Startups: Plan ahead to avoid costly legal disputes (part IV)

7 mins

Posted on 07 Dec 2015

For all the handy tips that I have been dishing out so far, check out the previous instalments ( parts I, II & III)...

You've managed to get some seed investors interested and they have stumped up the cash for you to make your product and to market it to your selected audience. These are exciting times for a business startup, as you put together a small team of technical, sales and operations staff and see all of your hard work coming to fruition. Remember though that you will now have duties as an employer and will need to be even more vigilant about protecting your business and its brand.

Employees, consultants and interns

Business startups need to engage staff and consultants in an appropriate manner, understand the differences between consultants and employees and paid and unpaid interns, and have them sign up to appropriate form contracts. To fail to do so could lead to employment claims, tax demands by HMRC, national minimum wage issues and the type of IP issues I set out in my previous posts.

When recruiting staff you need to plan your processes carefully so that you do not fall foul of any discrimination law and that any background and right to work checks are appropriate. Also, you should confirm that the individuals will not be in breach of any third party obligations by joining your team (i.e. that they are not bound by post-termination restrictions from a previous employment or engagement).

Payroll and Insurances

When paying employees’ salaries you must withhold certain amounts for HMRC in respect of income tax and national insurance contributions. You will need to set up a payroll system to deal with this and register as an employer with HMRC. You will also need employers’ liability insurance after hiring employees and it may be advisable to get public and product liability cover if relevant and directors often want protection with Directors’ and Officers’ insurance.

Paying staff in equity instead of cash

Leaving aside any tax issues and issues around determining an appropriate share scheme for your business, if you fail to pay employees in cash you risk breaching the law around the national minimum wage. In reality, it is unlikely there will be an issue about this unless the employee makes a complaint, so in most cases you should be OK. Do keep an eye on the company’s relationships with such employees though and take advice if you have any concerns.

Enshrine your values and ethos

All companies should consider implementing staff handbooks from the outset. This should help ensure that all staff and third parties conduct themselves in the manner expected when doing work for your company. This also helps lower your potential liabilities. Key policies to include in a staff handbook from an early stage are an IT use and communications policy, an anti-bribery policy, an equal opportunities and diversity policy, a data protection policy, a social media policy and a health and safety policy (once you have 5 employees, you need to have a written health and safety policy). You will have minimum legal obligations to follow in respect of family leave related matters, so a policy is not necessary. That said, having one in place makes understanding your obligations and explaining to an employee their rights so much easier.

Remote working

A lot of Startups have a flexible approach to working arrangements and rightly so. Just be aware that your health and safety and employers’ liability insurance obligations will likely extend to home/remote workers. Also, employees should check their own home insurance and rental agreements to ensure they are not breaching any third party obligations by working from home. You can find lots of free information on your health and safety obligations on remote staff or office based staff on the Health and Safety Executive website.

Data protection obligations

As you will likely be processing personal data of your staff, clients, customers and users of your product, you will have to comply with data protection obligations and you may have to register your business with the Information Commissioner’s Office (you can do this online here).

3 Key Tips to avoid legal battles at this stage

1. Use appropriate documentation to engage staff and consultants

At the risk of oversimplifying the issues:

- An employee will be an individual that you control at work and tell them how, when and where to do their duties. Consultants on the other hand are in business for themselves and work on temporary projects for you using their own equipment, under their own guidance and providing other suitable persons to do the work if they deem it appropriate; and

- An intern should be paid if do they anything more than shadowing for work experience.

I'll post on these much larger topic in due course, including an explanation of the differences between a worker and an employee, although the above distinctions are sufficient for now. When you have decided what type of staff you have on your hands, you need to have a think about the form of contract they must/should have:

Employees - all employees from C-Suite to junior positions must receive within 2 months of starting employment a statement of written terms and conditions of employment to include things like job title or description, salary, holiday entitlement, sick pay etc. That said, it is better for you to include more clauses to protect your company, such as data protection consents and IP and confidentiality clauses for all employees and outside interests, detailed duties/obligations and post-termination restrictions for more senior/technical/sales staff.

Consultants - as discussed in my previous posts, one of the main issues with consultants is that they will usually own the IP they create, not you, unless there is an assignment of the IP rights. Therefore, a consultancy agreement with a suitable IP provision is recommended. Remember that if you include a power of attorney to allow you to register their IP to you, you need to sign the agreement as a deed. The same goes for employment agreements. In addition, a consultancy agreement ideally should have confidentiality protections, suitable non-competition clauses, data protection consents, a statement of the services to be performed and that these do not amount to an employment relationship and, which is very important, that the consultant indemnifies you for relevant tax liabilities or employment dispute costs if they are found or claim to be an employee.

Interns - interns whether paid or unpaid should be provided with an agreement which at the very least sets out their role as appropriate, has confidentiality provisions, contains data protection consents and provides for a simple IP assignment (although take legal advice when asking an unpaid intern to sign up to an IP provision, as that could trigger the need to pay them). If they are being paid, they will be workers and so remember that payroll deductions need to be withheld. In that case, you have more freedom to impose restrictions and more detailed duties on the individual.

As your company grows beyond the Founders, you should have a think about what staff policies are appropriate for which individuals and put those policies in place.

You can find lots of information about how I can help you draft those documents here.

2. Use appropriate service providers

For anything like insurance cover, payroll set-up or if you need an outsourced health and safety function, it is best to use reputable providers. I have an ecosystem of such providers that I can tap into, so feel free to get in touch if you need a contact.

3. Take appropriate legal advice

Ah, the awkward sales pitch! Jokes aside though, a lot future problems can be avoided by having a frank and honest discussion with a legal adviser at the outset. I am happy to have a free 30 minute "health check" with Startups to assess if there's anything you need to be doing now or planning for in the future.

For more specialist legal advice for business startups please contact me on 0207 329 9090 or email me at

The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.

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