UK: A Can Of Worms (And Then Some) ~ LLPs And Auto-Enrolment

Last Updated: 23 July 2014
Article by Kris Weber

The Supreme Court recently gave its decision in a long-running case concerning the extent to which a partner in a law firm could benefit from the protection afforded to whistleblowers under the Employment Rights Act. One of the more surprising ramifications of the judgment is that professional partnerships, constituted as LLPs, are now potentially under an obligation to auto-enrol all of their equity partners into pension schemes. Or face criminal sanctions if they don't...

Background: auto-enrolment

Auto-enrolment is something with which most, if not all, corporate entities will already be eminently familiar.  Only those with fewer than 60 employees will not yet have reached their staging date, but without exception they will nonetheless be gearing up for it.  Whatever legal form an employer takes, it should ensure it knows the fine detail of what it needs to be doing for its employees (or, more properly, its "workers") in terms of pension provision going forwards.

Whistle-blower protection under the Employment Rights Act

Krista Bates van Winkelhof was a partner in an international law firm, she practised corporate law and split her time between the UK and sub-Saharan Africa.  (Please bear with me: I promise that this is still an article about auto-enrolment.)  For various reasons, which are understood to be the subject of separate ongoing legal proceedings, Ms Bates was expelled from the partnership.  She brought a claim in the Employment Tribunal asserting, amongst other things, that she enjoyed statutory protection as a whistleblower under the Employment Rights Act 1996.  Such protection is only available to employees and workers, and until very recently the received wisdom was that partners in law firms (or, in fact, in any professional services firm) were neither of these.

That, however, is now no longer the case.  The Supreme Court has held that "members" of limited liability partnerships – which basically means those who are designated as "partners" in the vast majority of professional services firms such as accountants, actuaries, surveyors, fund managers and lawyers – are "workers" for employment law purposes.  Although the Supreme Court did not rule on the related question, they are highly likely to be "workers" for auto-enrolment purposes too. 

To be (in receipt of qualifying earnings) or not to be, that is the question

However, simply because someone is a worker does not automatically mean that they have to be auto-enrolled into a qualifying pension arrangement.  They have to have "qualifying earnings" (in excess of a particular threshold, currently Ł10,000) as well.  The Pensions Act 2008, which regulates the auto-enrolment regime, defines qualifying earnings very tightly as, essentially, "salary, wages, commission, bonuses and overtime" (plus the statutory maternity and paternity pay that new parents enjoy).  It is very unlikely, whatever an LLP's partnership deed says, that the monthly drawings of an equity partner in an LLP will constitute any of those things.

But buried deep in the small-print of the 2008 Act is an interpretative provision which requires any phrase, connected with "employment" and having a specific meaning in that context, to be given an equivalent meaning in the context of a "worker".  Clearly much will depend on the precise basis on which a partner is remunerated, and on the terms of the partnership deed (members' agreement) that is in place for the particular LLP in question.  However it is not beyond the realms of possibility that equity partners in professional services firms could find that their monthly drawings – which, legally, are an 'on account' payment of current year's profits – constitute "qualifying earnings" for Pensions Act purposes. 

"Imprisonment for a term not exceeding two years..."

The real sting in the tail comes when one looks at penalties for non-compliance with the auto-enrolment regime.  Failure by an employer to auto-enrol its workers, as required by section 3 of the 2008 Act, is potentially a criminal offence.  Furthermore, liability won't necessarily stop with the actual employer: any officer of a body corporate, with whose consent (or through whose neglect) an offence is committed, is equally liable.  And the Act sets down a prison term of up to two years as one of the penalties for those deemed responsible for non-compliance.

It's also necessary to bear in mind here that the law hasn't actually changed as a result of the Supreme Court decision: it's merely been clarified.  Members of LLPs have therefore been "workers" ever since the Limited Liability Partnerships Act 2000 came into force.  Which means that any sizeable professional partnership, that has already had its "staging date" for auto-enrolment purposes, is potentially already in breach of the Pensions Act's requirements.  Although an unwitting breach of the law doesn't (in this instance) automatically lead to the possibility of criminal sanctions being imposed, they do kick-in when that breach becomes "wilful".  An interesting question is the extent to which a hypothetical LLP, that is already liable to auto-enrol its partners, is properly able to 'do nothing' – and not auto-enrol its partners – before its innocent breach becomes a wilful one.

Get out of jail free?

There is, however, potential salvation (for at least some LLPs) contained in Regulations made under the 2008 Act.  An employer's auto-enrolment obligations (and in particular its "staging date", as from which it is required to auto-enrol its workers) are commonly described as being driven by the number of staff it had on 1 April 2012.  However, to be entirely accurate, an employer's staging date is determined by the number of people that were in its "PAYE scheme" (i.e. the arrangement it has with HMRC that permits it to deduct tax from employees' income) on that date.  If an entity was not registered with HMRC to deduct PAYE tax from employees' pay (i.e. if it was not in a PAYE scheme) on 1 April 2012, then its staging date is pushed right back to 1 April 2017.

Many LLPs, and in particular those who employ their staff through a service company, will very probably not have been part of a PAYE scheme on 1 April 2012.  Accordingly, their staging date (as from which they will be required to auto-enrol any of their partners who have qualifying earnings) will be nearly three years hence.  Although those LLPs will still eventually become subject to the auto-enrolment regime (assuming of course that they have workers who are in receipt of qualifying earnings), this provision does give them some valuable breathing space.  In so doing it removes the headache of whether to comply, now, with an uncertain obligation, in order to stave off the possibility, however remote it might be, of criminal liability for something which cannot realistically ever have been intended as a legal obligation.

Next steps

LLPs should, as the Pensions Regulator has recently suggested, be looking at whether their partners are "workers" and are in receipt of "qualifying earnings" for auto-enrolment purposes.  However, their first consideration should actually be the extent to which the LLP (as opposed to any service company) was in a PAYE scheme on 1 April 2012.  If it wasn't, then nothing other than a watching brief going forwards is needed for the time being.

It is then to be hoped that, well in advance of April 2017, the Government chooses to clarify the legislation to make it clear that – whilst partners in professional services firms might well be workers and might also be receiving qualifying earnings – they are not within the scope of auto-enrolment.  Such an outcome would be not only sensible, but would surely give proper effect to the legislative intent behind auto-enrolment, which really cannot have been to require professional service firms that are constituted as LLPs to put all of their equity partners into personal pension schemes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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