Distinction between employee and partner/fixed distribution entitlement (5-20)
[I]gnoring for the present section 2(3)(b) [the same as Partnerships Act (Ont.), s.3.3(b)], it was frequently held prior to the 1890 Act that employees who were remunerated by reference to the profits of a business were not partners therein, at least where it appeared from the agreement that no partnership was intended. Indeed, the comparative popularity of this device may, in some measure, have contributed to the gradual introduction and recognition of the concept of "salaried" partnership, which in general involves an employee being held out as a partner and remunerated by a fixed salary and/or a share of profits, but denied many of the rights and duties normally associated with partnership, e.g. an obligation to contribute capital and to share losses and a right to participate fully in the management of the firm. A significant feature in such cases will often be that, on a true analysis, the salary is payable irrespective of the profitability of the firm, so that the element of risk participation is lacking, although this has recently been held not per se to be inconsistent with the existence of a partnership. [fn 91: M. Young Legal Associates v. Zahid [2006] 1 W.L.R. 2562 (CA); Hodson v. Hodson [2010] P.N.L.R. 8 (CA). ...] Equally, there are, inevitably, instances in which persons described as salaried partners are to be regarded as partners in the true sense, particularly when their salary is dependent on the firm's profitability [fn 85: As in Marsh v. Stacey (1963) 107 S J. 512, where a "junior" partner was entitled to "be paid a fixed salary of £1,200 as a first charge on the profits" but in one year the profits were not sufficient to pay that sum to him. The Court of Appeal held that he was not entitled to have the deficiency made good by the other partner.] and they have capital at risk in the firm. [fn 93: See Reid v. Hollinshead (1825) 4 B. & C. 867; Ex p. Chuck (1832) 8 Bing. 469; Gilpin v. Enderby (1824) 5 B. & A. 954. In such a case, an express term in the agreement negativing any implication of partnership may be ineffective vis-a-vis third parties, such as HMRC: see Fenston v. Johnstone (1940) 23 T.C. 29, where there was held to be a partnership and not merely remuneration for management services. The managing partner put up no capital and contributed no assets, but he was to share in profits and losses arising in the development or sale of certain land….] Latterly, such persons have tended to be designated as "fixed share" partners to emphasise the difference in their status, [fn 94: Although not strictly necessary as a matter of law, there has, in recent years, been a tendency to provide that fixed share partners should contribute a small sum of capital and be entitled to a minimal share of residual profits and losses, in order to ensure that partnership status and, thus, the benefits of self-employed (formerly Schedule D) taxation are achieved….] although the change of nomenclature is of no real significance.
Effect of s. 5 of the Partnership Act 1890 (U.K.) (similar to s. 6 of the Partnerships Act (Ontario)) (12-05)
The dual agency concept: The reference to each partner being “the agent of the firm and his other partners” requires explanation. At first sight the reference to the firm appears to be mere surplusage, since that expression is merely shorthand for all the partners, such, indeed, appears to have been the view of Park J in Major v Brodie [f.n. 23: [1998] S.T.C. 491, 504c-e]. However, in the current editor’s view these words may serve a function and establish what might be styled the pure form of mutual agency, under which each partner acts in dual capacity, i.e. as agent for the partners collectively [f.n. 24: It is, at the same time, recognised that this necessarily entails the partner also acting as his own agent, which is something of a contradiction in terms. This point was not adverted to in Major v. Brodie, supra.] and as agent for each of the other partners in their individual or separate capacities. This is consistent with the dual nature of a partner’s liability under the Partnership Act 1890 and, to an extent, the treatment of a partnership debt under the insolvency laws, but it is fair to say that the concept does not appear to have been recognised by Lord Lindley himself.
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