Automatic enrolment: new exemptions for directors and LLP members

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The DWP has issued a consultation on proposed changes to automatic enrolment which are intended to come into effect on 6 April 2016.

Two new exceptions are being created to the employer duty to automatically enrol. These will apply to company directors and certain LLP members.

In relation to directors, the duty to enrol is being replaced by an option to enrol where the jobholder “holds office as a director of the company by which the jobholder is employed”. This means that no director has to be enrolled, but (where the director has a contract of service and qualifying earnings) they can be automatically enrolled and they can still choose to opt in to the pension scheme. Sole directors (where there are no other employees) are already totally exempt from the automatic enrolment requirements.

The second proposed change is an attempt to clarify the position of LLP members. In May 2014 the Supreme Court held in Clyde & Co that LLP members could be “workers” for the purposes of the employment protection legislation - key to this was that the member was an integral part of the business and could not market her services to other firms. Although the case was not about automatic enrolment, the general view is that a similar definition of "worker" is used and that LLP partners can be “workers” for automatic enrolment purposes.

The intention of the new provision is to exclude those who are “genuine partners” from the scope of an LLPs automatic enrolment duties. The draft regulations do not attempt to define "genuine partner” but the proposed new exemption will apply to:

  • LLP members;
  • with qualifying earnings; who
  • are not treated for income tax purposes as being employed by the LLP under section 863A of the Income Tax (Trading and other income) Act 2005.

Section 863A applies to those who are, for income tax purposes, treated as being employed by the LLP under a contract of service instead of being a member of the partnership.

In order to be subject to automatic enrolment at all, partners have to be “workers” and also have to have qualifying "earnings”. “Earnings” are sums payable in connection with “employment”. It may therefore be unlikely that any “genuine partner” would be subject to automatic enrolment in any event because, even if he or she were a worker on the Clyde & Co basis, he or she would probably not have “earnings”. The change may make it easier to identify a partner who is likely to be subject to automatic enrolment – if an LLP partner is treated for income tax purposes as an employee then it seems likely that they will be a “worker” and also have “earnings” and so be subject to automatic enrolment.

In summary, in relation to LLPs:

  • members an LLP who are not "workers" and/or do not have "earnings" are not subject to automatic enrolment;
  • members who are taxed as employees rather than partners are likely to be subject to full automatic enrolment duties (if they are also workers and have earnings); and
  • members who are not taxed as employees will be subject to the new exemption (if they would otherwise satisfy all the relevant criteria). This means that they can be automatically enrolled but there is no duty to do so.

A change to the current exception for employees with tax protected status is also proposed to pick up on the new 2016 protections.

The consultation also proposes some simplifications to the timing of the provision of information where the staging date is being brought forward and on re-enrolment and a transitional easement for employers currently using a contracted-out scheme to satisfy its automatic enrolment duties. More detail on this can be found in my recent update on contracting-out.