Leaves of Absence in Partnerships
Edited by Sarah Wilshaw-Sparkes
“Can you advise of the range of arrangements generally made in partnership or directorship agreements for leaves of absence such as maternity leave or sabbaticals or extended sick leave whereby you, as a principal or shareholder in the business, are not actively working in the business on a daily basis? I would be interested in the range of issues, problems and solutions on this matter. I am in a situation (on maternity leave) where I will not be working on a daily basis in the business but am able to be involved in a shareholder capacity i.e. monthly meetings.”
We put this question to our senior contacts in local and global professional services firms and received several generously lengthy responses – on promise of anonymity.
Perhaps the bedrock in the answers we received is to prepare. Whether the actual event is expected (like a sabbatical) or unplanned (like a serious illness), policies that are fair to all can be developed well before the leave needs to be taken.
“It would be important to agree things with the partner group up front first, including agreement on what her involvement is expected to be and how she will fulfil it so there is no perception of risk of exploitation by either partner and all the necessary wheels are oiled beforehand.”
“I would suggest the partners should agree a schedule [of profit sharing] upfront: I would think most businesses would like to encourage occasional extended breaks for all partners while at the same time ensuring the business continues to prosper.”
There are many issues that need to be balanced in the extended leave situations like maternity and long-term sickness. These include, in no particular order:
- the needs of the leave-taking Partner
- the needs of the clients of the leave-taking Partner
- the management implications to the remaining Partners
- staffing implications
- the financial implications on the partnership as a whole
- the ability to plan cover for the leave-taking Partner’s duties (i.e. forewarned and planned versus sudden illness)
- the length of leave required
Two issues were identified here.
- Should the partner on lengthy leave be paid salary for time spent attending regular meetings such as monthly partnership meetings?
The short answer seems to be that salary would be paid for time spent in meetings of significant duration but probably not for an hour here or there. The theme of ‘agree it upfront’ came through strongly again!
Would the individual be paid for the time in these meetings? My guess is that if an arrangement was made up front, the firm would compensate for attending agreed meetings including local monthly partner meetings (usually a half or full day), specific specialty area meetings or worldwide meetings. This time could then be paid either by approving the extension of the paid leave period which would be the simplest (but not always most practical) solution, particularly if on unpaid maternity leave, or paid as salary.
Attending a one hour meeting or phone call here and there would probably not merit salary… which is fair enough as partners should not be expected to see their partnership role as time and materials. However, I would be confident that if a more formal involvement and contribution were agreed with management then the time would be recognised and paid for.
This commentator also pointed out that all costs of travel to significant meetings would also be met by the firm whilst the partner was on extended leave. “After all, she is still a partner of the firm with full decision and voting rights like any other but she just happens to be on leave.”
- Should the partner on lengthy leave be entitled to any profit share?
Our respondents indicated that a lower profit multiplier would usually apply during periods of extended leave.
“It comes down to the firm’s compensation committee (or equivalent) applying the appropriate performance multiplier at the end of the year considering the contribution. I would expect in this case the person would get a 1 or 0.5 which means that get some profit distribution upside but it is relatively small given they have not been actively commercially contributing to the result.
It is important to remember that the ‘ownership share’ in a professional services partnership is not like an equity share in a company which guarantees all shareholders equal return on their investment. In most professional services partnerships the distribution is based on individual performance and contribution to the overall profit pool and one cannot expect to share equally in that pool if one is not contributing either commercially or practice development-wise – which I believe is fair enough.”
In one case time away on sabbaticals counted fully towards profit share allocation. It is perhaps noteworthy that sabbaticals were the only type of extended leave covered by a policy on profit share in this firm:
“We have a mutual agreement within our Partnership that each Partner is entitled to a 5 week sabbatical leave, every 4 years. Historically, the focus has been a combination of risk management and partner well-being issues. We have an agreed sum that is made available to the partner taking the sabbatical leave, and they continue to receive their full profit share allocation when they are on leave.”
One response we received pointed out that the aim of a sabbatical is to recharge the partner’s battery. Generally, partners who are off on sabbatical would not be expected to show up for regular meetings…
What about profit share during lengthy absence due to illness? Partnership Agreements can deal specifically with the incapacity of a partner and provide certainty both for the incapacitated partner and the remaining partners.
“Our rules set that the incapacitated partner will receive the share of profit equal to their grossed up (by the calculated amount of tax) regular drawings for the first 3 months of their incapacity. After the first 3 months, the incapacitated partner is not entitled to any share of income until they are able to return to work. Part time return to work is provided for by way of negotiation.”
Profit Share and Salary – Worked Examples
The senior administrator at one professional service firm helpfully provided some concrete parameters for paid periods, and for share of profits. Specifically:
“I would expect that partners would need to deal with absences by apportioning the compensation between personal services (base salary) and share of profits. If someone is absent from the business then the base salary probably ceases but the share of profits should continue for some agreed period of time and possibly the portion of profits paid would vary depending on the any contribution made.”
The smaller the partnership the more likely that other partners are picking up extra duties to keep the business running so those left behind should get a higher share of profits. The partners would need to agree how generous they want to be depending on what the business can afford and how those left behind are managing.
- Leaves of absence can have a paid portion depending on the reasons for the absence:
- Maternity leave (12 weeks of full paid compensation: base salary, profit share and superannuation)
- Short term illness (base salary continues until the statutory entitlement is paid and then the company pays 70% of the base until temporary disablement insurance kicks in to pay 70% of base. No entitlement to profit share or super once the insurance kicks in.
Other extended absences such as 3 month holidays, time to write a book etc. Normally no portion is paid beyond the regular vacation balances.
I would suggest the partners should have a table like the one below that they discuss and agree is fair to all concerned.
|Approved absence period||Base salary||Share of profits/losses|
|Up to one month||100%||100%|
|1 – 2 months||20%||100%|
|3 – 6 months||0%||80%|
|6 – 12 months||0%||50%|
|12 – 24 months||0%||30%|
|above 24 months||0%||20%*|
Maternity Leave in a NZ-focused Professional Services Firm
This partner is on slightly reduced hours after a return to work from maternity leave for her second child:
- Took 2 periods of three months (2 babies)
- Absence was covered through a Memorandum of Understanding between the Partners. It covered a broad understanding of the leave such as essential duties that would be required during the leave period, what would happen to the shareholding if the partner couldn’t return after 3 months /12 months. The agreement applied to sabbaticals and long term sickness also
- Partner continued to log in and answer emails / clear queries during absence, staff also called if necessary. Other decisions were made in her absence by the other Partners
Profit share was reduced during the time she was absent.
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