People power: getting the right people on board

Posted: 19/03/2025

Hiring staff is likely to be one of the first steps an early-stage company takes when it starts to scale-up.

Many early-stage companies rely on their founders to launch their business, often without written terms in place. However, as workloads increase and you look for investment, employing more staff is likely to be high up the agenda. When doing so, it is important to make sure that the right people and paperwork are in place, and that you have a basic understanding of UK employment law to help manage HR risks.

Employment status

One of the first things a company needs to think about is the basis on which it is going to engage staff.

You can hire individuals as employees, workers or self-employed contractors, all of whom have different rights and responsibilities. Which status is right for you will depend on the role, business needs, and cost.

Employees
Broadly, an employee is employed under a contract of service and agrees to work personally for you (meaning they cannot send someone else to do the work). They tend to work (and be paid) regularly. They are also subject to control by their employer, which means that their employer has the ability to say how, when and where the work is done.

Employees have a number of statutory rights, including: statutory sick pay, annual leave, minimum wage, a minimum notice period, maternity and paternity pay, the right to not be unfairly dismissed (generally subject to a two year qualifying period of service although this is due to be removed in Autumn 2026), the right not to be discriminated against and not to be subjected to a detriment for blowing the whistle. The employer is also responsible for deducting tax and National Insurance from pay through PAYE and for auto enrolling its employees in a pension scheme.

Self-employed contractor
Self-employed contractors on the other hand are employed under a contract for services. They are in business on their own account and provide their services either directly or through a services company. Self-employed contractors have the freedom to decide what work they do, when, where and, importantly, how they do the work. They can work for many different clients and can often send someone else along to do their work. Consultants have limited statutory rights and, importantly, are responsible for their own tax and National Insurance payments.

Workers
Workers are an intermediate category. They are contractors who engage with you personally to do the work as part of your business, where you are not actually a customer or client of their business. Like employees, workers are entitled to statutory sick pay, annual leave, and minimum wage, and are protected from discrimination and being subjected to a detriment for blowing the whistle. They are also responsible for their own tax and National Insurance.

Implied employment relationship
One important thing to bear in mind is that an employment or worker relationship can arise even where you have engaged someone as a consultant or in some other capacity, provided that the core ingredients are there, namely they agree to do the work themselves, are under your control and are obliged to turn up for work and be paid. It is how the relationship works in practice that counts, not what ‘labels’ you attach to your workforce: consultant, freelancer, contractor.

A good example of this is interns. Many early-stage companies take on unpaid interns or volunteers to save money. However, you will need to bear in mind that, unless interns are work shadowing (not carrying out productive work) for a relatively short period, they are likely to be, at least, workers, and therefore entitled to minimum wage and holiday. If they are engaged for longer and are subject to your control, they could be employees and entitled to all the statutory rights/responsibilities that go with employment status (see above). Further, from Autumn 2026, the government is going to ban unpaid internships except in very limited circumstances.

Documenting the relationship with your workforce

Whatever the legal status of the staff you hire, it is important to get the right paperwork in place from the outset. There are a number of other reasons why you need written contracts in place.

Employees must be given a written statement of their terms and conditions (including for example pay and benefits, working hours etc) within two months of them starting. If they do not receive this, employees can claim compensation of up to four weeks’ pay in an Employment Tribunal.

More importantly, employment contracts protect your business. Employees are an asset, but they are also a risk – in terms of the damage they can cause if they leave suddenly or if they go off to join a competitor or misuse your confidential information or intellectual property. The key clauses you need to think about include:

Notice periods
You will normally want to be able to terminate a contract fairly quickly subject to statutory minimum notice periods (roughly one week per year of service). However, you will probably want an employee to give you longer notice if they resign to enable you to find a replacement.

Intellectual property, confidentiality and restrictive covenants
In addition, you will need to protect your business through intellectual property and confidentiality clauses which set out clearly who owns any intellectual property, and what information staff are prevented from using, as well as through using restrictive covenants such as non-compete clauses which protect your client relationships.

Protecting the business against misuse of your intellectual property rights and confidential information is one of the key reasons for getting written terms in place for staff. Investors will want to know that the key assets of the business (which are likely to include your intellectual property) are owned by the start-up and properly protected.

Most intellectual property rights created by employees in the course of their employment will be owned by their employer automatically. However, this is not the case for consultants; rights created in the course of a consultancy will normally belong to the consultant, unless you have a contract in place transferring ownership to the start-up.

Consultancy agreements
Having strong consultancy agreements in place which transfer ownership of any intellectual property created during the consultancy to the start-up and which protect its confidential information can often be critical to securing investment and to a start-up’s long-term success. It is also helpful to agree clear deadlines for work delivery and payment in consultancy agreements so that you can plan work streams and budgets, as well as obtain indemnities from the consultant for tax and national insurance and any claims that the consultant is in fact your employee or worker.

Service agreements
It is also important to make sure that the founders have contracts of employment or service agreements in place which cover key terms such as remuneration and responsibilities, but also what happens if the relationship breaks down, including notice period, the founder’s resignation from the board, and any restrictive covenants which prevent them from competing after they leave or taking your staff and customers. These need to dovetail with any shareholders agreements or other corporate documents which protect the founders’ status.

Staff handbook
Companies are also required to have certain employment policies in place including procedures for how disciplinary, performance and grievance issues will be managed and, if you have over five employees, your health and safety responsibilities. It is recommended that you have in place a suite of other basic policies from the outset, including a diversity, equity and inclusion policy (including anti-harassment) and policies dealing with sick and family leave, holiday, and data protection so that there are procedures in place for managing the common HR issues that you are likely to face as a business.

Disputes

Despite your best efforts, your recruitment choices may not always work out. There are a number of employment claims that a company may face from its employees.

Discrimination
One of the key risk areas are discrimination claims from employees (or even applicants).

It is unlawful to discriminate against anyone (employee or worker) or harass based on any of the eight ‘protected characteristics’ set out in the Equality Act 2010 (age, sex, race, sexual orientation, disability, religion or belief, marital status, and pregnancy or maternity). Compensation for discrimination is uncapped, and takes into account the losses suffered, as well as an award for ‘injury to feelings’.

Dismissal
Currently employees with over two years’ service have the right not to be unfairly dismissed, which means that you must be able to show one of the five statutory fair reasons for dismissal, namely capability, conduct, redundancy, breach of a statutory enactment (eg they do not have the right to work in the UK), or some other substantial reason. You must also be able to show that you have followed a fair procedure if an employee is dismissed, which will include the right to an appeal. Unfair dismissal claims are brought in the Employment Tribunal, which can award compensation of (currently) up to £115,115.

In certain cases, such as whistleblowing, there is no qualifying period (ie an employee can bring a claim from day one of their employment) and compensation is uncapped.

Employees who are dismissed by reason of redundancy may also be entitled to a statutory redundancy payment (calculated according to age and length of service).

Having the right contracts and policies in place (and following them) from the outset will help minimise the risk of employment tribunal claims and protect your business.

Employment Rights Bill – what lies ahead for employers?

All employers should be considering the impact of the Employment Rights Bill on their staff, particularly in relation to the following areas:

unfair dismissal rights;
fire and rehire;
employment status;
zero-hours contracts;
family-friendly rights;
flexible working;
right to switch off;
redundancy consultation.

Although most provisions will not come into force until Autumn 2026, they are likely to have a significant impact on startups and their hiring strategies. Click here to read a previous article which provides more information relating to these areas.

This article is an edited summary from Penningtons Manches Cooper’s guide on ‘Navigating the journey of growth: key legal considerations for scaling up’. For a copy of our guide, please click the banner below or get in touch with your usual contact.