Canada: There Are Times When You Don’t Want To Make Partner…

Last Updated: June 5 2014
Article by Curtis E. Marble

Most Read Contributor in Canada, September 2018

Overview

Recently, the Supreme Court of Canada ("SCC") and the Supreme Court of the United Kingdom ("UKSC") both had cause to consider the nature of partnership, and when certain protections due to employees or workers are extended to partners. While the two cases presented very different scenarios – the Canadian case concerning human rights, and the UK decision concerning employment rights – both decisions suggested that partners may indeed be employees in certain situations.

Background & Decision

McCormick v Fasken Martineau

John Michael McCormick had brought a complaint to the British Columbia Human Rights Tribunal ("BCHRT") alleging that a provision of the Fasken Martineau DuMoulin LLP ("Fasken") Partnership Agreement  placing a time limit on the ownership interests of equity partners constituted age discrimination contrary to BC's Human Rights Code (the "Code").   At issue before the BCHRT was whether or not there was an employment relationship pursuant to the definition in the Code. The BCHRT concluded that there was an employment relationship.  Fasken applied for judicial review, and although this was denied by the British Columbia Supreme Court, the British Columbia Court of Appeal ("BCCA") allowed the appeal, concluding that Mr. McCormick was not in an employment relationship pursuant to the Code.  Mr. McCormick appealed to the SCC.

Mr. McCormick became an equity partner at Fasken in 1979, and had an ownership interest in the firm as well as voting rights. In 1980, those partners with an ownership interest in the firm voted to adopt a provision whereby equity partners were to retire as equity partners at the end of the year in which they turned 65.  Mr. McCormick voted for this provision. When determining that McCormick was not an employee pursuant to the Code, the Court considered Mr. McCormick's role within the firm, and noted at paragraph 26 that:

While the specific indicia used in other jurisdictions may vary from those adopted by Canadian authorities, the consistent animating themes are control and dependency.

Justice Abella supplemented the control and dependency analysis with the test applied by the BCHRT for determining whether an individual is in an employment relationship under the Code.  The test considered: 1) utilization, which looks to whether the alleged employer utilized or gained benefit from the employee; 2) control, which asks whether the alleged employer exercised control over the employee; 3) financial burden, which asks whether the alleged employer bears the burden of remuneration of the employee; and 4) remedial purpose, which asks whether the ability to remedy any discrimination lies with the alleged employer.

In assessing the degree of control of a partner in a limited liability partnership, Justice Abella noted that control over workplace conditions and remuneration often lies with the partners who form the partnership.  As such, the Court concluded that, in most cases, partners are not employees of the partnership but are collectively the employer.  This means that, absent express statutory language, human rights legislation would likely not apply to partnerships. Mr. McCormick was, therefore, not found to be an "employee". Notably, the Court did not preclude the prospect of a partner ever being determined to be an employee under the Code.

Clyde & Co LLP v. Bates van Winkelhof

At first glance, one may think that the decision in Clyde & Co LLP v Bates van Winkelhof ("Clyde") is contrary to the findings in Fasken since the Appellant was found to be a worker for the purposes of the UK Employment Rights Act ("UK ERA"). Like the SCC, the UKSC did not preclude partners from being considered workers in certain situations, but does so by relying on statutory interpretation rather than a contextual analysis.

Ms. Bates van Winkelhof (the Appellant) is a solicitor who became a member of Clyde & Co LLP (the Respondent) as an Equity Partner in February 2010.  The Firm had two levels of membership: "Equity Membership" and "Senior Equity Membership." Equity Members received a fixed annual share of profits and such profit sharing units as the management board might determine.  The rights of Senior Equity Members were more extensive but both groups could all vote to elect the Senior Partner and the members of the management board.  In November 2010, the Appellant reported to the Firm's money laundering reporting officers that the managing partner of the firm with which she had an employment contract, as part of a joint venture agreement, had admitted to paying bribes to secure work and the outcome of cases.  The Appellant alleged that, as a result of this disclosure, she was subject to a number of detriments, including expulsion from the Firm in January 2011.  The Appellant claimed that her disclosures were "protected disclosures" within the meaning of section 43A of the UK ERA, and brought an action against the firm pursuant to section 47B of the UK ERA.

Ms. Winkelhof appealed the decision made by the United Kingdom ("UK") Court of Appeal, which held that the Appellant could not be a worker for the purpose of section 230(3) of the UK ERA because section 4(4) of the Limited Liability Partnerships Act  ("UK LLPA") holds that a member of a limited liability partnership ("LLP") should not be regarded as being "employed".  As such, the Appellant would not be entitled to the whistle-blower protection provisions per sections 43A and 47B of the UK ERA.

Lady Hale, writing for three out of five members of the UKSC, concluded that the Appellant fell within the statutory definition of a "worker" per section 230(3)(b) of the UK ERA, and was therefore entitled to the whistle-blower protection provisions in that statute.

Lady Hale noted it was common ground that 1) the Appellant worked "under a contract personally to perform any work or services" for the LLP, and 2) the LLP was not her "client or customer".  What was at issue, however, was whether members of a LLP could be employed by the partnership. Per UK LLPA section 4(4):

A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.

Lady Hale construed section 4(4) to mean:

[W]hatever the position would be were the LLP members to be partners in a traditional partnership, then that position is the same in an LLP.

The question then becomes whether "employed by" in s. 4(4) covers those who "[undertake] to do or perform personally any work or services for another party to the contract" per UK ERA 230(3)(b). Lady Hale found that it did not, because:

  1. the natural and ordinary meaning of "employed by" means to be employed under a contract of service;
  2. the law now distinguishes between i) those who carry on a profession or a business undertaking on their own account and enter into contracts with clients or customers to provide work or services for them and ii) those who are self-employed people who provide their services as part of a profession or business undertaking carried on by someone else;
  3. if Parliament wished to exclude the possibility that partners in a traditional partnership can also be workers for that partnership, it would have done so expressly; and
  4. the UK ERA itself contains extensions of definitions to what would otherwise be the natural and ordinary meaning of these words – these extensions are limited to this Act, and cannot be extended to the UK LLPA.

Lady Hale then went on to consider the concept of subordination at paragraph 71, as the Court of Appeal previously noted that "underlying the statutory definition of worker is the notion that one party has to be in a subordinate relationship to the other." Parting ways with the SCC's reliance on a fulsome review of the relationship between the parties, Lady Hale concluded at paragraph 39 that trying to construct a test for subordination was largely unhelpful as "[w]hile subordination may sometimes be an aid to distinguishing workers from other self-employed people, it is not a freestanding and universal characteristic of being a worker." As such, an analysis of subordination in terms of the Appellant's role vis-à-vis the partnership, was not explored by this Court. Ultimately, Lady Hale did not resolve the issue of whether 1) it is the law that a partner can never be an "employee" of the partnership, and 2) if so, whether this reasoning also means a partner can never be a "worker" for the partnership.

Significance

The SCC did not accept the argument made by the BCCA that a partner can never be an employee for purposes of the Code, and as such this decision is not conclusive that a partner in a LLP could never be considered an employee, at least for human rights purposes.In this sense, Lady Hale's judgment demonstrates how such a legal impossibility may come to pass: statutory interpretation may result in a partner being an employee.

This is significant given historical jurisprudence establishing that it is an impossibility for an individual to have the dual role of both an employee and a partner of the same partnership.  This leaves open the possibility that, especially where human rights legislation is concerned, a partner who has less control and greater dependency on their firm may find themselves as being an "employee" for the purposes of human rights legislation, but being a "partner" for other purposes. Similarly, even minor changes in Canadian legislation may result in Lady Hale's analysis being adopted in the process of statutory interpretation.

Case Information:

McCormick v Fasken Martineau DuMoulin LLP, 2014 SCC 39, Docket 34997.

Clyde & Co LLP and another v Bates van Winkelhof, [2014] UKSC 32, (Easter Term).

Curtis wishes to thank Beverly Ma, Summer Student, for her assistance with this post.

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