what does “all of their time and attention” mean?
i’ve read hundreds of partner agreements over 20 years and i am unable to meaningfully distinguish between the following:
- partner duties (what partners must do to keep their jobs)
- partner prohibitions (what partners cannot do)
- grounds for expulsion (what actions partners may do that are serious enough to cause their dismissal from the firm)
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i’ve seen countless different ways that these items are presented in partner agreements. for years i’ve asked these questions:
- aren’t partners prohibited from failing to perform their partner duties, as specified in the partner agreement? the answer of course is yes, so why differentiate duties from prohibitions?
- if a partner fails to perform partner duties, isn’t that grounds for expulsion?
- shouldn’t violation of all prohibited acts be grounds for expulsion?
so i usually combine the three categories. but it’s up to you and your attorney to determine how to lay it out in your partner agreement.
items that are clearly partner duties
my reading of hundreds of partner agreements over the years has shown that many of the “duties” listed are really prohibitions. by contrast, my list is restricted to duties.
- a partner shall render any lawful services for the firm as are from time to time reasonably requested of the partner or assigned to the partner.
- a partner shall devote 100 percent of his or her productive time, attention and energies to the firm’s business, to the best of the partner’s abilities, competently, with diligence, professional care and objectivity, in good faith and with integrity, as is required for performance of his or her duties.
- all fees for provision of services by the partner pursuant to this agreement shall belong and be payable to the firm.
- a partner shall
- promote the business of the firm
- perform all acts necessary to maintain the partner’s skills and licenses at an appropriate level
- participate in activities designed to enhance and develop the practice of the firm
- comply with all terms of the partner agreement and the policies, practices, procedures or rules of the firm
prohibitions and restrictions
- a partner shall not engage in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, except for the provision of certain services on behalf of the firm. a partner shall not engage in non-firm activities that interfere with or diminish the reputation and good standing in the firm’s market and community.
- no partner may actively engage in any other business without firm approval. “actively” is defined as having a meaningful role in the management or administration of the business, without regard to the time of day or the day of the week that the partner engages in this activity.
- a partner may be a passive investor in a business for non-attest clients of the firm and organizations that are not clients of the firm.
- no partner shall receive compensation for personal services other than from income that has been reported as the firm’s income. this includes delivering speeches and writing articles, books and other publications.
- no partner shall hold public or civic office, or any position with a professional or charitable organization, without the approval of the other partners.
- all partners are restricted from the activities listed below. it is the duty of a partner to notify the managing partner of any activity or proposed activity that may reasonably be deemed to be in violation of any of these prohibitions. but to the extent that the firm is asked to approve a partner’s involvement in any of the activities below, such approval shall not be unreasonably withheld.
- assign, transfer, pledge, compromise or release any claims or debts of the firm
- make, execute and deliver any assignments for the benefit of creditors or any bond, confession of judgment, chattel mortgage, indemnity bond, surety bond or contract of sale
- hire or agree to hire any person or discharge any person who is currently employed by the firm
- enter into any ownership or management position with any existing or potential client that would prohibit the rendering of a cpa opinion
- make contributions on behalf of the firm to charities, religious organizations or political organizations
- serve as a trustee, director or executor without the firm’s approval. if these arrangements are approved, the firm should always be named in these positions, not the individual partner. in situations in which it is not possible to name the firm, all fees will be remitted to the firm as if the firm were named the service provider. if the partner leaves the firm and keeps the fiduciary roles listed above, the partner shall remain obligated to remit the fees back to the firm or buy the clients just as if he or she purchased traditional clients.
- indemnify against any act, debt, default or misconduct of any person or partners
- assign, mortgage or sell his or her interest or rights in the firm or its assets or income
- make, execute, deliver, endorse or guarantee any commercial paper
grounds for expulsion
attorney peter fontaine provides us with the following guidance:
expulsions typically result from violations of the partnership agreement or common unacceptable behaviors, the latter of which includes:
bad acts. fraud, embezzlement, criminal acts, tax evasion, etc.
performance issues. this includes failure to meet performance standards and metrics, failure to follow firm policies, failure to meet professional standards, conflicts of interest, breach of fiduciary duties, independence violations, poor judgment and more.
fontaine cautions that performance violations are less clear-cut and the source of much debate about whether a termination is “wrongful.”
fontaine strongly suggests that expulsions be well substantiated and documented.
based on our reading of hundreds of partner agreements, these are the most common grounds for expulsion:
- declaration of bankruptcy.
- for the following items, expulsion should only occur after the partner receives counseling on the transgressions and is given a reasonable time frame to resolve the violations:
- substance abuse
- failure to comply with the general policies and procedures that allow the firm to conduct its business in a planned, professional manner
- violation of any provision of the partnership agreement
- declining to perform those duties normally expected of a partner
- performance that falls below the firm’s performance standards for partners
- conviction by final action of any court of any offense punishable as fraud, theft, embezzlement or any other felony or act involving moral turpitude.
- engaging in any unauthorized or prohibited activity or undertaking that adversely affects the firm’s earnings.
- expulsion, suspension and other forms of professional discipline by the final action of any professional organization, especially the aicpa and state cpa societies.
- resignation from any professional organization under threat of disciplinary action.
- engaging in activities, illegal, immoral or unethical, or engaging in acts of personal misconduct that cause either the firm or its members’ reputations to be impaired because such activities have been publicized in the firm’s marketplace or are otherwise accessible to the public.
- assigning, mortgaging or selling his or her interest or rights in the firm or its assets or income.
- breach of fiduciary duties to the firm or its clients.
- hiring or agreeing to hire any person or discharge any person.
- making contributions on behalf of the firm to charities, religious organizations or political organizations.
- assigns, transfers, pledges or releases any claims or debts of the firm. a partner cannot make, execute and deliver any assignments for the benefit of creditors or any bond, confession of judgment, chattel mortgage, indemnity bond, surety bond or contract of sale.
- making, executing, delivering, endorsing or guaranteeing any commercial paper; indemnifying against any act, debt, default or misconduct of any firm member.
what does an expelled partner lose?
this varies by firm, depending upon the severity of the violation and the degree to which the partners wish to penalize the expelled partner. my experience is that the majority of firms opt for a severe penalty over a mild one.
says peter fontaine, “what are uniformly forfeited are separation benefits such as retirement, buyout and deferred compensation. the partner agreement needs to be carefully drafted to avoid confusion.”
great recommendation: fontaine suggests that rather than take away 100 percent of expelled partners’ benefits, the firm pay them a small severance benefit in exchange for signing a broad, enforceable release of claims the partner might have against the firm, such as
- discrimination
- retaliation
- wrongful termination
- failings by management
- punishments that don’t fit the crime
- failure to uniformly apply standards
partners will devote all of their time and attention to the firm: what does this really mean?
virtually all partner agreements that i have read contain a provision requiring partners to devote all of their time and attention to the firm. being a partner in a cpa firm is commonly considered a 24/7 job. they average 2,400-2,500 total work hours a year and work many nights and weekends.
as a result, firms are rightly concerned that partners engaged in other businesses would not devote the necessary time, energy and attention to being partners.
what does “all time and attention” really mean? to drill down, we called upon our two legal experts, peter fontaine and russell shapiro.
says fontaine: “when partners own or operate another business, it’s reasonable for the firm to ask, ‘what are the partners’ priorities? where is their loyalty? are they truly committed to the firm? why aren’t the partners spending more time developing business, stepping up their game, mentoring staff or exhibiting more leadership?’ there is a natural suspicion by the firm that any activity that is meaningful and/or not entirely passive is likely to create a conflict of loyalties at times.”
according to shapiro, “the partner agreement should provide very specific guidelines for what is allowed and not allowed. one of the key criteria for defining ‘all time and attention’ should be the extent to which a partner’s involvement in another business is active or passive.”
- active means the business needs the partner to operate. example: a partner owns a building and does all the work, including finding tenants, fixing things, tenant relations and paying bills. despite the partner’s assurances that he or she tends to these duties only “after hours,” this is inconceivable in the eyes of the other partners.
- passive means the partner is an investor who may occasionally be consulted for advice. passive also encompasses a partner making a few phone calls at night and doing a little fix-up work on weekends. (shapiro)