Sarah Rushton explains how to let underperforming partners go with a minimum of fuss

When dealing with underperforming partners, emotions can run high. The remaining partners may resent carrying dead weight, the outgoing partner may feel betrayed. However, in a difficult market, weeding out underperforming partners could be vital for survival. How painful and disruptive the process is depends upon the skill of the lawyers advising the partnership and the ability of those in charge to manage the outgoing partner's exit with dignity.

Before going down the route of expulsion, it is worth considering other options, such as reduced profit share or de-equitisation. If expelling an equity partner, the remaining partners will have to work out if they can afford to repay the outgoing partner's equity share.

The first port of call for law firms considering a shake-up is the partnership agreement (or partnership deed). In the absence of such an agreement, the Partnership Act 1890 provides that a partner cannot be expelled by the other partners. Instead they must apply to the court for dissolution. Since the court can only order the dissolution of the whole partnership and cannot simply exclude the unwanted partner, this is a matter of last resort.

For the partnership agreement to be binding, all partners must have signed up to it. If they have not, it may be deemed to be a partnership at will, in which case the outgoing partner could apply for its dissolution.

Most partnership agreements set out the terms for expulsion, either with or without cause. Expulsion with cause, which is usually immediate, is typically related to misconduct, wrongdoing or incapacity and is set out in the agreement. Expulsion without cause (or 'retirement') generally provides for either the partnership or the partner to give notice to the other – the norm being between six and 12 months. An expulsion based on a partner's failure to perform to a certain level will be treated as expulsion without cause – and mean the partnership has to rely upon the longer notice provisions – unless failure to perform is set out explicitly as a reason for expulsion with cause in the partnership agreement.

Another consideration that needs to be taken into account is the difference between a genuine partner and a salaried partner – as the latter may also be an employee. The label given to a relationship is not necessarily conclusive: the courts take a range of factors into account when determining whether or not an individual is an employee. Merely sharing in the profits or being taxed in a particular way is not necessarily conclusive.

While genuine partners do not qualify for certain employment rights, they do enjoy protection in relation to discrimination. It is, for example, unlawful to discriminate against a partner on the grounds of sex, race, disability or religion. However, there are significant differences between the rights of partners and of employees in relation to age discrimination.

The duties of partners to each other and to the partnership are different to the duties between employer and employee. Partners have a mutual duty of good faith which is much more onerous than the duty of mutual trust and confidence implied into every contract of employment. Care must be taken to prevent the outgoing partner from being able to claim that the partnership has breached its obligations of good faith.

An outgoing partner has the right to inspect the partnership books – and therefore access client data, addresses and information about payments to other partners. The risks of allowing outgoing partners to see such details will be mitigated if there are restrictive covenants in place which prevent such information being used in the future.

Where post-termination restrictions are in place, they are generally more easily enforced against genuine partners than employees. A partnership agreement may impose a financial penalty for breach of any restriction or may delay payments to the partner pending the end of the period of restriction.

A well-drafted partnership agreement should include the right to either suspend or put a partner on gardening leave. In the absence of such a provision, the exclusion of a partner is likely to be a fundamental breach of the partnership agreement – and if the remaining partners are in fundamental breach, they are unlikely to be able to rely on any post-termination restrictions in the deed.

Even if the prospect of expelling a partner is not on the cards, in uncertain times partnerships would do well to ensure that their deeds are fit for purpose.

Sarah Rushton is head of employment at Forsters.