LLP Members Given Whistleblower Protection

Clyde & Co LLP and another v Bates Van Winkelhof

Originally published in the June 2014 issue

The Supreme Court recently handed down its much anticipated judgment in the case of Clyde & Co LLP and another v Bates Van Winkelhof. In determining that members of LLPs are “workers”, the Supreme Court has extended to LLP members not only the protection of whistleblowing legislation (the key issue in the case) but also, potentially, various other rights associated with worker status. This decision is highly significant for professional services and investment firms, including hedge funds, as these firms tend to be structured as LLPs.

What is the case about?
Ms Bates van Winkelhof, a former partner at Clyde & Co LLP, alleges that she was expelled from the law firm after she blew the whistle on the managing partner of their Tanzanian associate firm, following his admission that he paid bribes to secure work and to secure the outcome of cases. She had also recently announced her pregnancy. Alongside complaints of sex and pregnancy discrimination in the Employment Tribunal, which were not the subject of the appeal to the Supreme Court, Ms Bates van Winkelhof brought a complaint on the grounds that her expulsion from the partnership (among other things) was a detriment that she suffered because she had made protected disclosures under the whistleblowing legislation.

The respondents, both Clyde & Co and an individual partner at the firm, sought to prevent Ms Bates van Winkelhof’s claims of whistleblowing from being heard by the Employment Tribunal. Clyde & Co argued that as a partner in the firm, Ms Bates van Winkelhof could not be a worker under the Employment Rights Act (which contains the protection for whistleblowers) and so had no rights as a whistleblower when she was expelled.

The decision of the Supreme Court
Overturning the earlier Court of Appeal judgment on the issue of worker status, the Supreme Court held that members of LLPs are “workers” and therefore have the same protections as employees if they have “blown the whistle” on wrongdoing at work.

One of the issues argued in the Supreme Court was whether or not an equity member of an LLP (someone who effectively owns the firm with his or her fellow members) was subordinate to that LLP and so could be classified as a worker. The Supreme Court concluded that it is possible to be your own boss and still be a worker, recognising the commercial reality that, regardless of the structure of an LLP, not all members are equal. This finding means that, while not all members will necessarily or automatically be workers, it is certainly likely that most will be.

Impact of the decision
So what are the wider implications of this decision? There is no doubt that the ruling chimes with the underlying purpose of the whistleblowing rules, namely to empower individuals to speak out if they discover wrongdoing at work. It is to be welcomed that this has now been indisputably extended to members of LLPs, often those most likely to come across corporate malpractice, particularly at a high level.

Such self-policing is surely one of the most effective ways of fostering a culture of compliance, and thus minimising risk. And given the increasingly regulated nature of the financial services sector, in which members of LLPs often find themselves effectively under a regulatory duty to blow the whistle, the decision may well have particular impact on hedge funds and other investment firms.

Whereas this new-found protection against retaliation may encourage more members to come forward to report unlawful conduct, something which will generally benefit the LLP, it also means that LLPs now need to be better prepared to deal effectively with such reports, and the individuals making them, to avoid successful claims by members who may perceive that they have suffered a detriment as a result. In addition, given that one of the unforeseen consequences of the judgement is the potential extension of certain other worker rights to members, LLPs will need to at least be aware of these possible new obligations. In this article, we suggest some practical steps which hedge fund LLPs should take in response to the decision.
Whistleblowing and how to deal with it
The most significant element of the decision for hedge fund LLPs will be the protection that has now been extended to members in the event that they blow the whistle on unlawful conduct. Workers who suffer a detriment (and employees who are dismissed) because they have blown the whistle may bring a claim in the Employment Tribunal. Detriment can include anything from expulsion from the LLP to reduced remuneration or damage to career prospects. The claim may be against the employer (or the LLP) and the individual employee or member within the organisation who caused the detriment. If successful, the worker is entitled to be compensated for any financial losses they have reasonably suffered, and for any injury to feelings. There is no requirement for a minimum length of service, and the compensation available is uncapped.  As such, it is similar to discrimination claims under the Equality Act 2010. The clarification that members of LLPs are entitled to protection under the whistleblowing legislation therefore potentially opens LLPs up to significant liability if they fail to protect those who seek to point out wrongdoing in their organisation.

It is clear that businesses have an interest in uncovering wrongdoing or unlawful practices within their organisation, while also managing what information (if any) is made public. Encouraging the reporting of these matters through internal channels may help avoid fraud, regulatory breaches or financial irregularities, and protect the reputation of the LLP. In some cases, the consequences may be particularly severe. If, for instance, there is an allegation of corruption in a business, this could give rise to criminal liability for the business as well as individuals under the Bribery Act 2010. A prudent LLP will want to ensure that any such allegation is properly investigated to prevent it from recurring and to limit any such criminal liability. At the same time, the LLP will also want to ensure that the whistleblower is protected from detriment, for example, at the behest of the individual who has been exposed as a result of the whistleblowing.

Hedge fund LLPs should therefore take steps now to protect themselves.

They should put in place a clear and transparent whistleblowing policy, or review their existing policy, and ensure that it applies to members of the LLP as well as employees and other workers. It is important that the policy has the support of the senior management of the hedge fund. It would be sensible, for instance, for the managing partner to write the foreword to the policy and expressly endorse it.

The policy should set out the procedure that should be followed by a member (or, indeed, any other worker) who wishes to raise a concern.  It should specify the person or persons to whom they should make the report (enabling the worker to bypass the level of management at which the problem may exist). It should be clear about the extent to which confidentiality will be maintained and should contain assurances that the person who raises the concern will suffer no retaliation as a result of doing so unless it has been done maliciously and without foundation. There should be some method of collating information which shows the number of concerns raised under the policy and the outcome in each case. The policy should be regularly reviewed in order to ensure that it remains effective and relevant for the hedge fund.

Investigative procedures
LLPs should designate a member or members with responsibility for monitoring, investigating and reviewing the hedge fund’s whistleblowing policies.

Larger organisations, in particular multi-jurisdictional organisations, should consider putting together a committee of members from different parts of the business who are automatically notified of any whistleblowing complaint. This will ensure that complaints are not stifled and they are looked at outside the particular cultural context in which the allegedly wrongful activity took place. It may be worth setting up a dedicated email address which will send an email to each member of the committee when a report is made.

Member protection
LLPs may also wish to consider putting in place an automatic review of any decision to expel a member, or to reduce that member’s remuneration or promotion prospects, in respect of any member who has raised a concern in, say, the previous 18 months.

In addition, LLPsshould consider giving access to a confidential helpline, to give workers an alternative way in which to raise concerns. This can be particularly useful where a member fears reprisals from the person to whom he or she is making the report.

Finally, management should be given training on the new policy, its principles and operation.

Advantages of preventative action
By putting in place robust procedures which protect people who raise concerns, LLPs should be better placed to defend any litigation or answer any regulatory investigation into their practices. However, it is important to remember that preventative action is not merely defensive. It can provide a genuine commercial advantage. As more businesses become sensitive to the reputational damage which can flow from allegations of corruption and other unlawful conduct, many will require their business partners and suppliers to demonstrate that they have taken action to prevent against such wrongdoing.  Having proper processes in place will help to satisfy concerns from potential clients as well as from regulators.

The potential extension of other rights
The Supreme Court decision was concerned exclusively with the extent to which whistleblowing protection extended to members of LLPs. There is, however, a knock-on effect of the decision to define members of LLPs as workers. The definition of “worker” is used to confer a number of other rights more commonly associated with employees, not members. While the Court acknowledged that confirming worker status for some members would also give rise to such other rights, it declined to explore these rights in any detail. As a result, the position remains unclear as to how other ‘worker’ rights may attach to members of LLPs. A number of concepts which underpin LLPs, such as the fact that members generally take drawings on account of profits rather than salary or wages, do not translate easily into the employment sphere. However, it may be wise for LLPs to take a conservative approach to their members’ rights, pending clarification. We set out below the key rights which now are likely to apply to members of LLPs as a result of the judgment, and the steps that LLPs should consider in order to avoid potential liability in future.

Limits on the working week and holiday rights
Workers have the right under the Working Time Regulations to not work in excess of a certain number of hours per week (48 on average). Arguably, this also now applies to members of LLPs. Whereas the ramifications of a breach may not be significant, LLPs should nevertheless consider seeking opt-outs from their members in relation to the limits put on working time (in the same way as for employees, normally by way of their employment contract). While opt-outs could be included in LLP members’ agreements in the future, for the time being it should be sufficient to ask members to enter into a simple stand-alone opt-out agreement.

Members who qualify as workers are also now entitled to minimum holiday entitlements under the Working Time Regulations. This is currently 28 days per year (including bank and public holidays) for full-time workers. In practice, this is unlikely to be an issue as most members will have the opportunity to take time off and in any event, most LLP agreements already contain provision for holiday. [There are, however, complicated provisions relating to a worker’s entitlement to holiday while on long-term sick leave, which are beyond the scope of this article. In addition, a recent decision of the European Court of Justice also has implications for the remuneration payable during holiday for members whose pay is directly linked to their individual performance (i.e., if it is akin to commission) which may be affected by the absence of holiday. In those cases where this might be relevant, LLP members’ agreements may need to be revised in order to reflect these developments, but this will very much depend on the structures currently in place.]

National minimum wage
The national minimum wage is very unlikely to be an issue for the majority of members of hedge funds. However, the new obligation to ensure that members receive at least the national minimum wage could potentially impact on certain clawback provisions, such as in relation to drawings on insolvency, or, in a regulated business, under the remuneration code. The concepts do not sit easily together. For the time being, however, regulated LLPs may consider including a carve-out from any clawback provisions so that they only apply ‘to the fullest extent permitted by law’ in order to guard against any challenge by an aggrieved member who may otherwise receive less than the national minimum wage.

Unlawful deductions
Workers are protected from their employer making unlawful deductions from their pay. While it has always been a breach of contract for an LLP to withhold sums that are properly due to a member, members will now be entitled to bring their claim for any deductions in the Employment Tribunal, which may be quicker and cheaper than bringing a breach of contract claim in the High Court.

However, this should rarely be an issue in practice. Employers are permitted to make deductions from pay (or require contributions from the worker) if the worker has agreed in writing to the deduction or contribution. It is likely that where a deduction is made from a member by an LLP, this will already be covered in the LLP members’ agreement, which will serve as the worker’s consent to the deduction, but it might be worth checking the members’ agreement.

Part-time workers
Part-time workers are protected from suffering less favourable treatment when compared with a comparable full time worker. It is therefore important to ensure that members who work part-time are given similar benefits and pay (pro rata) to their full-time colleagues, unless the LLP can objectively justify the difference in treatment.
Pensions Auto Enrolment
There is now a real risk (but it is not yet certain) that members who qualify as workers, who are over 21 and who earn more than £10,000 per annum, will need to be automatically enrolled in a pension scheme (subject to their right to opt out) with effect from the LLP’s staging date. If the LLP does not currently operate a scheme, or if it does not wish or is unable to use an existing scheme for this purpose, it would need to find a provider that will assist.

While this may seem daunting and administratively cumbersome, the costs of auto-enrolment at present are not high. Employers must contribute a minimum of 1% of the worker’s qualifying earnings. These are their earnings between £5,772 and £41,865; anything above that figure will not be taken into account. Therefore, a member earning £100,000 will be entitled to a minimum contribution of as low as £360.93 per year from the LLP. In these circumstances, it may be more straightforward to seek opt-outs from members (taking care not to fall foul of the safeguards preventing employers from inducing workers to opt out).

LLPs should discuss this further with their pensions advisers before taking any action, as the position for LLP members is far from certain at the moment.

This case was about ensuring that lawyers, accountants, hedge fund managers and a host of other professionals are protected against detriment if they blow the whistle about matters of which they become aware at work, and which may have wider ramifications for the public at large. Partners are the people most likely to become aware of wrongdoing in LLPs but, prior to this decision, risked being at the greatest disadvantage with respect to protection. As such, unlawful conduct, which it would have been in the LLP’s interest to uncover, may have continued undetected. It is therefore in everyone’s long-term interests for hedge fund managers and others who are members of an LLP to have the same whistleblowing protection that other workers in the financial services sector already enjoy.

The clarification made by the Supreme Court as to members’ status is unlikely to affect LLPs on a day-to-day basis. Most members will already be entitled to holiday; they will receive an amount well in excess of the national minimum wage and the LLP may well already have in place a whistleblowing policy which is used for employees of the organisation, so members will know the correct procedure for reporting wrongdoing (even if they did not previously have the certainty that they would be protected from detriment were they to do so). However, it is nevertheless important for LLPs to be aware of their potential new obligations so that they can respond accordingly.