Lifecycle of a tech startup series: Employees and Consultants

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.