When Is a Partner Not a Partner? Control, Dependency and the Lurking Spectre of a Duty of "Good Faith"
May 27, 2014
On May 22, the Supreme Court of Canada upheld the British Columbia Court of Appeal’s decision that an equity partner in a law firm was not an employee for the purposes of the B.C. Human Rights Code (Code).
The case, McCormick v. Fasken Martineau DuMoulin LLP, dealt with a complaint to the B.C. Human Rights Tribunal by John McCormick, a then 64-year-old equity partner at the law firm of Fasken Martineau DuMoulin LLP. McCormick argued that the mandatory retirement provision of his partnership agreement violated the prohibition against age discrimination in employment in the Code. The provision required all equity partners to retire and divest their ownership shares at the end of the year in which they turned 65. In an interesting twist, McCormick actually had a chance to vote on this policy when the firm voted to adopt it in the 1980s.
In order for the Code to apply to a retirement policy in a partnership, the partners would have to be deemed employees, such that the policy could constitute discrimination in employment. Thus, the question for the Supreme Court was whether McCormick, as an equity partner, could be considered an employee under the Code.
The Court confirmed that the test used to assess whether an individual is an employee is the "control and dependency test," which looks to the control exercised by the alleged employer over remuneration and working conditions as well as the dependency or vulnerability of the alleged employee. The more dependent an individual is, and the more control he or she is subject to, the more likely it is that he or she is an employee.
Partners are normally in control of remuneration and working conditions, even though there may be administrative processes or committees in place to address them. As a result, the Court found that most partners in a partnership, including McCormick, will not be employees for the purposes of the Code.
When Is a Partner Not a Partner?
In order for a partner to be an employee for the purposes of the Code, the "powers, rights and protections normally associated with a partnership" would have to be "greatly diminished." Essentially, the partnership would have to lack those basic hallmarks of control and power that exist in most partnerships, including:
- the protection afforded by the strict measures required to expel a partner from the partnership and the right not to be subject to discipline or dismissal;
- the right, on leaving the firm, to the partner’s share of the firm’s capital account;
- the duty that partners owe each other to render accounts; and
- the fact that the partnership is run for the economic benefit of the partners.
Notwithstanding the foregoing, the Court noted that partners may have recourse for a claim of discrimination under s. 22 of the (British Columbia) Partnership Act, which provides that partners owe each other a duty of the utmost fairness and good faith. However, the Court held that partners are not likely, absent special circumstances, to be in breach of this duty where the policy, as it was in this case, is "designed to benefit all partners by ensuring the regenerative turnover of partnership shares."
This case is equally applicable to partnerships outside of law firms, including accounting, engineering and other partnerships.