That Light Bulb Moment: Launching a start-up but feeling left in the dark?

 Employment considerations for start-up businesses

All founders are likely to be either employees or self-employed contractors of the start-up business. They must therefore, like any other employee or contractor, enter into an appropriate agreement and receive compensation for their employment or provision of services.  Founders who are employees must be paid at least the minimum wage.  Founders who are contractors may have more creative remuneration packages involving options or shares.

Start-up founders often focus their time and energy on financing their new business and on developing and marketing their core products or services.  As the business grows and more employees are hired, proper compliance with UK employment law becomes more and more essential.  This is even more important in today’s working environment where remote working and remote management are now an integral part of our day to day lives.

Businesses which do not comply with relevant employment laws can find themselves facing substantial risks – both financial and reputational.  Employment litigation can be expensive and start-up businesses often underestimate the amount of management time involved in dealing with them and the resulting disruption.  You should ensure that your business has the appropriate strategy, agreements and policies in place from the outset.

You may have already considered certain strategic employment issues.  How will you, for example, recruit key staff who may already be working for your direct competitor?  How will you protect intellectual property created by your employees?  Can anything be done to protect your confidential information?  It is important, however, to give careful thought to other key areas.  Taking the time to do that from the outset will minimise risk and help the business succeed.

Careful recruitment

Recruiting the right people is key to business growth and careful planning will be needed to ensure you get the process right.

Discrimination, victimisation and harassment in recruitment on the grounds of any of the nine “protected characteristics” are prohibited under the Equality Act 2010.  You should therefore follow a fair and proper process throughout the recruitment process (and retain evidence of this) so as to avoid or successfully defend litigation.  Any offer of employment should be conditional on the employee meeting certain requirements, including the provision of satisfactory references (which you should then follow up!).

Job applicants are “data subjects” who provide personal data (and frequently also “special category data”) to prospective employers who, as “data controllers”, then process that data.  Proper consideration will need to be given to your obligations under the GDPR and the UK’s Data Protection Act 2018.

You will need to take steps to prevent illegal working and ensure that employees have the right to work in the UK.  EU citizens who arrive in the UK from 1 January 2021 will need to meet the requirements of the new post-Brexit immigration rules in the same way as non-EU citizens.

Get the status right…

It is vital to determine an individual’s status (i.e. whether they are an employee, a “worker”, or self-employed) from the outset.  This will affect whether that individual benefits from the full range of rights available to employees (such as the right to claim unfair dismissal, or the right to a statutory redundancy payment), or whether they benefit from certain limited rights available to “workers”.

The status classification also has important implications for the tax treatment of the individual’s income (here is an example of why this might matter).

…and then get the documentation right

All employees should have a contract of employment setting out the terms and conditions governing their relationship with you.  All employees and workers should receive written confirmation of certain key terms by law and, since 6 April 2020, those terms must be provided before employment commences.

You may want to give careful thought to including different terms in your employment contracts depending on the seniority of your employees.  For example, in employment contracts for senior staff you may wish to include restrictive covenants which, if drafted reasonably, can help prevent your employee from soliciting other staff and/or suppliers or from working for a competing business when he/she leaves your employment.  These types of clauses are unlikely to be enforceable for junior staff (except those in direct sales roles).

Key policies

Whilst you are only legally required to have a small number of staff policies in place, there are others that you may wish to set up as a matter of good practice, particularly as your business grows.

Policies can set out the standard expected of employees, assist with the running of the business and reduce legal risk by making sure employees and managers understand their legal rights and responsibilities.  As a minimum, your business should have in place policies and procedures covering: Discipline and Grievances, Health and Safety, Whistleblowing, Equal Opportunities, Data Protection and Bribery.

However, depending on your strategy, and as your business grows, you may want to introduce further policies dealing with, for example, working arrangements, sickness, leave entitlements and social media (here is an example of the importance of workplace policies).

Protect your IP

If intellectual property forms a vital part of your product or service, you will need to think carefully about how to properly protect it.  Generally, an employer will own the intellectual property in works created by its employees “in the course of” their employment (i.e. within the scope of the employee’s duties).  However, it is still advisable to include an appropriate intellectual property clause in employment contracts.

In contrast, IP created by consultants will belong to them rather than in the recipient of their services.  It is therefore critical to include a specific assignment of intellectual property rights (and power of attorney) in consultancy agreements.

In addition, you will want to ensure that all staff sign up to appropriate confidentiality provisions – whether in employment contracts or by way of a separate Confidentiality Agreement – to protect the business’ confidential information.

Reward

Setting the right level of salary for your staff is critical for your recruitment and retention strategies but it can give rise to some complex issues.  For lower paid staff, you will need to ensure that you comply with national minimum wage legislation.  This legislation is highly technical and has resulted in several high-profile employers inadvertently falling foul of the rules and receiving large penalties (as well as being publicly named and shamed for underpaying their workers).

You may want to reward employees with discretionary bonus payments.  Carefully drafted clauses will need to be included in the employment contract to ensure that employees do not have a contractual right to receive a bonus and that it remains a discretionary payment.  Employers also typically put separate bonus scheme rules in place.  As the business grows, you may also wish to consider introducing some form of share scheme for executive directors and employees to help retain and motivate your staff.

Pensions legislation requires all UK employers to automatically enrol “eligible jobholders” in a pension scheme and for employers and employees to make certain minimum contributions into that scheme.

What happens if things go wrong?

It is possible that, once your business is up and running, employment disputes may arise.  Sometimes these can be dealt with internally (for example, by following an effective grievance procedure).  However, if the dispute is more serious, it may be necessary to consider external mediation.  If an employee brings a claim at an Employment Tribunal, you will need to ensure that the business responds quickly and takes proper legal advice in order to manage the risks involved.  Some disputes or claims can be managed by negotiation – typically this will involve the employee entering into a settlement agreement and their employment terminating in return for a settlement payment.

Getting the right legal advice on these matters can save huge amounts of time and remedial legal fees. Start-ups regularly rely on existing or “off the shelf” documentation to employ new staff, on the assumption that if they have been used by others then they must “do the job”. This is a dangerous assumption, not only because employment law changes frequently but the document may contain inaccuracies and may not properly address your specific circumstances.

The Employment team at Greenwoods GRM is on hand to advise you and your business on the employment issues mentioned in this article.  We are experts in advising on all areas of employment law, including employment disputes, and we look forward to working with you.