Expanding your team is a significant milestone that demonstrates your business’ growth and ambition. It’s an exciting time for all involved, but as a founder of a start-up or a small business, you need a more detailed overview of HR processes and employment law. While you are likely to be familiar with basic employment concepts and are potentially using off-the-shelf templates, scaling your team requires a more strategic approach to avoid any potential pitfalls.
This guide covers the top questions you should be asking as your business grows. Questions about your team’s employment status, your employment contracts and if they are fit for purpose as your organisation changes, creating an HR compliance strategy, protecting and retaining your IP and your people, employee relations , and what to do if your employees resign. We want to help you create a solid HR foundation to protect you from financial and reputational risk.
Contents:
- Employment status: are you classifying your staff correctly?
- Employment contracts: are your agreements fit for purpose?
- HR compliance: is your current strategy enough?
- IP and confidential information: are you protected?
- Retaining talent: how can you keep your top performers?
- Discrimination and harassment: are you complying with equality laws?
- Employee relations and disputes: are you prepared?
- Resignations and dismissals: what are the risks?
- Remote workers: do you have a policy?
Employment status: are you classifying your staff correctly?
As your start-up begins to scale, it is crucial to understand the different types of employment status that can apply to your staff. Individuals are categorised as either employees, workers or self-employed contractors .
Individuals will enjoy different employment law rights depending on their employment status. For example, employees have the broadest rights, including protection against unfair dismissal and entitlement to notice periods and statutory redundancy payments. Workers don’t have these rights, but they do have some rights that employees are entitled to, such as paid holidays, statutory sick pay, the national minimum wage and an entitlement to be automatically enrolled in a qualifying workplace pension scheme. Self-employed contractors do not get any of these rights.
Employment status determines not only the employment law rights of your team but also how they are taxed. Employees and workers are taxed through the PAYE system, which means you, as the employer, must deduct income tax and National Insurance contributions at source and remit these payments to HMRC (as well as pay employer National Insurance contributions). Genuinely self-employed contractors are paid gross of tax, meaning they receive their full earnings and are responsible for handling their own tax payments through self-assessment.
As your business grows, it’s important to be clear on the employment status classification of each team that accurately reflects how they work in practice. Misclassification of staff can often happen at the early stages of a start-up, for example, hiring someone as a contractor, but treating them as a fully integrated employee. This can lead to employment law and tax liabilities, including claims for underpaid statutory entitlements such as holiday pay, as well as liability to HMRC for taxes, National Insurance payments and potential fines and penalties.
Employment contracts: are your agreements fit for purpose?
When recruiting staff, you may understandably begin with template or off-the-shelf employment contracts. These are often efficient and cost-effective ways to document the employment relationship in the early days of your business. However, as you grow, it becomes increasingly important for your employment contracts to be tailored to the specific needs of your business and the roles your employees will be carrying out, particularly senior or key employees. This is the stage where basic off-the-shelf agreements often fall short as your business becomes more complex and roles evolve.
Off-the-shelf agreements typically lack many of the detailed provisions necessary to protect your business in key areas such as intellectual property, confidentiality, and restrictive covenants. These terms and conditions are vital, especially if your employees are handling sensitive information, developing significant amounts of intellectual property, or in a worst-case scenario, leaving to work with a competitor. Without these protections, your business could be vulnerable to major risks, including loss of IP and breaches of confidentiality. As you start to hire more senior or specialised staff, your employment contracts must reflect the strategic importance of these roles.
For example, you may need to include bespoke performance-related bonus schemes, robust notice periods (with rights to pay in lieu of notice or place the employee on garden leave) or put in place equity and share incentive schemes. Basic templates and off-the-shelf agreements rarely cover these matters adequately.
Even if your off-the-shelf templates include these types of provisions, it’s important they be reviewed by an employment lawyer to check they are legally enforceable in the context of your business. For example, restrictive covenants must be tailored to the role the individual is performing and go no further than is reasonably necessary to protect a legitimate business interest. If you’re finding that your existing contracts don’t fully reflect the needs of your growing business, where, for example, you have key employees who are now developing your IP or are privy to sensitive confidential information or trade secrets, this might be a sign that you need to move beyond basic solutions and invest in tailored employment contracts that fully protect your business.
HR compliance: is your current strategy enough?
In the early stages, founders commonly outsource HR functions on an ‘as and when needed’ basis. Outsourcing HR can be incredibly helpful for basic matters such as setting up payroll, implementing basic employee-facing policies and advising on routine HR matters such as disciplinary and performance management matters. However, as your business grows and you employ more staff, the complexity of HR matters can evolve, and outsourced HR services may lack the depth of expertise to navigate complex employment law challenges.
This is often the case with sensitive employee relations issues such as complex grievances, investigations and employment tribunal claims. Here, the stakes are higher in terms of financial and reputational consequences for your business and expert legal advice is typically recommended. For instance, handling allegations of discrimination, harassment, or unfair dismissal requires not only a thorough understanding of UK employment laws, but also a strategic approach to mitigate risks and your business’s reputation. While HR consultants can offer general advice, they may not have the specialised knowledge or regulatory qualifications needed to conduct sensitive investigations, draft legally compliant settlement agreements, or defend your business in an employment tribunal. These are functions that are typically better supported with the expert advice and guidance of an experienced employment solicitor.
Developments in employment, immigration and data protection laws in recent years have made even administrative HR tasks incredibly complex. For example, holiday pay has been a challenging area of employment law for HR and payroll teams to navigate, with serious financial implications for getting it wrong. There is also a suite of compliance obligations on employers that go beyond basic HR advice such as carrying out pre-employment immigration checks and handling employee personal data in compliance with the GDPR, with significant fines and penalties for non-compliance. As a result, businesses need to be more vigilant than ever in ensuring compliance and it is important to consider external legal support to avoid costly mistakes.
IP and confidential information: are you protected?
As your business grows, you will likely develop proprietary information, trade secrets and innovative processes and technologies. This might include software, product designs, unique algorithms and source code, and of course, confidential business strategies. These are some of your most valuable assets and can influence your company’s valuation considerably. They also constitute your business’ confidential information and intellectual property and must be protected robustly from third parties such as competitors, consultants and (ex)employees.
Without adequate protection, there’s a risk that employees or contractors could take valuable IP and trade secrets with them if they leave the business, potentially harming your competitive position in the market. If any of your employees are privy to significant amounts of confidential information or are involved in developing IP, it’s crucial for their employment contract to include detailed terms and conditions around confidentiality and IP.
For example, all employment contracts should prohibit employees from disclosing confidential information both during and after their employment ends. Employment contracts and contractor agreements should also state that any inventions, designs, or other IP created by these individuals during the course of their engagement are automatically the property of the company. It’s common for these contracts to include a clause that allows the company to take ownership of IP created by the employee through a power of attorney granted by the employee in the company’s favour.
While employment contracts protect confidential information internally, there will also be many situations along your journey where you need to safeguard this information externally. When disclosing sensitive details to third parties, such as partners, suppliers, or potential investors, non-disclosure agreements (NDAs) become essential. NDAs ensure that any confidential information shared during negotiations or collaborations is protected and cannot be used without your consent, providing a layer of security for your business’s critical assets beyond the internal protections offered by employment contracts.
If you need assistance with drafting or reviewing NDAs, seeking guidance from a commercial law solicitor can help to ensure your business interests are fully protected.
Retaining talent: how can you keep your top performers?
You’ve hired top talent and you’re seeing great results for your business, but what can you do to retain your highest performers? In a competitive labour market, retaining key employees is a constant challenge, but the stakes are even higher for start-ups. Early employees often hold extensive knowledge of the company’s systems and processes, customer connections, and other important assets that can be hard to replace. While well-drafted employment contracts will include terms like garden leave and post-termination restrictions to limit the damage if such employees leave, these measures don’t prevent an employee from deciding to move on in the first place. Even when employees aren’t considered ‘key’, high employee turnover can still be detrimental due to the costs of recruiting and training new talent and potential disruption to customers.
Creating a positive work environment is one of the most effective ways to encourage long-term loyalty from your employees. Research shows that employees are motivated by more than just remuneration when it comes to decisions to stay or leave a job. Empathetic managers, opportunities for learning and development and work-life balance are key priorities for employees in today’s economy. Consequently, investing in a leadership program for line managers can pay dividends when it comes to fostering employee loyalty, as can clear employee development plans for their professional growth.
Alongside culture, incentives and benefits play a significant role in motivating and retaining staff. Salaries that are competitive and benchmarked regularly according to industry data is extremely important, as are other aspects of an employee’s package such as equity, bonus and commission schemes depending on the role. For key hires, you may wish to explore the use of retention bonuses that are payable on completion of a specific period of service or project as an additional form of motivation, perhaps during a critical business period where continuity and stability are critical (eg following an acquisition).
Workplace benefits such as private medical insurance, wellness and mental health programs and gym discounts can also encourage staff loyalty. If you’re noticing higher turnover rates than usual, or struggling to retain key talent, it might be time to reassess your retention strategies. In some cases, bringing in HR consultants or legal experts can provide valuable insights into how your current practices measure up and what changes might be necessary to better support your employees and the long-term goals of your business.
Discrimination and harassment: are you complying with equality laws?
Having a diverse workplace is widely recognised as a strategic advantage. However, despite good intentions to promote diversity, equity, and inclusion, many businesses still find themselves tripped up by the extensive protections afforded to employees and workers under UK equality laws.
The Equality Act 2010 provides robust protection for employees and workers against discrimination based on protected characteristics including race, religion or belief, sex, age, pregnancy and maternity, disability, gender reassignment, sexual orientation and marriage or civil partnership. It is unlawful to directly or indirectly discriminate against someone in the workplace on the basis of these characteristics, or to harass or victimise them. There is also specific protection against sexual harassment and a new duty on employers to take reasonable steps to prevent sexual harassment. Claims brought under the Equality Act 2010 can be both costly and damaging to a company’s reputation, with workers able to bring claims in employment tribunals.
The Equality Act 2010 is relevant in nearly every aspect of employment, from recruitment and daily management decisions, to termination of employment. This means employers must be informed in all areas to avoid inadvertently breaching equality laws. While some forms of discrimination are more obvious (eg selecting an employee for redundancy due to their disability), other forms of discrimination are less obvious but also impose legal liability on employers.
For example, employers will be in breach of equality laws if they fail to make reasonable adjustments to accommodate an employee’s disability (eg allowing time off for medical appointments), or if they adopt employment practices that unintentionally disadvantage a particular group of employees (eg requiring all employees to work overtime, which could disproportionately affect women with caregiving responsibilities).
One of the first steps in fostering a diverse and inclusive workplace is to establish basic policies and procedures to align your HR practices with the requirements of the Equality Act 2010. A good starting point is an equal opportunities policy that clearly outlines your commitment to diversity and non-discrimination. It’s also important to ensure that your recruitment processes are designed to attract a diverse pool of candidates. This might involve using inclusive language in job adverts, offering flexible working arrangements, and ensuring that your selection processes are free from unconscious bias. In the long term, you could explore additional measures such as mandatory diversity and inclusion and anti-harassment training for all staff.
Addressing issues like discrimination and harassment head-on is critical to maintaining a fair and inclusive workplace. Start by establishing clear, well-defined procedures for investigating complaints, ensuring that all allegations are handled promptly, confidentially, and without fear of retaliation. Employees should have clear channels for reporting their concerns, such as a dedicated HR contact and access to a whistleblowing hotline or email alias. If you receive complaints about discrimination and harassment, you should investigate them thoroughly and in a timely manner. Employers of all sizes, should now also be carrying out a risk assessment to decide what steps it needs to take to prevent sexual harassment in the workplace.
It’s also essential to support those affected by discrimination or harassment, whether through counselling, adjustments to their work environment, or other measures. Regular training on diversity, inclusion, and anti-harassment for all employees, particularly management, will help create a culture of openness and accountability, preventing issues from arising and ensuring a safe and respectful work environment for everyone.
Employee relations and disputes: are you prepared?
The early days of start-up life are often characterised by a close-knit team, where informal communication and a shared vision drive the business forward. However, as your business expands and you hire more employees, team dynamics and employee relations often start to shift. The simplicity of those early days gives way to more complex workplace people management issues, where the potential for underperformance, disciplinary issues and disputes increases. For example, as your customer base expands, you will need to make sure staff are adequately servicing accounts and meeting sales quotas and have policies and procedures in place to address substandard performance. Equally, the high-stress nature of start-up life can lead to employee and manager disputes which you will need to address quickly before they spiral out of control.
The best way to manage employee relations issues is to prevent them. Begin with a culture of clear communication and regular, constructive feedback against defined performance criteria. This could be delivered through informal performance discussions between an employee and their manager, as well as during formal performance appraisals. Encouraging open and transparent communication at all levels of the organisation will reduce the likelihood of escalation of a workplace dispute, for example by implementing mechanisms for employees to offload complaints (eg staff surveys or one-to-one meetings with their manager).
That said, workplace disputes will inevitably occur at some stage of your start-up journey. When they do occur, having robust policies and procedures in place to deal with them is essential for managing employee relations issues. This means having clear performance and disciplinary procedures that comply with UK employment law requirements, as well as conducting thorough investigations into allegations of underperformance and misconduct or staff grievances.
The consequences of mishandling employee relations issues can be severe. If, for example, you dismiss an employee for underperformance, but do not have sufficient evidence of underperformance or fail to carry out a fair performance improvement process, this could result in legal claims against you for unfair dismissal if the employee has over two years’ service. Similarly, if you receive an allegation of harassment from a staff member but don’t investigate it properly, this could give rise to legal claims under the Equality Act 2010. Legal claims can be both costly and time-consuming for a business to manage, not to mention potentially damaging to your company’s reputation.
In situations where disputes are particularly complex or where there’s a risk of legal action, it’s advisable to seek expert advice from an employment solicitor. Doing so can help you navigate the complexities of employment law, protect your business from legal risks, and maintain a positive and productive work environment.
Resignations and dismissals: what are the risks?
Despite your best efforts every employment relationship eventually comes to an end. Sometimes, employees choose to move on by handing in their notice of resignation. In other instances, you may need to enforce an exit by dismissing a member of your team. Whether an employee leaves voluntarily or is dismissed, there are several critical steps you should take to protect your business, particularly when it comes to safeguarding your confidential information and IP.
When an employee resigns, especially if they hold a key position, it’s essential to manage their departure in a way that minimises disruption and protects your business. If there is a risk of the employee leaving for a competitor, check the employment contract for a garden leave clause and enforce it if applicable. Garden leave allows you to remove the employee from their regular duties and workplace location during their notice period while continuing to pay them. This helps to prevent the employee from interacting with customers and colleagues, thereby reducing the risk of them causing harm to your business if they plan to join a competitor. Additionally, review any post-termination restrictions in the contract and remind the employee of these obligations. If you suspect the employee intends to join a competitor, seek legal advice on steps you can take to prevent this and immediately take action to secure confidential information, IP, and access to customer databases. Ensure that the departing employee returns all company property, including devices, documents, passwords, and any copies of confidential information, before their final day of employment.
If you are dismissing an employee, it is crucial to ensure that you have a potentially fair reason for dismissal and that you follow a fair process. Failure to do so could result in claims for unfair dismissal, particularly where employees have over two years’ service. Successful claims could lead to compensation awards in an employment tribunal and, in rare cases, an order to reinstate or re-engage the employee. For instance, if you are planning to dismiss an employee for poor performance, while capability is a potentially fair reason for dismissal, employment tribunals will expect you to have followed a fair performance management process, including setting clear, objective goals and milestones for improvement. Similarly, for misconduct, while conduct is a potentially fair reason for dismissal, you will need to investigate the allegations thoroughly and hold a disciplinary hearing in accordance with your disciplinary procedure before making a decision to dismiss. Assuming you have a fair reason and process for dismissal, you must also comply with the employee’s contract of employment to avoid breach of contract claims. This typically involves providing the correct amount of notice as specified in the contract or making a payment in lieu of notice if the contract allows, as well as ensuring that other contractual and statutory entitlements, such as accrued but untaken holiday pay and statutory redundancy payments, are paid out.
Some resignations and dismissals can be particularly high-risk, especially when they follow a recent workplace dispute or involve potential discrimination issues. In such cases, it’s advisable to seek advice from an employment solicitor before proceeding with the dismissal. An employment law solicitor can guide you on the overall strategy and explore alternative approaches to minimise the risk of legal claims.
Remote workers: do you have a policy?
Recent increases in remote and flexible working have brought many advantages, from increased morale and productivity to reduced overheads. However, managing a remote or hybrid workforce comes with its own set of challenges from an HR perspective.
When leading remote teams, your duty to protect the health and safety of your employees remains as important as ever. This is a legal duty that extends beyond the traditional office and includes remote work. One effective way to fulfil this duty is by using questionnaires or assessments to verify that employees have safe and comfortable workstations at home, including ergonomic chairs and appropriate lighting. It’s also crucial to be aware of potential legal or contractual restrictions that could affect remote working. Employees may unknowingly breach covenants in their rental agreements, mortgage terms, or personal insurance policies that restrict business activities from being conducted at home. As an employer, it’s important to communicate with your employees about these potential issues and ensure they verify that their remote working setup complies with any relevant agreements. You must also ensure that your employer liability insurance covers remote working arrangements. This coverage is essential to protect both the business and employees in the event of any work-related incidents that occur while working from home. Reviewing and updating your insurance policies to include homeworking will help mitigate risks and ensure compliance with your legal obligations as an employer.
To manage remote working effectively, many employers put in place a comprehensive remote working policy or introduce homeworking terms in their employment contracts. Remote working terms typically set expectations for availability and communication, continuity of service for customers, and protecting IT systems and confidential information from unauthorised access. While many start-ups operate in a highly flexible manner, it is still recommended to invest in a formal remote working policy or to include remote working terms in employment contracts. This is particularly important, as we have seen many cases where businesses need to initiate performance management, disciplinary, or dismissal proceedings due to underperformance or misconduct linked to remote work. Having clear terms in place around these issues will help protect your business and provide a solid foundation for managing remote employees effectively.
Remote working becomes even more complex when staff work overseas for extended periods of time. From an employment law perspective, employees could potentially accrue local statutory rights in the country where they are based, which can complicate both the management and termination of their employment. Remote working arrangements abroad also raise significant tax issues, both for the employee - who could become a deemed tax resident of another country - and for the employer, who might inadvertently create a tax presence in that country, depending on the nature of the employee’s work and the length of their stay.
There are also risks associated with the transfer of personal data from the UK to another country, which can add further layers of compliance complexity, especially under data protection laws such as the General Data Protection Regulation (GDPR). In response to these challenges, many employers have developed working abroad policies in the aftermath of the Covid-19 pandemic to mitigate these risks. Such policies often allow for short periods of work abroad, but typically require prior approval from the employer to manage the associated legal and tax risks effectively.
As your start-up grows, you are likely to see a shift in the complexity of HR matters. Solutions you relied on in the early days of your business journey such as off-the-shelf templates and outsourced HR may no longer provide sufficient protection to your business and a more tailored approach may be necessary. Employment laws are fast evolving in the UK, with a range of developments this year already and many new obligations on employers due to come into force over the next year.
Secure your business’s future today. Our team is here to provide bespoke employment law services as you scale your business. You can stay up to date with our newsletters and regular events and webinars or get in touch directly with one of our employment law solicitors.
