've got the issue that you want to deal with. And I'll respond as to what my view is and how I would advise this individual.

Andrew: OK, fantastic. So let's talk about, say, a female corporate partner in a law firm, highly, experienced, highly effective, highly profitable. She's got high billable hour targets that she's performed up to for years and years and years. But she's gone on maternity leave and she's about to return from that. She discusses coming back to the office with her team head and with some of her other colleagues too, and discovers that all of the clients she's built up over many years prior to having children have been distributed to others in the team. But very worryingly, there is no intention of the peers to transfer them back to her, which takes her by surprise and doesn't make her particularly happy.

Andrew: She also understands that there have been internal communications between a number of her partners complaining about the fact that she said she's “going to need to leave work on time to collect her children from nursery”. I mean, that's just unthinkable Sejal, isn’t it.

Sejal: Well, I know. And, you know, people think it. But do they actually say it?

Andrew: Outrageous? Unfortunately, we do see things like this fairly often.

Sejal: We do.

Andrew: Shortly after returning to the office, our partner’s told she just isn't keeping up and is given notice of compulsory retirement and just stopping there. One of the mechanisms you can have in a LLP agreement is the giving of a compulsory measures, which is simply a way for a partnership to decide. Maybe that decision is concentrated in just a few hands, that someone should go and they don't even need to be reasons given for that, as long as they make that decision in the way that it's provided for in the agreement itself.

Andrew: So under this LLP agreement in our fictional situation our partner/member, isn't owed a duty of care, isn't owed a duty of good faith, has agreed not to sue her fellow members personally, and it also, as I say, permits her to be given notice without any reason whatsoever.

Andrew: So even if she did think, I'm not happy with this and I'm going to try to sue the LLP for being forced out, which doesn't immediately sound promising in an agreement where you've said they can do that to you. The agreement also says that all disputes to be dealt with by way of arbitration. And if you haven't dealt with an arbitration, it's basically a confidential version of going to court where both sides pay an arbitrator who has essentially all the same powers as a judge. As a consequence, it takes longer and it's more expensive. And you also tend to find that arbitrators like to stage down the middle, whereas judges tend to make, I think, sometimes slightly more firm decisions. Depends on your arbitrators and there are fantastic ones out there.

Andrew: So I'm sitting back here as the bloated heavyweights at my firm, thinking great. This female partner can complain all she likes. What is she going to do about it? But then I discover that there's an agile, aggressive lawyer who might be able to give me an answer I don’t like.

Sejal: Absolutely, absolutely. And I would love to have been instructed by this individual.

Sejal: So it's not so straightforward. And, whilst partners are not employees, and therefore they don't have unfair dismissal rights, they do have the right not to be discriminated against on the grounds of some protected characteristics of which sex, race, disability are a few. And this is set out in the Equality Act 2010. And in this particular scenario, it's likely that the partner can rely on the protected characteristics of her gender, her sex. And this could be problematic for this partnership and LLP’S when considering issues of compulsory retirement, particularly if there's no reason or plausible reason as to why the decision has been taken. And therefore, sticking to the terms of a deed or membership looks considerably a riskier proposal if you've just decided, actually, you know what, it's not working out, we're going to try and retire you without notice, without any thought behind it, without any rationale. And as you said, Andrew, a well drafted partnership or LLP agreement will deal with things that happen in the event of dispute between partners. And typically, it will include provisions for arbitration. But, unfortunately for you, not for my client. Such clauses are of little use where the provisions potentially impinge the partner’s or member’s right to bring a discrimination claim.

Sejal: So that's something that, you know, partnerships or LLP need to be firmly reminded of when advising a partnership in such a dispute or when you think you need to expel a partner.

Andrew: Is there any way that I can exclude that, as the head of the big firm so that there's no right to go to the employment tribunal?

Sejal: No, no, you can't. Any clause that purports to exclude or limit a partner's right to bring a discrimination claim will be unenforceable. So you can't do that, unfortunately.

Sejal: So if I was advising this partner, I would advise her to commence proceedings in the employment tribunal and the good thing for my client in this case is that there's no fee in the employment tribunal, unlike civil courts, where you have to pay an issue fee and pay fees to run the claim. This is just completely free. All she needs to do is pay her legal costs if she wants to appoint solicitors. And she doesn't have to do that. So that's a good thing for her in terms of bringing a claim.

Sejal: There are strict time limits in bringing a claim. So she has to bring or start ACAS conciliation proceedings within three months of the active discrimination, so that in this case, it would be the expulsion or the compulsory retirement.

Sejal: So you're probably thinking Andrew, well, say what if she does? She's not going to have much by way of damages, is she?

Andrew: Yeah, that’s right.

Sejal: Well, that's wrong.

Andrew: I should have known.

Sejal: If she was successful, she could recover compensatory award, which is based on the period that she's out of work. Now, if she's just coming back from maternity leave and she's maybe agreed a flexible working arrangement, she may find that it's going to be really difficult for her to find a similar arrangement going forwards relatively quickly. So her damages could be quite significant. And because it's a discrimination claim, this compensatory award is uncapped and so therefore the damages could be quite significant. In addition to that, it doesn't stop there, she could also recover an award for injury to feelings. And injury to feelings is intended to compensate the individual for hurt and distress they've suffered as a consequence of the partnership's discriminatory action towards them. And an award for injury to feelings can be made irrespective of whether she has suffered a financial loss.

Sejal: So it may well be that that she leaves a partnership and she walks into another job, another role. So her losses have been mitigated. So she hasn't got any financial loss. She can still bring a claim for injury to feelings.

Sejal: And there are a number of bands. You've got three bands. You've got the lower band at which at where the act of discrimination is isolated or one off. And the award there is up to £9900. You've got middle band, which is for serious cases which don't merit the highest band and that could be up to £29,600. And then you've got the upper band, which is a campaign of discriminatory conduct, and that can go up to £49,300.

Andrew: So what would we be talking about there Sejal, with months and months of communications with derogatory things being said?

Sejal: Yeah, I think middle band we're looking at there, I think the upper end of the middle bands for about £20,000.

Sejal: So, you know, when I'm acting for organizations, they come to me and say, look, we're not worried about the money. We're just happy to pay them and deal with that. Which is fine. But there are other elements to think about. And in addition to monetary values, there are significant reputational risks. And my advice to this individual, if I was acting for her, would be to report the matter to the SRA. And if we did that, then, it could lead to an SRA investigation, which would not be helpful and would not be. Well, which partnership want that?

Andrew: I wouldn't take it.

Sejal: Yeah, exactly.

Andrew: So that's the Solicitors Regulatory Authority.

Sejal: Yes.

Andrew: And they can discipline, impose fines. So, hang on a minute. You're telling me? Not only have I got to worry about getting sued with no ability to recover costs for the person who's suing me, who doesn't have to instruct lawyers. But now I can get a black mark against the firm and any individual that's been involved from my professional regulatory body. This is a nightmare, Sejal.

Sejal: Absolutely absolutely. And also, what you need to also be aware of, if the partner was being pretty robust and said, actually, “you know what, I don't care about the money, I'm going to take them to the cleaners. I want this out to be in the public domain”. Any judgment is in the public domain. So once a judgment has been made, it's out there for everyone to see. So that in itself could cause reputational risk for the partnership or the LLP.

Andrew: What about the hearing itself? Can I turn up at that?

Sejal: You can. Absolutely. It's an open hearing unless we make an application for it to be restricted. And in these sorts of circumstances, there won't be a restricted reporting order. So it will be a public hearing that reporters can attend and anybody from the street can attend to hear what's going on.

Andrew: Well, we want to close that down straightaway.

Sejal: Yes, absolutely.

Sejal: And the other thing I would advise because we know, you've alluded to, Andrew, that there's been things that have been said about her, between colleagues, about her leaving work early. I would also advise her to make a subject access request under the Data Protection Act, just to find out what information they're holding about her. And that could be quite significant and put the partnership into a lot, you know, create a lot of work for them. If it was carefully drafted and asking them to search emails, text messages, WhatsApp messages, correspondence about different partners and colleagues who may have said such things.

Andrew: So this is a legally enforceable request, which they have to comply with to produce information about the individual making the request? And you can specify what you want to see. And as you say, all those things we all think are private, for instance, WhatsApp messages. Does she have a secret WhatsApp message to people? But no they can and are produced. And lawyers in particular are cautious about not giving full disclosure because that's professional suicide. You've got to, you've got to come clean.

Sejal: Yeah.

Andrew: And that's an unhappy situation for them to be in.

Sejal: Yeah.

Andrew: I like the sound of that a lot. And it's something that I see all the time in partnership disputes.

Sejal: Totally, totally. And so yes. So it's, you know, I think partnerships have to be very wary and before they make decisions about expelling or retiring partners. And I think what they should do is document their decision making and the rationale as to why they're doing what they're doing.

Andrew: Yes, that's right. At least if they thought about it and they've applied sound principles, it's fairer. And the closer you get to fair the farther you get from danger.

Sejal: Yeah, absolutely. And, you know, in certain respects, you may say, well, look, I've got this partner that's not performing. Their billable hours are shocking. Can I then dismiss them? Because I've got a reason now to dismiss them or retire them. That Would be okay, wouldn't it?

Andrew: Well, I'm not so sure. Sejal, I'm beginning to doubt everything now. I wonder whether you might have to try and help them recover their performance or see if you can do anything to assist them.

Sejal: Yeah, absolutely. And I think you've got to look into that, because it may well be that if you drill down and find out exactly what's causing the performance issues, they may have an underlying health condition, which is impacting their performance. And that underlying health condition could amount to a disability and therefore they could be protected under the Equality Act and have a disability discrimination claim.

Andrew: Right so lots of things that can be done. So unfortunately those well drafted LLP partnership agreements, which you still need because if you haven't got them, you've got a host of problems on top of that, if you're trying to run the business. But they don't lock out potential claims of every kind. There are still plenty of things that can be done and always worth considering. So even if you signed up to that swingeing LLP agreement, there would still be many things you need to consider and you need to equip yourself with a lawyer who knows how to make those claims effectively.

Sejal: Yeah and I think, you know, with the environment that we're all in and how litigious people have become, I think it's really important that if a partnership or an LLP is thinking about retiring a partner, they should take advice before they do so because it could go horribly wrong once they make that decision, if they hadn't, you know, taken steps to make sure that actually what they're doing is appropriate and right under not only the agreement, but in accordance with discrimination and whistleblowing legislation.

Andrew: I guess the danger is lots of businesses or many businesses, they don’t look before they leap. And they store up enormous problems for themselves, whereas even a brief discussion with someone like you could have saved them a lot of difficulty.

Sejal: Yeah, absolutely.

Andrew: Well, any further thoughts?

Sejal: No, I just hope that you found this useful and just makes you realise that you've got to look at the wider picture. And I think also one takeaway point is, you know, document your decision making, because if in the future you get embroiled in litigation, having notes and documents of your decision making is really, really helpful.

Andrew: Yeah, and I guess another takeaway for me is, for heaven's sake, appoint someone like Sejal to your board if you've got them in your business because you'll get the best advice.