Lifecycle of a tech startup series: Employees and Consultants

15 December 2021

In our previous blog in our Lifecycle of a tech startup series, KNow Wear Limited secured investment of £500,000. Having completed the raise, you, Sarah and Chris have decided that you need more help in developing and marketing the product. You are looking to create two new roles in the business - the first is a Software Developer to support Sarah’s work and the second is a Head of Marketing.

Employment status


The first point of consideration for the Founders is what type of “employee” they would like to hire. The law recognises three types of employment status: employees, workers and consultants (ie. self-employed contractors). Employment status is important as it governs an individual’s rights in employment law and the extent of KNow Wear’s responsibilities to them. Employees may also be either permanent hires or subject to a fixed term contract, and may be full or part time.

The key features of each type of employment status are summarised below.

Employees

  • work under a contract of employment
  • are obliged to provide work personally, meaning they cannot substitute themselves with someone else to provide the work
  • most commonly have set days and a set number of hours of work each week
  • have a number of statutory rights including: statutory sick pay, rest breaks, annual leave, minimum wage, the right to not be unfairly dismissed (subject to a qualifying period of service) and minimum periods of notice
  • the employer is responsible for deducting tax from pay through PAYE

 

Workers

  • work under a contract of services
  • have a limited right to subcontract their work
  • have a more casual arrangement, often with no set hours or days of work
  • their contract with the business may contain terms such as “casual work”, “zero hours” or “work as required”
  • are entitled to a number of statutory rights including: minimum wage, holiday and rest breaks
  • the employer deducts tax and NI from their wages

 

Consultants

  • provide their services under a consultancy agreement either directly or through a personal service company (PSC)
  • are able to substitute their services
  • can decide when they work and what work they complete
  • often supply their own equipment
  • often agree a specific price for a piece of work or project
  • can work for multiple companies concurrently should they chose to
  • are responsible for their own tax

You decide that the positions the company is recruiting for will be permanent roles in the business. You want certainty that once you have made these hires, those individuals will be providing their service to the company, for set days and hours each week. You also want the hires to be fully integrated into the organisation. On this basis, you agree that the company will employ individuals in these roles (as opposed to recruiting workers or engaging consultants). You begin advertising for the two roles on a permanent, full time basis.

 

Pre-hire actions


The recruitment process is well underway. Interviews have taken place and you have selected two individuals for the roles. Before making the hires, you must take the following actions:

  1. Ensure that the individuals have the legal right to work in the UK. To do this, you complete a right to work check on the prospective hires. You also set out in the offer letter that employment is contingent on the individual having the legal right to work in the UK.
  2. Register as an employer with HMRC. You are able to do this up to four weeks before the new employees are paid for the first time.
  3. As set out in our previous blog, obtain employers liability insurance. You need to have this in place from the employees’ start date.
  4. Set up a workplace pension scheme and establish whether the new hires need to be automatically enrolled in the scheme.
  5. Draft the employment contract. Employees are entitled to a statement setting out particular key terms of employment from the first day of employment.
  6. Draft a basic staff handbook. This will contain key employment policies and a privacy notice.

Contract of employment


Your lawyers advise you that there are a number of statutory requirements relating to what information must be set out in the employment contract. You then discuss with your lawyers what additional terms you would like to include, relevant to the business.

As a startup, it is of paramount importance that you protect your intellectual property and confidential information. Because of this, you include a tailored IP clause, stating that anything that is created by the individuals during the course of their employment is the property of the company.

You want to ensure that the employees do not come on board, make a note of all of your ideas and confidential information about the product, and then leave. Therefore, you include post-termination restrictive covenants in the contract which prevent the employees improperly using or retaining confidential information, as well as preventing them from working for a direct competitor for a reasonable time after their employment has ended. You receive specific legal advice to ensure that the restrictions are appropriately drafted to provide the company with maximum protection.

Having not hired individuals before, you also want to ensure that you have the flexibility to terminate the employees’ employment should relationships break down. Therefore, you decide that the employees will be subject to a 6 month probationary period, in which either party can terminate employment giving just one week’s notice.

You can undertake regular probation meetings with the new hires during this period to set goals and targets to drive success.

Once the terms are finalised, you send the contracts to the employees to ensure that these are signed and in place ahead of their start dates.

Having employed a Software Developer to help Sarah develop the product, the company will now consider applying for Research and Development (R&D) tax relief on their salary costs, including pension contributions and employer NICs. Look out for our next episode of the lifecycle of a startup series where we will discuss in more detail what an R&D tax relief is and the eligibility requirements.

About the author

Georgia Roberts is an Associate in the employment team who acts for both employers and employees. Georgia has versatile experience dealing with a wide range of employment law matters including dismissals, discrimination, equal pay, redundancies, restructuring, industrial relations, employee engagement, disciplinary and grievance processes and employment litigation.

 

Lifecycle of a tech startup series

Episode 1

Case study

Welcome to the first blog in the series on the lifecycle of a tech startup.

Read the blog

Episode 2

The basics

Last time we met the founders of a wearable tech startup, who wanted to take the next steps towards establishing their business.

Read the blog

Episode 3

Intellectual Property

As part of the incorporation process, our founders started to think about any intellectual property rights (IPRs) the business was using and ownership of the same. In this blog we shall be exploring the IP considerations founders should be considering in a bit more detail.

Read the blog

Episode 4

Preparing to raise investment

In the last instalment we talked about the ways in which the founders of KNow Wear Limited could protect the intellectual property in their business. Since then, the business has been progressing well and our founders have been working on developing a prototype.

Read the blog

Episode 5

Tech in Two Minutes/Lifecycle of a Tech Startup - Essentials for e-commerce businesses in the UK

Alex Torpey speaks about the legal notices and key points to note for online retailers and platform operators in the UK.

Listen to the podcast

Episode 6

Tax reliefs

After a brief detour to consider the essentials for e-commerce businesses in the UK in episode 5, you and the other founders are now once again focusing your efforts on raising investment.

Read the blog

Episode 7

Seed raise

Having decided in episode 4 on targeting angel investors to raise £500,000 investment in the business, the founders of KNow Wear Limited researched various angel investor networks which aimed to connect startups like yours with angel investors. You applied to pitch at a couple of events and were invited by one network to interview with them in person.

Read the blog

Episode 8

Employees and Consultants

Having completed the raise, you, Sarah and Chris have decided that you need more help in developing and marketing the product. You are looking to create two new roles in the business - the first is a Software Developer to support Sarah’s work and the second is a Head of Marketing.

Read the blog

Episode 9

R&D tax relief

Knowledge of the UK tax system is valuable for any UK business owner, start-ups can dramatically improve their chances of success by ensuring they claim the various tax reliefs and incentives available.

Read the blog

Episode 10

Obtaining a Sponsor License

Following their seed raise and having secured some additional capital through an R&D repayment claim KNow Wear Limited have identified some overseas talent that they would like to hire to help to expand the business.

Read the blog

Episode 11

Directors' Duties

As a director you owe duties to the company and in certain circumstances to the company’s shareholders, employees and creditors. Breaching these duties can lead to civil or criminal penalties and so you have asked the company’s lawyers to remind you of the duties that apply to you as a director.

Read the blog

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