Employees and employers are protected by statutory rights. These rights have been approved by parliament and are written into British law. The Employment Rights Act 1996 is the relevant act which sets out the statutory rights of employees and employers. One example example of a statutory right would be holiday allowance.
LLP Members are protected by contractual rights. These are what protect the agreements and contracts we enter into on a day-to-day basis and are legally binding on each of the parties. For example, something as everyday as buying lunch from a supermarket creates a contract between an individual and the supermarket.
This is relevant to LLP members because, by becoming an LLP member, the individual agrees to vary their employment with the Ltd company and join the LLP as a partner. The new LLP member has therefore agreed to alter their statutory rights as an employee and engage with the LLP in a new agreement as a partner which is protected by contractual rights.
Each LLP Member is entitled to an award of compensation for agreeing to vary their statutory rights. This compensation amount is then used to form their capital contribution into the LLP.