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LLP members and pensions auto-enrolment – reducing risk and protecting rights

The recent Supreme Court ruling in Clyde & Co LLP and another v Winklehof  held that LLP members were “workers” for the purposes of whistleblowing protection and whilst the decision represents a significant development in the area of employment and partnership law it also means that LLP members now have the benefit of part-time worker, national minimum wage, working time rights and pension auto-enrolment rights. This will affect thousands of firms typically acting in areas of law, accountancy and financial services.

Generic retirementIn particular, the issue of auto-enrolment may be an urgent concern for those LLPs that have already passed the staging dates for auto-enrolment of workers into a qualifying pension plan, but failed to include LLP members in that exercise. Certainly initial reaction from commentators is that LLP members are workers and as such will be caught by the auto-enrolment requirements. The rationale for this is that since the Supreme Court judged LLP members to be workers, as defined under s230(3)(b) of the Employment Rights Act 1996, they will also be regarded as workers under the equivalent definition s88(3) of the Pensions Act 2008 which relies on very similar wording.

This approach would certainly be consistent with recent changes in HMRC’s attitude towards LLP members’ self-employed status: notwithstanding the latter, HMRC will maintain that members are actually employed for tax and NIC purposes unless certain conditions can now be evidenced.

The position seems less conclusive when considered alongside the Pension Regulator’s own advice. This suggests that when considering individuals for inclusion in auto-enrolment closer examination of their position may be required and that while individual tax status may be relevant it will not be the only determining factor. The Regulator sets out those factors that should be considered in paragraph 18 of its guidance.

The main concern is that while legislation governing whistleblowing protection and auto-enrolment may rely on similar definitions to identify what constitutes a worker, the purpose of each is very different. Whistleblowing legislation is intended to benefit a wide body of workers and protect them against retaliation in the event that they whistle-blow on a perceived wrong-doing. The auto-enrolment legislation is intended to install compulsory saving for retirement in the work place amongst lower paid workers. The inclusion of members of LLPs typically operating in law, accountancy and financial services was unlikely to have been a consideration when the pension legislation was being devised.

This apparent inconsistency does raise some questions and it is likely that either further case law or legislation will be required before the position is clarified. However, there is no guarantee that this potential anomaly will be addressed in the short term and therefore a more suitable approach would be for LLPs to assume that auto-enrolment does apply to its members.

That being the case certain important considerations relating to compliance with auto-enrolment and broader pensions arrangements should be anticipated. These will include matters such as ensuring that changes to the distribution of partner’s profit sharing does not constitute an inducement for opting out; identifying members who have registered for the life-time allowance protection and risk losing this if they fail to act on time; ensuring that any pension obligations are restricted to those of auto-enrolment and do not present a more open-ended contractual commitment to provide members with pension rights.

In addition to the above those firms which have passed their designated staging date should now seek specific advice on how to approach the Pensions Regulator.

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further