Important announcement regarding auto-enrolment and partners in LLP businesses
We have recently received further information regarding auto enrolment and partners in LLPs.
Following a recent Supreme Court ruling concerning LLPs it has now been recognised that there could be a potential requirement to automatically enrol partners into a Qualifying Workplace Pension Scheme. For this reason the Pensions Regulator (TPR) has produced further guidance and commentary, which as you will see may have an immediate and retrospective impact:
- On Wednesday 22 May 2014 the Supreme Court ruled in Clyde & Co v Bates van Winklehof that a partner of Limited Liability Partnership (LLP) was a ‘worker’ under the Employment Rights Act 1996 (the ERA). The Court made no distinction between ‘equity partners’ or ‘salaried partners’.
- Prior to this ruling, previous case law under the ERA said that a partner of an LLP was not considered a worker under the ERA.
The Court noted that the same definition is used in other legislation, most notably in relation to the national minimum wage, working time and part time working.
- Whilst the Court did not mention the automatic enrolment legislation, the definition of ‘worker’ under the ERA is very similar to the definition of worker in the Pensions Act 2008 for automatic enrolment purposes. We have been asked by a number of LLPs for our view on the implications of the Supreme Court’s ruling for automatic enrolment and set out our view opposite:
Assessing a ‘worker’ under the Pensions Act 2008
- Given the similarity in the definition of worker in the ERA and the Pensions Act 2008, the Regulator’s view is that an LLP should assume that the Supreme Court’s decision is equally applicable to the Pensions Act 2008 for automatic enrolment purposes.
- The effect of this is not that every partner of an LLP is necessarily a ‘worker’ for automatic enrolment purposes, rather that they could be a ‘worker’ for automatic enrolment.
- The LLP will now need to assess each of their partners against the definition of worker in the Pensions Act to determine whether the partner is a worker or is self-employed for automatic enrolment purposes, having regard to the matters mentioned by the Supreme Court.
- These are:
- Integration within the organisation
- Exclusivity (ie. could the individual provide services to anyone else)
The Court emphasised that there was no single factor that was determinative of worker status, and in particular dependence/subordination was an indicator rather than a requirement of being a worker.
- More information on the definition of worker and the general factors to consider in identifying workers can be found in Detailed guidance no.1 – Employer duties and identifying the workforce
- If, after this assessment, the LLP determines that a partner is a ‘worker’ under the Pensions Act 2008, they should apply the employer duties to the worker in the same way they would for any other worker.
However, partners will only have to be automatically enrolled if they receive “qualifying earnings” (which includes salary, wages and commission but not genuine profit share). If they are “workers” but do not have “qualifying earnings” then they still have the right to request to be enrolled into a registered pension scheme and the right to be provided with certain prescribed information.Automatic enrolment, if required, should take effect from the LLP’s original staging date (with backdated contributions where appropriate). The partner will still have the option to opt-out once enrolled and would need to do so if he does not want to lose any relevant HMRC protections (individual advice should be taken on this if appropriate). If the partner is an active member of a qualifying pension scheme already (and has been at least since the staging date) then no further action need be taken. We would recommend that the employer reviews information in the Detailed Guidance No.1, however, we have highlighted below a number of the key areas of the guidance from the TPR below:
The first step for an employer is to see if they employ anyone classed as a ‘worker’. To do this, they need to understand their contractual relationships.
9. A worker is defined as any individual who:
- works under a contract of employment (an employee), or
- has a contract to perform work or services personally and is not undertaking the work as part of their own business.
10. Anyone who has entered into a contract of this type (sometimes referred to as a ‘contract of service’) with an individual is an employer and is required to comply with the new employer duties.Personal service workers15. If an individual does not work under a contract of employment, they may still be assessed as a worker for the purposes of the new duties if they have contracted to perform work or services personally (this is sometimes referred to as a ‘contract of services’). However, an individual who is paid a fee as a self-employed contractor under a contract for services is not normally a worker.
16. The distinction between a ‘contract for services’ and a ‘contract of service’ is much debated in employment law and employers will be used to making the assessment of employee status for employment rights and tax purposes.
17. However, employers should not rely solely on a person’s tax status when assessing whether they are a worker. An individual considered by HM Revenue & Customs (HMRC) as self-employed for tax purposes may still be classed as a ‘worker’ under the new employer duties legislation, if they are in fact working under a personal contract of services.
18. No single factor, by itself, is capable of being conclusive in determining whether a contract is ‘for services’ or ‘of service’.
However, individuals are likely to be considered as personal service workers (workers under the contract of services) if most, or all, of the following statements are true:
- The employer relies on the individual’s expertise and expects them to perform the work themselves
- There is an element of subordination between the employer and individual, for example the individual reports to the employer’s managers or directors in respect of the specific operation or project on which they are contracted to work
- The contractual provisions state that the contract is not a contract for services between the employer and the individual’s own business
- The contract provides for employee benefits such as holiday pay, sick pay, notice, fees, expenses etc
- There is a mutual obligation set down in the contract to provide or do the work
- The individual does not incur any financial risk in carrying out the work
- The employer provides tools, equipment and other requirements to the individual to carry out the work.
19. This list is not exhaustive. As when they are assessing an individual’s status for tax purposes, an employer must take into account all relevant considerations.
This is a complex area and it is clear that the onus falls on the employer to determine and record how they have assessed individuals within the business. As this area is based on employment law we are unable to provide advice and would recommend that legal advice is sought. The above is provided for information purposes only and should not be considered as advice.