LLP Members and Pensions Auto-Enrolment: An Update

by Dechert LLP

The UK Supreme Court ruled in May 2014, in Clyde & Co LLP and another v Bates van Winkelhof, that members of Limited Liability Partnerships (LLPs) are to be treated as “workers” and therefore are covered by the protections which UK law provides for whistleblowers. That LLP members can be workers for the purposes of the UK whistleblowing legislation potentially means that they are likely to be capable of being covered by the statutory auto-enrolment provisions relating to pensions - because the pensions legislation uses pretty much the same definition of worker to determine its application. This OnPoint reports on the recent observations on this issue made by the Pensions Regulator.

Bates van Winkelhof and its potential application to pensions auto-enrolment

Ms Bates van Winkelhof, a partner at London-based law firm Clyde & Co, claimed that she was forced out of the firm having “blown the whistle” on the managing partner of the firm’s Tanzanian associate firm. She reported that the managing partner had engaged in bribery and money laundering, was dismissed from the Tanzanian associate firm, and was suspended and eventually expelled from membership of Clyde & Co LLP. To be eligible for the protection afforded to whistleblowers under the domestic employment legislation, Ms Bates van Winkelhof needed to show that she was a “worker” for the purposes of the Employment Rights Act 1996, either by being an employee of the LLP or, to paraphrase, by working for the LLP under a contract to perform services personally where her services were not being provided to the LLP as a client of a business operated by her.

As we previously reported, the Supreme Court found in May 2014 that LLP members can constitute workers for the purposes of the Employment Rights Act 1996 and can therefore be eligible for domestic whistleblowing protection. In essence, LLP members can satisfy the statutory definition of workers because they provide personal services to the LLP and do not do so in the course of their own business because they are part of the LLP.

The regime requiring employers to implement pensions auto-enrolment applies to “workers” as defined in the Pensions Act 2008. The definition of "worker" in the Pensions Act 2008 is broadly the same as the definition under the provision of the Employment Rights Act 1996 considered in Bates van Winkelhof. This definition covers an individual working under a contract of employment or under a contract whereby the individual undertakes to perform personally work or services for another party to the contract (who is not a client or customer of a business operated by the individual). On this basis, one consequence of Bates van Winkelhof is that LLP members are likely to be capable of being workers for the purposes of the Pensions Act and therefore within the scope of the auto-enrolment regime - if they satisfy the requirements for being a worker.

The Pensions Regulator’s views

The Pensions Regulator has now taken the opportunity to comment on this issue in its first quarterly compliance and enforcement bulletin issued on 1 August 2014. In this bulletin the Pensions Regulator noted that, whilst the Bates van Winkelhof case concerns the definition of a worker under the Employment Rights Act 1996, the definition is very similar to that of a worker in the Pensions Act 2008 for the purposes of automatic enrolment. Its view is therefore that an LLP should assume that the Supreme Court’s decision in Bates van Winkelhof is “equally applicable and as such, members of an LLP could be considered workers for automatic enrolment”. It is unsurprising that the Pensions Regulator has taken this view of the effect of the Bates van Winkelhof case but it does reiterate that auto-enrolment should be a very real concern for LLPs.

Practical consequences

LLPs do not have to take any action unless and until they have a “staging date” for the purposes of pensions auto-enrolment. That said, the Bates van Winkelhof case does mean that those LLPs which have already reached a staging date will need to consider this issue. As the Pensions Regulator puts it, “[t]his ruling applies retrospectively. Any LLPs that have a staging date up to and including 1 May 2014 will need to assess whether a partner is a worker for automatic enrolment. If so, they should take steps to automatically enrol any partner with qualifying earnings with effect from their automatic enrolment date, unless the partner was an active member of a qualifying scheme on this date."

As and when the LLP becomes subject to auto-enrolment, the LLP will need to consider whether any of the LLP’s members should be treated as workers and therefore should be auto-enrolled. As the Pensions Regulator notes, “the factors to be taken into account in determining whether an LLP member is a worker are integration within the organisation, dependence/subordination, and exclusivity (i.e. could the individual provide services to anyone else).”

Qualifying earnings

If an LLP determines that a partner is a worker and so is potentially covered by auto-enrolment, the employer will need to determine whether the the auto-enrolment provisions actually apply. As the Pensions Regulator notes, this will include “assessing whether qualifying earnings are payable, with reference to the LLP’s particular remuneration arrangements and the kinds of payments that count as earnings under the [Pensions] Act.”

Employers are only obliged to auto-enrol workers who are receiving “qualifying earnings” above the relevant earnings trigger for automatic enrolment (currently £10,000 per annum) and who otherwise qualify for auto-enrolment (so-called "eligible jobholders"). Workers who receive “qualifying earnings” below the automatic enrolment trigger do not need to be auto-enrolled but have a right to opt in to an automatic enrolment scheme and must be given certain information about the scheme within six weeks of becoming such a “non-eligible jobholder”.

“Earnings” include salary, wages, commission, bonuses, overtime and certain statutory payments. The nature of the LLP member’s earnings may therefore need to be considered carefully to determine whether an LLP member who is a worker falls within the scope of the auto-enrolment provisions. No specific guidance has been issued by the Pensions Regulator on the assessment of “qualifying earnings” in the context of LLPs.

Whilst an LLP member who is a salaried employee or who is treated as a salaried member for tax purposes may well be considered to be receiving qualifying earnings, it could be argued that a full equity member of an LLP who only receives drawings on account of profit share is not entitled to “earnings” and therefore falls outside the scope of the auto-enrolment provisions. This argument is less strong for LLP members who receive a fixed monthly drawing (paid akin to salary) which represents a priority profit share, particularly if those drawings are non refundable. LLP members who receive discretionary profit allocations reflecting personal contribution to the business could also be described as receiving something akin to a bonus (which would be more likely to be qualifying earnings).

Even if an LLP takes the view that it does not have to auto enrol its LLP members (or offer them access to the auto-enrolment scheme) because they do not receive qualifying earnings, those members may well fall into the category of “entitled workers” and so should be offered access to a pension scheme (which does not need to be an auto-enrolment scheme) and be given information about that scheme within six weeks of becoming such an entitled worker.

Three further points are worth bearing in mind:

  • Employers cannot offer financial inducements, such as higher remuneration or one-off bonuses, to members to encourage them to opt out of their auto-enrolment entitlements.
  • Any members who do join a pension scheme, or are automatically enrolled, will need to consider whether this affects any life time allowance HMRC protections from which they benefit. If they are auto-enrolled they may want to opt out as soon as possible to avoid any detrimental impact on any such protection.
  • The consequences of failure to comply with the auto-enrolment regime can be significant. In the first instance a defaulting LLP in respect of which Pensions Regulator takes enforcement action will likely be issued with a warning letter requiring it to comply with its auto-enrolment duties. The Regulator may also require the LLP to make backdated contributions with effect from its staging date. The Regulator can also investigate alleged non-compliance and has the power to issue various compliance notices. A failure to comply with such a notice can result in a fixed penalty of £400 for a first offence and escalating penalties for more serious or persistent breaches (ranging from £50 a day for employers with less than five workers, to £10,000 a day for those with 500 or more). Furthermore, a “wilful” failure by an employer to comply with its auto-enrolment duty can amount to a criminal offence, punishable by a fine and/or imprisonment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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