LLPs in full retreat in face of HMRC crackdown

Last month I reported on the plans by HMRC to remove self-employed status from fixed-share partners in limited liability partnerships or LLPs, a business structure frequently used by accountants and solicitors.

The issue has become very pressing for those affected since it now seems very likely that the rule changes will come into effect this April. That leaves very little time for organisations to conduct thorough overhauls of their business structures and, in many cases, to come to terms with renegotiating key terms with senior employees. Further, if self-employed status is to be maintained, fixed share members are facing up to the prospect of having to meet significant cash calls.

Accountants such as Baker Tilly have warned that the new rules “will be far harsher than originally expected”. Even those contemplating hasty changes may be caught out since tax specialists have advised that sudden injections of capital may be seen by HMRC as tax avoidance.

Details are emerging of the steps being taken. Law firm Weightmans has confirmed that its fixed share partners are not currently required to make capital contributions and thereby to share the risk of ownership. As a result they have commenced consultations with those effected which are due to conclude at the end of January.

Trowers and Hamlins is another firm that has commenced consultations. Their senior partner has confirmed that one option under consideration is to ask for increased capital contributions by way of a cash call.


Justice Secretary Grayling to use EAT case as political challenge to EU law

Last October Joshua Rozenberg reported in The Guardian that a recent case concerning Moroccan workers in diplomatic missions in London resulted in failed claims for unfair dismissal, unpaid wages and breaches of the Working Time Regulations because the employers were able to claim state immunity. I commented about the case last November.

It has now emerged that the Justice Secretary, Chris Grayling, intends to use the case as a way of challenging “creeping” increases in the influence of EU law in British cases. It is part of the Tories’ wider campaign to be seen to be taking a strong line on Europe in the run up to elections and in the face of what is regarded as a significant challenge from UKIP.

While much is made of the effect of the European Convention on Human Rights, particularly in the context of immigration cases, these decisions only have to be taken into account by courts in the UK. However legal practitioners, particularly in the field of employment law, have been dealing with the direct application of European law for decades. Cases are often referred to the European Court for guidance and decisions of the European Court can be directly applied in employment cases in England and Wales.

The crucial difference is that some claims can be brought based on the direct application of EU law. That happens with claims, such as these, based on the EU’s Charter of Fundamental Rights, enshrined in UK law by virtue of the Lisbon Treaty in 2009. Significantly these rights would remain even if the UK withdraws from the European Convention on Human Rights.


making homophobic comments concerning an openly gay employee who uses similar words is still discrimination

Does it matter by whom potentially discriminatory comments are made?

In the context of race discrimination, whether words are discriminatory has for some time involved consideration of who said them. In particular, self-referencing use of obviously abusive and discriminatory terms has become commonplace in the music industry and elsewhere. One argument put forward is that the use of such words by black people is a way for them to take control of them and thereby diminish their effect. It is an obviously difficult and controversial proposition. For example, it blurs the distinction between what “society as a whole” (if there is such a thing) regards as unacceptable abusive, discriminatory and derogatory words.

How does this apply in the case of homophobic taunts. There has been a good deal of recent coverage of problems in schools and in the field of sports. This month former Aston Villa and VfB Stuttgart footballer Thomas Hitzslperger came out and is one of the very few sports professionals to have done so. In doing so he said that it had not been easy to live with some of the comments dished out on the subject. Meanwhile, in schools, 99% of 1600 gay teenage pupils interviewed said they had heard homophobic language used regularly. In response Stonewall has launched a campaign fronted by Will Young to tackle the problem. Highlighted as a particular concern is the use of the phrases “you’re so gay” and “that’s so gay” in a disparaging context.

A workplace example of the misuse of homophobic terms was considered by the Employment Appeal Tribunal in Smith v Ideal Shopping Direct Ltd. Mr Smith joined Ideal Shopping Direct as a TV operations project manager in late 2009. He was dismissed in July 2010 following an altercation with a Ms Pearce. He was told by Ideal’s most senior employee that Ms Pearce might raise a formal complaint and said that, if she did so, he would lodge a complaint about the employer’s response to matters concerning his sexuality. Ms Pearce did complain and this led to disciplinary proceedings. On 14 July he was asked to attend a disciplinary hearing on 19 July. As he said he would Mr Smith said that he would be raising a grievance about having been bullied and subjected to homophobic behaviour by other staff in the workplace.

On 15 July he was summarily dismissed. The reasons given were those that had led to the commencement of the disciplinary proceedings.


a topical problems for schools – allegations of historical child abuse

What should a school do if its caretaker is accused of historical child abuse?

In Z v A the President of the Employment Appeals Tribunal considered whether dismissal of the employee for “some other substantial reason” was justified in light of the allegations. The Police reported to the school that historical allegations of sex abuse had been made against the caretaker. The allegations did not concern allegations during or in connection with his employment at the school. The Head did not believe the allegations but decided that it was appropriate to suspend the caretaker while investigations continued. After about a year nothing had emerged to support the allegations and the Police indicated that a decision to charge the caretaker would not be taken in the immediate future. However, the investigations remained open.

The Head decided that they had to act and recommended to the Governors that he should be dismissed. Dismissal duly followed and the decision to dismiss was upheld on appeal. Their main reasons were the risk to children and to the school’s reputation. An employment tribunal found that the dismissal was unfair, primarily because the reason was not some other substantial reason of a kind justifying dismissal, and awarded compensation. However the Claimant was not entitled to damages in respect of that part of the claim based on his post-dismissal depression preventing him from obtaining work. As an aside, it might have been more relevant to consider how the school would have dealt with any requests for references from prospective employers.

In his judgment President Langstaff noted that the Employment judge had acknowledged that a school cannot reasonably ignore an allegation of historical child abuse.


“belief” in the Labour Party can be a protected characteristic

Regular readers know that one of my favourite areas of employment law is the extent to which case law is extending the definition of what is a religion or belief for the purpose of protection from discrimination. Earlier articles have covered not telling lies, conscientious objection to abortion, wearing a poppy at work, belief in climate change and even belief in the BBC!
The latest decision in this line concerns a belief in the Labour Party. Mr Olivier, who worked for the DWP, has been an active member of the Party for over 30 years. In May 2013 he was elected as a Labour councillor but he did not notify his line manager before taking up the post, as required by DWP procedures. He also breached the Department’s policies by writing a letter to a local newspaper in which he criticised the government’s policy on benefits. He was dismissed for gross misconduct and brought claims for unfair dismissal and direct discrimination.
A preliminary hearing was called to determine whether Mr Olivier’s belief in democratic socialism constitutes a philosophical belief capable of protection under the Equality Act 2010. The tribunal applied the guidelines in Grainger v Nicholson (the climate change case referred to above). Mr Olivier asserted that the Labour Party encapsulates and enshrines a core set of beliefs that are recognised by the general public and has core values including democratic socialism, a strong welfare state, fiscal controls and the nationalisation of key services.


an insidious attack on civil justice

Last month I reported about the punitive approach being taken by judges to failure to comply with directions, as well demonstrated by the “plebgate” case. Andrew Mitchell, former Chief Whip, was restricted to recovering only his court fees because his lawyers had failed to submit a costs schedule on time. We now know that the Police Federation has apologised for their “politics of personal attack” (an interesting phrase) which had to happen after their key witness failed to substantiate his allegations (that’s a generous assessment). Why is this relevant for employment law? The answer is that the rules that govern employment tribunal claims have been, for some years, subject to the so-called overriding objective. Judges appear to have got carried away with the power conferred on them by a sub-paragraph (1.4(g)) “fixing timetables or otherwise controlling the progress of the case”. On the back of this apparently harmless and potentially beneficial objective Lord Jackson published a report which is overtly political in terms of access to justice and has been seized on, particularly by London based appellate judges who, frankly have, based on their recent performances, played a game which undermines the true purpose of appeals.
Is it the fault of claimants and respondents that their lawyers have been unable to comply with strict deadlines? Might that be because they’re not properly funded? Might that be because employers (and employees) can’t afford to pay their lawyers to provide proper representation?
The latest celebrity (and legal) news (courtesy of is that another case concerning Katie Price has been kicked out because of a failure to exchange witness statements on time. So, a case fails not on its merits but because a particular deadline hasn’t been met. Don’t get me wrong – I’m not saying that there should not be penalties, such as forfeiting costs for the procedural hearing but is a proportionate response the loss of the case?


civil partners denied hotel accommodation – not as clear cut a case as you might think

This long running case (Bull & Anor v Hall & Anotherr) hit the headlines this month when the Supreme Court gave its judgment on whether it was unlawful discrimination for Christian hotel owners to refuse a double room to civil partners, under a stated policy that they would only provide double beds to heterosexual married couples (which they had accidentally omitted to mention when taking a booking over the phone).
The Court held that it was indeed unlawful sexual orientation discrimination, although there was a split as to whether it was both direct and indirect discrimination, or just the latter. The court was unanimous, however, that while there had been a breach of the hotel owners’ right to manifest their religion that was justified for the protection of the rights and freedoms of others. According to Lady Hale human rights law:
requires “very weighty reasons” to justify discrimination on grounds of sexual orientation. It is for that reason that we should be slow to accept that prohibiting hotel keepers from discriminating against homosexuals is a disproportionate limitation on their right to manifest their religion.
There was no dispute that restricting the availability of double beds to the married was indirect discrimination – the hotel owners, Mr & Mrs Bull, were undoubtedly imposing a requirement that only heterosexual married couples could take a room with a double bed. Their argument failed that this was justified because they should be permitted to run their business in a way compatible with their belief that to permit unmarried couples to share a bed would be to facilitate what they regarded as a sin.
It was emphasised that civil partnership had been created to recognise (and encourage) stable, committed, long term relationships and accord equality of respect and esteem to same sex couples. Specific exceptions had been carved out for ministers of religion and religious organisations – which indicates that there was no intention to allow individuals to opt out of the prohibition of sexual orientation discrimination on the grounds of their religious views in any other circumstances.
Where the Supreme Court split was over whether the treatment was direct discrimination with the dissenting minority taking the view that civil partnership could not be equated with marriage and therefore did not turn the indirect discrimination into direct discrimination. However, Lady Hale, giving the leading judgment, made clear that, in her view, the status of marriage and civil partnership were “indissociable” from the sexual orientation of the parties entering into each type of contract. The denial of a double bed to one group whilst allowing to the other was, in the majority’s view, direct discrimination.


recoupment of recruitment costs

Cleeve Link Ltd v Bryla concerned the question of the enforceability of a clause seeking to recoup recruitment costs from an employee, and clearly establishes that an Employment Tribunal is entitled to consider whether or not such a clause is unenforceable as a penalty.
It arose in the case of Ms Bryla, a care worker recruited from Poland. Her contract of employment incorporated a term entitling her employer to recover all of its recruitment costs, which included an agency fee of £400 and her airfare, if she left within the first 6 months of her employment. The clause provided that after 6 months’ employment, the proportion recoverable would reduce gradually to zero over the next half year (reducing by one-sixth each month). Ms Bryla left the job after only 12 weeks, when she was dismissed without notice for misconduct following an altercation about her working hours. She was owed £1,203.35 for unpaid wages but was paid nothing.
An employment judge found that the clause was unenforceable as a penalty, despite finding that the clause represented a genuine pre-estimate of the costs of recruitment incurred by the employer. The Employment Apppeal Tribunal overturned this. On the facts as found by the Employment Judge, the clause did not amount to an unenforceable penalty but a genuine liquidated damages clause. However it firmly rejected the employer’s suggestion that an Employment Tribunal has no jurisdiction to find a penalty clause unenforceable.
It seems to me that the deduction contemplated by the contract must be a lawful deduction. If it is a penalty clause, it is not a lawful deduction, and I cannot accept [Cleeve Link’s] argument that it is not within the province of the Employment Tribunal to decide this matter. This is no different to a number of other aspects of a contract of employment that fall to be considered, construed and adjudicated upon in the context of the statutory jurisdiction.


does anyone, including judges, know the correct approach to ETO dismissals and administrations?

In March 2011 I commented on the uneasy interplay between insolvency law and employment law. At that time the question was whether highly contentious “pre-pack” administrations provided an opportunity to dispense with a workforce as well as most of the company’s debts by using a TUPE exemption. Oakland v Wellswood (2008) appeared to allow administrators to do so, whereas OTG Ltd v Barke appeared to close that option.
Against this background Crystal Palace FC Ltd & Another v Kavanagh & Ors is a recent and significant Court of Appeal case dealing with the fairness of dismissals by administrators of struggling companies. In 2009 the finances of the company running the club were in a parlous state and it went into administration at the beginning of 2010. The administrator wanted to sell the business as a going concern, if he could. One obstacle to this was that the ground where the club played was separately owned, and the only credible buyer, a consortium, wanted the ground as part of the deal. The next month the ground’s owner was also put into administration by its bankers. Negotiations ensued which were complex, fast moving, and subjected to spin by the parties, but were not immediately productive.
The administrator decided to mothball the club once the season ended (with relegation narrowly avoided), in the hope of selling later. As part of that, in May 2010 he dismissed 25 employees who, he was advised, could be sacked without ceasing the core activities of the company. The administrator finally sold the company to a consortium in August.
An Employment Tribunal found that while the sale was not the reason for the dismissals, they were for a reason connected with the transfer. Normally such dismissals are automatically unfair. However it went on to decide that the dismissals were fair, being for an “economic, technical or organisational” (ETO) reason, in that reducing the wage bill would allow the administrator to keep the business going – a reason separate from the longer term objective of being able to sell the business later. (However, reducing the workforce to make the business more attractive to a buyer would not have been an ETO reason).
The Employment Appeal Tribunal disagreed with the Employment Tribunal about whether the dismissals were for an ETO reason. Because the administrator intended to sell the club eventually, the dismissals could not be regarded as for an economic reason, but could only be treated as being to facilitate the sale, applying the dictum of Mr Lord Justice Mummery in Spaceright Europe Limited v Baillavoine [2012] ICR 520 that:
For an ETO reason to be available there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. It is not available in the case of dismissing an employee to enable the administrators to make the business of the company a more attractive proposition to prospective transferees of a going concern.
The Court of Appeal in turn took the contrary view, because the circumstances in the present case differed from those in Spaceright – for example footballing is a seasonal trade, and the players tend to be its only realisable asset – and the EAT had put too much emphasis on the term “mothballing”.


TUPE changes

Draft regulations for the forthcoming TUPE reforms have been published. The changes they are intended to make are:

– To allow a transferee to start collective consultation with representatives of employees due to be transferred about planned redundancies before the transfer takes place, if the transferor agrees. This will require a good deal of co-operation between the two if the consultation is to be meaningful, and if a sale is not yet a “done deal” a seller may be reluctant to allow it.
– Providing that variations connected with the transfer will be deemed void if the transfer is the reason for the variation – but not variations for a reason “connected with” the transfer. This is apparently a narrowing of the scope of the regulations, and variations will also be allowed if there is an “economic technical or organisational” (ETO) reason entailing changes in the workforce, or an otherwise void variation is permitted by the employment contract. It remains to be seen whether vague, “catch-all” variation clauses will be found to be effective in such a situation. Courts and tribunals have in the past been reluctant to accept that employers can use very wide general variation clauses to make unilateral fundamental changes in employment terms (See for example SmithKline Beecham plc v Johnson). There is also the challenge presented of drafting a variation clause allowing for a variation which would be void in law (because the reason for the variation is the transfer), were it not for that clause’s existence.
– Making a similar change to the provisions on unfair dismissal, so that dismissals will be unfair if the reason for the dismissal is the transfer itself, but not if the reason is merely “connected with” the transfer. There will no doubt be a good deal of litigation about when a reason is the transfer and when it is just connected with it.