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There are many benefits to attaining partnership status in a limited liability corporation, but a recent ruling in the Illinois First Appellate Court reaffirms that collecting unemployment insurance is not one of them. In Weinberg v. Blair and Co., LLC, 2015 IL App (1st) 140490, the First District Appellate Court held that a partner of a limited partnership corporation was not eligible for unemployment compensation benefits under the Unemployment Insurance Act (Act) due to his partnership status.

The petitioner was a principal of WBC Holdings (WBCH), a subsidiary to William Blair and Company, LLC (WBC). WBCH had 170 principals and approximately 900 non-principal employees. Upon receiving the petitioner’s application for unemployment compensation, the Department of Employment Security found the petitioner eligible for unemployment benefits because he received remuneration for services that he performed as a “production principal” under the direction and control of WBC. WBC requested reconsideration, asserting that the petitioner was ineligible for benefits because he was a partner in the company, and was paid a percentage of profits.

The Department reversed its decision, finding that the petitioner’s compensation did not fall under the Act’s definition of “wages.” The petitioner appealed, arguing that, despite his partnership relationship with WBC, he was paid directly on commissions that he generated, as opposed to being paid out of the firm’s profits. The Department referee found that the petitioner performed services in the sales department “as a part of a venture for the common benefit” of the partnership and received commissions and a distribution of profits as a partner, and that those payments were not wages under the Act, but rather were profits paid into the partnership.

The petitioner appealed to the Department’s Board of Review, and the Board affirmed the referee’s denial of benefits. The Board found that WBC operates as a partnership rather than a corporation, for purposes of unemployment insurance, and that the petitioner could not show that he was an employee. The petitioner appealed to the circuit court, and the court reversed the Board’s decision, finding that the petitioner’s income was based both on commissions and company profits and that his commissions constituted wages under the Act. The Department appealed the circuit court’s ruling.

Under the clearly erroneous standard of review of the Board’s decision, the appellate court reversed the circuit court’s ruling. The Court did not evaluate whether the petitioner’s compensation was considered “wages” under the Act, but instead categorically held that partners of partnerships are ineligible to receive benefits under the Act. Although the court recognized that the Act defines “employing unit” to include partnerships, it found that partners themselves are not employees of the partnership. And because the Act requires an employing unit and an individual rendering service to the employing unit, the court held that the petitioner was ineligible for unemployment benefits under the Act.

In this particular case, the petitioner did not dispute that he was a partner of the firm and had the authority to bind the firm in conducting its business. Nonetheless, in evaluating the petitioner’s relationship with the firm, the court considered the existence of a principal/partner agreement and the petitioner’s compensation structure, which consisted of a guaranteed payment derived from partnership profits, an additional monthly amount based on his client base, and a quarterly share of the firm’s profits based on the revenue he generated and the amount in capital he invested in the company. The court also recognized that no income tax or payroll taxes were withheld from the petitioner’s compensation, and that he was required to pay self-employment tax.

If you have questions about this issue or any other employment matter, please contact Joseph F. Spitzzeri, Genevieve M. LeFevour, Brian C. Langs or Christopher J. Carlos.