Start-ups often start out as two or three founders working together and taking dividends only when there is money to distribute. If all goes well, the business reaches the point where it needs to hire its first employees. Rowena Kay explores the five key areas to think about when that day arrives.
Consultants are often a great option for small employers. You can obtain the benefit of top-class industry talent on a very flexible basis without needing to be able to provide a long-term role or full-time hours. However, the law sees consultants very differently from employees. They are assumed to be in business for themselves, and that means that they own what they produce, unless they specifically assign it to their client.
For an IP-rich business, it is vital that any consultancy agreements contain proper IP assignments. If your consultants contract through a limited company, you also need to ensure that their company owns the IP they say they can assign. Nothing will put off a potential investor more than discovering you do not own what you sell!
It can be easy to overlook employment contracts, or to believe that a basic form downloaded from the internet can do the job. That may be the case if you are hiring staff for a small retail or catering business – it can cover the legal basics like how much holiday you will offer and what the hours of work are.
However, in any business where intellectual property and confidential information are the core of your value, this type of template will not protect you adequately. Good quality, tailored employment contracts are a long-term investment and an insurance policy.
Shareholders and directors
When you start your business, often you do it with people you already know and trust. That is great for weathering the challenges of the early days. But it can leave you blind to the risks of a later falling out. Just as divorce lawyers will recommend a pre-nup, employment and corporate lawyers will always want to tie together the three forms of potential relationship with your burgeoning company.
It is normal to want to remove a director from the board if they resign or are dismissed from their employment, but that right is not automatic. Likewise, what would you want to do if most of the founders want to sell up, but one is holding out?
A properly drafted suite of documents could ensure that your reluctant employee can be ‘dragged along’ on a share sale, or removed from the board if needed. Agreeing what will happen whilst you all get along is much easier than once a disagreement has arisen.
Where are your staff?
Covid-19 has accelerated the remote working revolution. It is now common to see start ups whose founders don’t just live in different cities, they live on different continents. It can seem straightforward and easy to hire the best talent, whether they live in Boston, Lincolnshire, or Boston, Massachusetts. However, worldwide employees can bring worldwide legal responsibilities, especially for tax.
You cannot simply state that your employees work under UK contracts and run everything from the UK. You can be liable for running a local payroll and complying with local employment legislation – which in Europe is often far more favourable to employees than the UK.
Most significantly, local employees can be considered to amount to a place of business, which can trigger local corporate tax liabilities. Local advice from the country of hire is always a prudent move, particularly if the employee will have any responsibility for sales, or if you foresee a more permanent establishment in that country in the future.
Don’t forget the admin
Most people know that if they employ people, they will need to run a payroll. But fewer realise that they have to run immigration ‘right to work’ checks on all staff – including the ones you believe are British and Irish.
A surprising number also do not know that even small employers now need to provide a pension scheme. None of these duties are particularly onerous or time consuming – but tidying up the mess of non-compliance can be.