A modern partnership agreement (PA), also known as a partnership deed, will offer greater protections than relying on statutory law.
A signed and up to date PA is a key document to record the terms on which a partnership operates.
Legislation concerning partnerships is governed primarily by the Partnership Act 1890. However, this Act can be superseded by a formal written PA and will only then be applicable where the PA lacks clarity, or there is an absence of any provision or no written agreement at all (Partnership at will).
When a partner(s) join or leave, the PA must be amended to show this, including profit share ratios and any other pertinent matters, or they can be considered a ‘partnership at will’ and the Partnership Act 1890 will prevail – not the outdated PA.
It is extremely important to ensure that partners have a robust, easy to interpret PA. Avoid complicated legal terminology, as it is unnecessary and only serves to complicate matters when interpretation is required.
The matter in this article is based on the author’s current understanding of the law. The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, the author does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this article.
This article forms part of work I carried for my wife, a practicing general practitioner (GP), meaning some of the information is specific to GPs, although most is generic to partnerships.
There are Two Parts:
- IN BRIEF.
- IN DETAIL.
- If you trade as a partnership then best practice is to enter into a PA that is tailored to your circumstances and sets out the rights and obligations of each of the partners.
- If a PA is not carefully drawn up to cover all likely (or reasonably forseeable) issues then the Partnership Act 1890 will apply to all those issues where it is silent or unclear.
- If no current PA exists there is a risk that there is a ‘partnership at will’ (see below) which is governed by the Partnership Act 1890.
- Even if an agreement exists it is common for the terms of the partnership to change over time so it is important to establish whether the PA is kept up to date, or other agreements or conventions exist that govern the partnership.
- As to terminology, although there are technical differences between an agreement and a deed, for the purposes of this article, the terms ‘partnership agreement’, ‘partnership deed’ and ‘practice agreement’ all in effect mean the same thing.
- A PA is a contract and must be kept up to date at all times in order to be valid and thus effective – is the PA ‘fit for purpose (i.e. current and effective)?.
- Unless the partners recorded in the minutes of the practice meeting that the PA was to be amended to reflect that the previous partner had left (including profit share ratios), you are operating as a ‘partnership at will’ which is covered by the Partnership Act 1890 rather than the PA.
- Further, any time you do not record in the practice minutes other changes that affect the PA, you can also be considered a partnership at will.
- This is not a good position to be in, especially when relations have broken down (as you have recently witnessed).
- A signed and up to date PA is legally binding but if there are changes (such as a partner leaving) which go unrecorded then it is not and the Partnership Act 1890 prevails.
- Copies of minutes of practice meetings that amend the PA should be collated with the PA.
- However, the partners should not get into the habit of regularly amending the PA via the minutes of practice meetings and the PA itself should be amended periodically.
- All partners should sign the minutes to be legally binding.
The following outlines some of the key issues that any partnership should consider and some of the default provisions that apply under the Partnership Act 1890.
Legislation to Consider (Not an Exhaustive List)
- Partnership Act 1890.
- Limited Partnerships Act 1907.
- National Health Service (Scotland) Act 1978.
- Disability Discrimination Act 1995.
- Limited Liability Partnerships Act 2000.
- Limited Liability Partnerships (Scotland) Regulations 2001.
- General and Specialised Medical Practice (Education, Training and Qualifications) Order 2003.
- Primary Medical Services (Scotland) Act 2004.
- The Limited Liability Partnerships (Scotland) Amendment Regulations 2009.
- The NHS (General Medical Services Contracts) Regulations 2004 – SSI. 2004/115.
- Equality Act 2010.
- Tobacco and Primary Medical Services (Scotland) Act 2010 (Part 2).
- Refers to business structure, i.e. sole practitioner, partnership, limited company (LTD, by shares or guarantee), or LLP (limited liability partnership).
- NHS Boards are not allowed to contract with commercial bodies for GMS services.
- Partnerships (Prosecution) Scotland Act 2013.
- Bankruptcy (Scotland) Act 2016.
- The 2018 Scottish General Medical Services Contract Offer (published 13 November 2017).
- The National Health Service (General Medical Services Contracts) (Scotland) Regulations 2018.
- The National Health Service (Primary Medical Services Section 17C Agreements) (Scotland) Regulations 2018.
- The National Health Service (General Medical Services Contracts and Primary Medical Services Section 17C Agreements) (Scotland) Amendment Regulations 2018.
- The National Health Service (Primary Medical Services and Primary Medical Services Section 17C Agreements) (Scotland) Amendment Regulations 2021.
It is important to note that Scottish partnership law and Scottish and Northern Irish property law are in some respects different from the provisions that apply in England and Wales. Discrimination law is also different in Northern Ireland.
NHS/Government Documentation to Consider (Not an Exhaustive List)
- NHS Circulars:
- PCA(M)(2016)(3) – Golden Hello Scheme Summary (dated 09 May 2016).
- PCA(M)(2019)02 – The Primary Medical Service (GP Out of Hours Services) (Scotland) Directions 2019 (dated 22 February 2019).
- PCA(M)(2019)05 – GP Minimum Earnings Expectation (dated 01 April 2019).
- PCA(M)(2019)12 – General Medical Services Statement of Financial Entitlements for 2019/20 (dated (02 October 2019).
- PCA(M)(2019)13 – Primary Medical Services – Golden Hello Payments (dated 02 October 2019).
- PCA(M)(2019)14 – Primary Medical Services – Remote and Rural Golden Hello Payment for PMS and 2C Practices (dated 02 October 2019).
- PCA(2020)(M)05 – Scottish Statement of Financial Statements (SFE) 2020/21 (01 April 2020).
- PCA(M)(2021)08 – GMS Uplift 2021-22 (dated 20 August 2021).
- DC(2021)0906 – Minimum Earnings Expectation (06 September 2021).
- Primary Care in Scotland (SPICe Briefing dated 29 May 2019).
- GP Annual Certificate of Pensionable Profits (Submitted Annually) – Applies to all GP and non-GP partners.
- Practitioner Services (Medical) (NHS NSS organisation).
Is there a Partnership?
- This may be obvious where a formal PA exists, but a partnership may come into existence without any formal documentation and can be implied out of the relationship between the parties.
- For a partnership to exist under the Partnership Act 1890, a group of individuals must be carrying on business in common with a view to making a profit.
- If business is being conducted and no other formal business structure exists it is important to consider whether a partnership may have (perhaps inadvertently) come into existence.
What is a Partnership?
- A partnership is a collection of individuals ‘carrying on a business in common with a view to profit’ .
- A traditional partnership (unlike a LLP) is not a separate legal entity and each partner is jointly and severally liable with the other partners for all debts or obligations owed.
- The best way to think about a traditional partnership is to view each partner as an agent acting on behalf of all the partners.
- When contracting with other third parties the partner is acting on behalf of all the partners and can bind them to a contract without their express agreement.
- Generally, there are two types of partnership: general (i.e. traditional partnership) and limited (e.g. limited liability partnership, LLP).
Who are the Partners?
- The partners are jointly and severally liable for the debts of the partnership.
- If the partners have changed over time, it can be important to establish who was a partner at the time the liability was created.
- Unless there is a clear agreement, there can sometimes be a debate over who the partners are.
- For example, if one ‘partner’ is paid a salary then it may be argued that they are an employee and do not have a vote in the decision making of the business.
- There are different types of partner/individuals who can be in, and perhaps manage, the business:
- Managing Partner.
- Non-Equity Partner.
- Executive Director.
- Corporate Directors.
- A general partnership has two or more owners who set up the business together, with equal authority to make decisions.
- Partners may specialise.
- For example, the PA may assign one partner to run the business and the other partner deal with clients.
- A limited partnership includes owners who have no say in the business; they are silent investors who provide capital but are not actively involved in running the business.
- A managing partner is responsible for handling the day-to-day operations of a business partnership, and takes on two significant roles (as both an owner and a manager).
- This position exists within companies structured as partnerships and limited liability companies (LLC).
- They play a more active role than other partners, which may include general, nominal or silent partners.
- A managing partner functions similarly to a chief executive officer (CEO), as these professionals implement and manage strategies that promote their organisation’s mission and vision.
- While a CEO reports to a board of directors, the managing partner reports to an executive committee made up of other partners for approval.
- The managing partner collaborates with this committee or takes their direction to set organisational goals. The managing partner is responsible for ensuring that the business meets these goals and operates smoothly.
- Without establishing a managing partner, all the other partners would share the day-to-day management responsibilities.
- Allowing several partners to control these tasks at once could lead to confusion and, potentially, disagreements.
- Another benefit is enabling one partner to take on these responsibilities frees the other partners to focus on high-level or other business matters.
- At law and accounting firms, making partner is often the endgame for the associates: they buy into the firm and, in return, they get more money, greater influence and a higher status.
- Some firms prefer to offer associates a non-equity partnership, in which they have the title of partner but they do not become owners.
- Although non-equity partners do not have the authority of a full partner, usually, they have a say in the firm’s policy decisions and they receive a share of the profits.
- Common in law firms, they may designate a managing partner to tackle the big-picture, strategic, long-range issues, while an executive director handles the day-to-day tasks of managing a business.
- The managing partner is generally a solicitor/attorney, while the director may have a CV full of management experience, rather than a background in the law.
- Large firms may have multiple directors.
- At some investment companies, for example, becoming director is a step up the ladder toward partnership.
- It can also be something to offer staff who have valuable skills but who do not have the right talent for a partnership position.
- In all cases, however, directors remain employees.
- Unless their contract or (US) state law states otherwise, the partners are free to fire a director at any time.
- Corporations do not have partners; they have shareholders.
- Partnerships can do without directors, but they are a standard part of corporate structure.
- Below the shareholders are the board of directors, then the corporate officers.
- The board carries out the will of the shareholders, while the officers handle day-to-day management decisions.
- Shareholders are free to appoint or remove the directors at the annual meeting.
Details a Partnership Agreement Should Contain
The following issues should be included in a PA as essential clauses:
- Business Details:
- Details of the parties, and commencement date and duration of the partnership.
- Capital assets.
- Valuation of partnership assets.
- New partners and mutual assessment period.
- Duties of partners.
- How decisions are made – for example, voting for minor and major decisions, simple majority or unanimous.
- Professional registration (e.g. GMC/medical performers list).
- Income and expenses:
- Statement identifying the nature of the business.
- Details of income, including treatment of private income.
- Details of personal expenses.
- Details of expenses charged to the trading account.
- Profit and loss.
- How are profits divided.
- Fixed share partners.
- How is tax (e.g. income tax and national insurance) addressed.
- Details on production and location of annual accounts.
- Agreed profit shares of each partner.
- Details of partnership accounts.
- Signing annual accounts.
- Statement about taxation.
- Partners leaving in year and the apportionment of achievement and aspiration payment.
- Practice policy on a partner doing outside work.
- Details of the superannuation arrangements.
- Details of voluntary retirement.
- Period of mutual assessment.
- Compulsory retirement.
- Effects of Retirement, Expulsion or Death of a Partner on the Practice.
- Restrictive Covenants.
- Partners’ Obligations to Each Other:
- Statement about partners’ obligations to each other.
- Statement as to how partnership decisions are taken.
- Partners’ holidays, study leave and CPD arrangements.
- Illness of a partner and leave/insurance arrangements.
- Leave: holiday (annual leave and bank/public holidays), maternity, paternity, adoptive and compassionate.
- Gifts and legacies.
What are Some of the Consequences of Being a ‘Partnership at Will’?
- Any partner may dissolve it at any time with no formal procedure.
- Death or bankruptcy of a partner will automatically dissolve the partnership.
- No partner(s) has the right to expel another for any reason.
- No partner(s) has the automatic right to carry on the partnership.
- The assets will be frozen immediately on dissolution.
- Staff will be made redundant on dissolution.
- All partners are entitled to an equal share of the assets.
- All partners have equal liability for the debts.
- No new partner may be appointed without a unanimous decision.
- All partners may take part in the management of the partnership.
- Refer to Cheema v Jones & Ors  EWCA Civ 1706 for the importance of clarity in partnership arrangements.
It is not a foregone conclusion that the absence of a signed PA will result in a partnership at will. Much would depend on the circumstances but argument over the point can be extremely expensive itself.
- The partners are jointly and severally liable for all the debts and liabilities of the partnership, without limitation.
- This means you share all profits and losses, management authority, and risk for the business.
- This means that each partner could be sued individually or jointly with all the other partners.
- If one partner is pursued then they may seek a contribution from the other partners, but this will only be effective if the other partners have the ability to pay their share of the debt.
- Does not apply to LTD and LLP, as they as classed as a ‘separate legal person/entity’.
- Only in Scotland do partnerships have a separate legal entity (Partnership Act 1980, Section 4(2)) and specialist advice relating to Scottish partnership law should be obtained.
- However, separate legal personality does not carry with it the attribute of perpetual succession which is a feature of a fully corporate body.
- This means that a change in the membership of the firm means a new firm (aka GP partnership).
Duties and Responsibilities of the Partners
- The partners owe each other fiduciary duties and a duty of upmost good faith.
- This includes:
- To promote the success of the business.
- To avoid a conflict of interest and not to compete with the partnership business without the (fully informed) consent of the other partners.
- To render true accounts and deliver up any profits received.
- To disclose to the other partners any information that may adversely affect the partnership.
- With regards the PA, it may detail responsibilities for individual partners.
- For example, who is responsible for recruitment, training, etc (refer to Restrictions of Authority).
- The Partnership Act 1890 will imply that each partner has the right to take part in the daily management of the business unless stated to the contrary.
- The PA should set out the degree of commitment of each partner.
- What happens to the responsibilities of a partner who is, for example, absent on long-term sickness/absence?
- Practice partnerships may now include non-clinical members as long as one of the partners is a medical practitioner whose name is on the GMC GP register.
- Practices would be well advised to seek legal advice regarding any specific clauses that they may wish to apply to non-GP partners.
Amending a Partnership Agreement
- The PA can effectively be amended or supplemented to reflect any decisions taken at practice meetings, provided these are properly recorded in the signed and agreed minutes of the partnership meeting.
- If any other changes are made throughout the duration of the partnership, evidence of such changes must be recorded.
- Depending upon the significance of any new arrangements these may be recorded in either:
- The partnership minutes (e.g. a decision to change the partnership bank); or
- A deed of variation to the PA (e.g. a change relating to the ownership or development of the surgery premises).
New Partners/Change in Partnership
- Unless otherwise agreed, the admission of a new partner requires the unanimous consent of all the partners.
- Where a new partner joins the partnership it is good practice (some state vitally important) to re-evaluate the terms of any PA and require them to sign a deed of adherence (see below).
- A lot of practices think this should be done when the new partner has completed a mutual assessment period and do not appreciate that the new partner is truly a partner from day one so it is crucial that before the new partner joins a PA is signed.
- A new PA/supplemental agreement must be in place, signed and dated by all partners before the first day of an incoming partner’s period of mutual assessment.
- Ideally, partners must ensure that a prepared draft of the PA is available to show prospective partners.
- In the past, new joiners were usually recorded by way of a supplemental PA but with modern IT it is simplicity itself to re-print an existing PA incorporating the new partner.
- Failing this, a ‘partnership at will’ will almost certainly arise where the effect of dissolution may include the:
- Forced sale of all the partnership assets including surgery premises;
- Redundancy of all staff; and
- Loss of the existing NHS contract for services.
- There will be no restrictive covenant to protect any subsequent practice.
- The draft PA will almost certainly provide for a period of mutual assessment, which will normally either be six or twelve months in duration.
- What is the mutual assessment period of the practice?
- During this period either the existing partners or the new partner would be able to give notice if either side does not wish to continue the arrangement – often a period of one month – whilst leaving the original PA intact.
- Such notice would not end the partnership between the existing partners.
- Without such an agreement any termination of the arrangement could cause a dissolution as any original PA would cease to be binding on those partners who originally signed it.
- GP practices should consider updating their PA to reflect reimbursements available under the SFE (Statement of Financial Entitlements) where a partner is absent from the practice due to a period of parental or sick leave.
- Might not seem relevant now but useful for the practice to be competitive when it comes to recruiting new partners.
- Amend the PA (including profit share ratios).
What is a Deed of Adherence?
- Also known as Deed of Adherence to a Partner Agreement.
- Put simply, when a business has existing shareholders or partners it is important that when a new shareholder or partner joins they agree to comply with the terms of any existing shareholders agreement or PA.
- A deed of adherence is the form of document which is likely to be the quickest and cheapest way of ensuring compliance.
- A deed of adherence may involve additional complications and it might be more practical and cost effective to have a new shareholder or PA instead.
- Complications can arise especially if the existing shareholder or PA is badly drafted, not comprehensive enough or unacceptable to the new shareholder or partner.
- If the practice has a well-drafted PA, a deed of adherence should not be needed, as a name change in the PA should suffice!
Partnership Offer Letter
- Laying the foundations of a partnership in general practice begins with a comprehensive and concise offer letter.
- By setting out the terms and conditions and entering into a signed agreement, the parties involved will be fully aware of their position and obligations from the beginning; you will also mitigate the chances of a dispute later on.
- Once a new partner has been selected, the practice should send out a clear partnership offer letter.
- Because practices often delay (at their peril!) updating the partnership deed, this makes the offer letter even more vital because it can act as a ‘holding agreement’ and can be evidence of the admission terms until the deed is signed.
- Practices should make sure their offer letter is clear and sets out all the key points listed below.
- If accepted, protect the business and get the PA updated and signed as quickly as possible.
|1||Commencement Date||Detail the start date for the new partner.|
|2||Offer of Partnership||Clearly state that the position is self-employed.|
|3||Notifications||Who to notify once the offer has been accepted. For example, CCG and CQC/HIS.|
|4||Sessions||This is the practice’s opportunity to outline the role it wants to fill.|
|5||Partnership Share||Is it full parity or rising to parity over time? Or fixed share?|
|6||Working Capital||Set out any working capital contribution that is expected.|
|7||Surgery Premises||Does the practice want the partner to buy in or to go onto the lease?|
|8||Mutual Assessment Period||Length and notice period, driven by the start date.|
|9||Annual Leave Entitlement||Standard leave entitlement – but what about public/bank holidays and study leave?|
|10||Acceptance||Explicitly state the time frame within which the offer must be accepted.|
- As a partner you are self-employed, and therefore will receive a ‘drawing’ as opposed to a salary.
- This is a share of the profits, which is calculated by taking the practice expenses away from the total practice income.
- Most practices will work out a budget for the year knowing roughly what their income and expenditure will be.
- They will then agree what the partners’ drawings will be each month.
- Some practices will set this level such that it will share the expected ‘profit’ out monthly, and therefore there will be little additional money during the year.
- Other practices will set the drawings at a slightly lower level, and during the year there may be some additional payments or ’share outs’.
- In some practices income tax and national insurance contribution (NIC; both Class 2 and 4) are held back and paid by the practice, but this is not always the case and should be carefully understood.
- It is vital to clarify what arrangements are in place in consultation with an independent medical accountant.
- How will bonuses (if any) be dealt with?
- As a partner you are self-employed, and therefore your income is dependent on the ‘profit’ that is available to share between the partners after all the expenses have been paid.
- Parity means that if, for example, you have a 4-partner practice and the full-time partners earn £100,000 a year, and you are full time and have reached full parity, you would earn the same.
- In the past, it was normal for partners to start on 70% of a full share (parity) and then over a period of time (normally 2-3 years) that share would incrementally increase until reaching full parity (full share).
- This reflected the fact that you were joining an established business, and although you were qualified to work clinically as a GP it would take some time before you were able to fully participate in all aspects of the business and partnership.
- Over the years, the time to parity has reduced – now it can be as little as 1 year, or even given fully on joining a practice.
Can a Partner Earn Less Than a Salaried GP?
- Theoretically yes, and this has happened in a small number of practices.
- Normally GP partners will earn more than the salaried GPs working in the practice, reflecting the additional responsibilities and roles they hold.
- Depending on how the practice use their income, it is possible that a partner could earn less than a salaried GP, but if this was the case the practice would find it virtually impossible to recruit new partners.
- It would therefore be important to find out the reason why.
- For example, is it due to the number of staff employed, money owed to the practice, or is the practice not viable?
- A practice may also be registered for VAT.
- This is a practice liability not a personal liability.
- It is based on practice earnings which are deemed to be subject to VAT and the practice reaching a certain threshold.
- Practices who dispense medications to their patients, known as dispensing practices, are likely to be VAT registered.
- Can two or more partners be absent on holiday or study leave at the same time?
- What is the maximum consecutive working days a partner can take?
- What is a working day? For partners it would typically be Monday to Friday except public/bank/statutory holidays.
- Can a partners annual leave be revoked? For example, to due spikes in caseloads/emergency periods (i.e. COVID-19 response).
- In the absence of a clause/section in the PA to the contrary, all partners have a right to take part in the management of the business and the decisions that are taken.
- Each individual partner has one vote.
- Changes to the nature of the partnership (e.g. a change to profit share, or admitting another partner) require the consent of all the partners.
- This can cause difficulties, especially in larger partnerships, and it is normal for a PA to amend the default provisions that are implied under the Partnership Act 1890.
- With this in mind, if there is dispute between the partners over a decision that has been made, then it is important to establish whether a vote has been passed with the requisite majority.
- Unless there is an agreement to the contrary normal business decisions can be made by a simple majority of the partners.
- However, the Partnership Act 1890 requires that decisions regarding the nature of the partnership business require unanimity.
- There will often (or can) be varying levels of seniority within a practice and it is important that the PA outlines the roles and responsibilities of the partners and which of the partners have the authority to make decisions, including which matters require a majority vote or unanimous agreement.
- Decisions requiring unanimous agreement of the partners generally includes:
- Admission of a new partner.
- Dissolution of the partnership.
- Alteration of the PA.
- Development/acquisition of premises.
- Opening branch surgery.
- Sale of any practice premises.
- Other decisions are made by simple majority.
- For clarity, which situations:
- Allow a partner to make decisions alone;
- Require a simple majority; and
- Require a unanimous decision.
Authority/Restrictions on Authority
- What restrictions on authority do partners face?
- It is important to state the different functions each partner is to have within the partnership and the extent of their authority.
- For example:
- One partner may be in charge of recruitment whilst another is in charge of purchasing.
- The maximum amount any one partner may contract on behalf of the partnership is £500.
- Cheques can be signed by any one partner but any cheque for a sum in excess of £500 should be signed by two partners.
- A partner has authority to do whatever they feel is in the best interests of the business within their area.
- Restrictions include, for example, employment of staff, making loans, giving guarantees, financial matters, etc.
- Any partner ignoring a restriction or the scope of their role may be liable for breach of contract.
- It is important to remember that one partner’s actions, whether permitted under the PA or not, may legally bind all the others.
- Any claimant can bring an action against:
- An individual partner;
- All partners; and/or
- Any of the other partners.
- Internal liabilities (i.e. one partner to the others) (e.g. due to negligence/breach of a term in the PA) can be regulated by the insertion of appropriate clauses in the PA.
Alternative Dispute Resolution
- Disagreements and disputes can arise for several reasons: personality differences, performance and commitment issues, practice policies, bullying, absence from the practice, etc.
- The Partnership Act 1890 does not include a dispute resolution mechanism and if a deadlock arises then the only way forward can be to dissolve the partnership.
- It is common for a PA to specify a detailed dispute resolution mechanism to avoid this problem.
- If a dispute has arisen, you should consider whether the partners have agreed to follow a dispute resolution mechanism in their PA?
- If so, it is important to ensure that this has been followed.
- It is important to agree what are partnership assets and what assets belong to the individual partners.
- This is especially important where one partner is, for example, contributing land or other assets upon the formation of the partnership.
- On the dissolution of a partnership in the absence of any agreement all the partnership assets will need to be sold and the partners will be entitled to any residue after any partnership losses, debts, advances and expenses of the dissolution are paid.
Removing a Partner
- In the event of a dispute it may be desirable to remove one (or more) of the disgruntled partners from the partnership.
- However, the Partnership Act 1890 does not include a power to expel a partner.
- It is important therefore to reach an agreement on the circumstances upon which a partner may be removed from the partnership.
- Standard reasons, for example, include in the event of their bankruptcy, mental incapacity, a material breach of the PA, removal from the register, or poor performance.
- However, before doing so, the remaining partners will need to ensure that they have the power to expel that member and the correct procedure is followed.
- Will disputes be referred for arbitration?
- Unless there is an express power of expulsion in the PA, there is no automatic right to expel a partner and the partners will need to come to an agreement or it may be necessary to dissolve the partnership.
- For example, a partner may be expelled from the partnership after 6 months continuous or an aggregate of 9 months absence in any one accounting period (excluding any periods of maternity cover).
- It is important to note that no partner should be expelled without grounds being established under the PA.
- Amend the PA (including profit share ratios).
‘Green Socks’ Clauses
- One of the benefits of a well drawn up PA is that it can set out the circumstances under which a partner may be expelled from the partnership without going through the difficult and expensive process of dissolving the entire partnership.
- Partnerships can easily become dysfunctional based on disagreements on clinical matters or workload issues or there may be a personality clash which defies resolution.
- Failure to adhere to an acceptable dress code, even the colour of a partner’s socks, may become the terminal irritant in a dysfunctional practice!
- This has given rise to the popular description of the clause included in many PAs that states that any partner can be expelled for any reason if all of the other partners vote to expel them.
- However, it is essential that partnerships remember that despite the green socks clause they are still obliged to comply with all anti-discrimination legislation.
- Failure to do so could easily result in a lot of inconvenience and unpleasantness as well as extremely expensive legal costs and compensation.
- The Courts will normally consider all such clauses with regard to possible abuse and the consequent hardship of expulsion.
- Generally they will not allow a partner to be expelled, even if the wording of the clause permits it, if the expelled partner can show that their co-partners have not acted in good faith.
- If in doubt it is always best to seek legal advice before expelling a partner.
Compulsory Retirement Clauses
- Compulsory retirement clauses regularly appear in PAs but these must comply with discrimination legislation.
- There is in addition a requirement for the other partners to act in good faith.
- It is wise to discuss these issues with the partner to be expelled before the expulsion takes place in order to ensure that the proposed action is necessary and acceptable to all concerned.
- In case of doubt it is always best to seek legal advice before taking action.
- Amend the PA (including profit share ratios).
Death/Retirement of a Partner
- The Partnership Act 1890 does not allow for a partner to retire, so in the absence of an agreement, the death or retirement of a partner will require the dissolution of the partnership.
- A well-drafted PA can and should provide for a partner’s retirement without disrupting the relationship of the remaining partners, and avoid the need for a further agreement at the time of retirement.
- What notice does a partner have to give? Six months?
- How many partners can retire (within a set time period)?
- There is no default retirement age for partners but there are rights to expel under the PA for a number of specified reasons.
- Is there a no “green socks” provision?
- Amend the PA (including profit share ratios).
- In any PA it is important to consider what restrictions should be placed on a partner who decides to retire from the partnership, or if it is necessary for the other partners to expel them.
- In the absence of any agreement there is little to prevent a departing partner from setting up in competition with the partnership.
- In restricting the activities of an outgoing partner, the practice needs to consider:
- Radius (from the practice premises).
- The radius and time limit must be reasonable to be enforceable.
- It is suggested that this clause only be included having taken professional advice.
What about Employees?
- As a partner you employ your staff.
- This means as the employer, you and your partners are legally and financially responsible for your staff and must therefore comply with employment law, health and safety etc.
- This is one of the reasons why it is so important to have a good Practice Manager who will ensure that all of these aspects are covered – but ultimately the partners hold the responsibility.
- Although the partners may employ staff, a partner cannot also be employed by the partnership (i.e. you cannot employ yourself).
- The partners will be liable for any employment claims.
- The PA should outline the time frame for any partnership change.
- It is usual to see a minimum period in the agreement between partner leaving dates (typically six months apart).
- Without this being in place, a relatively stable practice could significantly reduce in partner numbers in a short time period.
- This could eventually result in enormous work and financial pressures on the remaining partners, problems with recruitment and retention of salaried GPs, and the eventual transfer of the NHS contract.
- Amend the PA (including profit share ratios).
Timing of Pay-Outs
- If the timing of pay-outs is outlined in the PA, it ensures that the outgoing partner is clear on the timing of repayments and that the incoming and ongoing partners are aware of their financial commitments.
- This is also a key factor in practices being able to manage their cash flow during the time of the partnership change.
What is ‘Last Person Standing’?
- This is a term used whereby partners have left the practice and the practice has been unable to recruit replacement partners, and the full liability of the partnership sits with one remaining partner.
- There are ways to reduce this risk.
- For example, ensuring there is a robust PA which prevents all the partners leaving in quick succession.
- Normally such a stipulation would, for example, mean that only one partner can leave every 6 months.
- Practices could keep a contingency fund that would cover the liability and hence protect all partners.
- The partners of the practice should be open about their plans for length of time they intend to work in the practice, so as to enable the practice to plan for the future and have a succession plan.
- Finally, if the practice is forward looking, has a positive attitude and is profitable, this is much more attractive to new partners, which in turn negates the risk of ‘last man standing’.
- Partnerships are bound by the law as it relates to discrimination with regard to gender, sexual orientation, disability, age, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.
- Even a carefully worded PA will not exempt the practice from their legal obligations in this respect.
Disability Discrimination Act
- The Equality and Human Rights Commission has published a Code of Practice Employment and Occupation to address issues raised by the Disability Discrimination Act 1995.
- This makes it clear that the Act imposes obligations on partners in firms, as well as employers.
- Since October 2004 this Act has given a partner, or applicant for partnership, or a prospective partner in a new partnership, similar rights to those of an employee.
- This is an extremely complex area of employment legislation and the LMC is unable to offer legal advice, although we may be able to offer some preliminary advice or support.
- It would appear that it is unlawful for a firm to discriminate against a disabled person who is an existing or prospective partner with regard to:
- Advertisements for a position.
- Who should be offered a position.
- The terms on which a position is offered.
- Refusing or deliberately omitting to offer a position.
- Refusing or deliberately omitting to afford access to any benefits.
- Expulsion from the partnership.
- Harassment or victimisation.
- Any other detriment.
- The duty to make reasonable adjustments applies to a firm in just the same way as it applies to an employer and relates to ‘any provision, criterion or practice applied by or on behalf of the firm’ and to any ‘physical feature of premises occupied by the firm.’
- The cost of making reasonable adjustments may not generally be passed on to the disabled person concerned.
- However, if adjustments are required in relation to a partner or prospective partner who is disabled, the cost is an ‘expense’ of the firm, to which a disabled partner may be required to make a ‘reasonable contribution’.
- In this respect it would be reasonable to take into account the proportion of the disabled partner’s share of the profits.
- Partners who believe they have suffered discrimination on the basis of disability do not need to use the statutory procedures before bringing a claim in the Employment Tribunal, but must lodge the claim within 3 months minus a day from the data of the last incident of disability discrimination.
- Any practice or individual should seek specific legal advice as soon as they become aware of any problem.
Partners’ Liability in Employment Disputes
- If the behaviour of one partner breaches employment law, leading for example to a claim for constructive dismissal, then the other partners would normally share ‘joint and several liability’ for the partner’s action(s).
- If an employee, such as a practice manager, creates a similar problem, then the partners would generally share the liability, unless there had been a very clear breach of practice procedures, in which case disciplinary action should be considered.
- The partners may then be able to make amends in order to rectify the problem.
- There are very clear statutory procedures for dealing with grievance, discipline and dismissal in the workplace and for any partner or employee to act precipitately without following the correct procedures could prove extremely expensive for the practice.
- Failure to follow correct procedures in an unfair dismissal case will lead to an automatically unfair dismissal and a very expensive settlement.
- It is therefore of critical importance that all practices have very clear written policies that staff and partners must follow when handling all employment issues.
- All partners and employees must be made aware of their responsibilities in this respect.
- Strict adherence to proper procedures will usually help minimise the risk.
- In the case of an employee who ignores correct procedures the partnership liability may be reduced.
- In the case of a partner, the partnership deed may cover failure to follow correct procedures.
- Practices may seek insurance cover for the legal costs resulting from an employment claim, but this rarely covers any financial award made to the employee, which may be substantial.
- If problems do arise it is wise to seek early advice from a lawyer with special experience in employment law to try to limit the damage.
Profits and Losses
- Unless otherwise agreed, all profits and losses of the partnership will be shared equally between the partners.
- If it is intended to divide the profits in anything other than an equal share then this should be documented.
- It is also important to consider whether any partners may make drawings on account of profits, if some profits should be retained to invest in the future of the partnership or to help mitigate losses in the event of an economic downturn.
Is an Exiting Partner Entitled to their Profit Share?
- If the partners have the power to expel a partner then it is important to consider whether this triggers a payment to be made to the outgoing partner under the partnership agreement.
- If so, the remaining partners will need to ensure they have the cash to make this payment.
- There are situations where a partner may forfeit their right to a share of the partnership’s profits.
- This is only in exceptional circumstances, but can be considered where, for example, a partner acts dishonestly or where they take secret profits.
Dissolution of the Partnership
- There may be some circumstances where a partnership is deemed to dissolve (e.g. the death of a partner) or by agreement between the partners.
- On dissolution any residue (if any) will be paid to the partners after any losses, debts and advances have been paid.
- The PA may specify how this will be split, but in the absence of any agreement this will be in accordance with the partners’ profit sharing ratios.