Start up to scale up – planning to take on your first employee(s)?

If you are starting a business from scratch or expanding and you need people to work for you, your first crucial decision is whether to use employees on a fixed term basis or engage self- employed free lancers. The choice will depend on various factors and each status has disadvantages and advantages, but the difference between the two is crucial as not all contracts say what they mean.

‘Understanding the difference in employment status is important as this determines your legal obligations. The differences can be subtle, and it can be all too easy to fall into the trap of treating a freelance worker as an employee, and visa versa,’ says Jessica Gowar, Head of Employment with Ware & Kay. This can lead to misunderstandings between you, and can leave both parties in vulnerable positions. It will be increasingly important to review and amend your contracts following the proposals currently under review to ban zero hours contracts.

Jessica Gowar outlines factors to take into account in deciding how to build a team and the steps for setting up as an employer.

Employment status – employee or contractor?

It is sometimes simpler to take on a self-employed freelancer than to employ them as an employee. However, where an individual is taken on as a self-employed person (even with the appropriate contract in place), if the working relationship is reflects a certain amount of control, that relationship will be seen in law as that of employer and employee. This means that despite the wording on the contract, the individual can bring a legal claim to enforce their rights as an employee. For example, they could claim for unfair dismissal if the relationship is brought to an end. HMRC can also claim for unpaid tax and national insurance payments. Recent media coverage of cases involving household names show that even employers with big HR departments can be challenged on this.

Even if the individual does not fulfil the requirements of an employee, they may still have the status of worker. While this does not give them the same protection as an employee, they have some important rights that a self-employed person does not have, such as for unpaid holiday. This article focuses on the two categories of self-employed contractor and employees, however, there are further complications relating to agency workers.

We can help you decide whether a self-employed person or employee is more appropriate for your business. This is a complex area, but here are some relevant factors to consider:

• a self-employed person is their own boss; they are paid a fee for the work done and can turn work down;
• a self-employed person decides how to do the work, whereas an employee is under your day-to-day control;
• an employee is committed to working for you; an independent person can decide whether or not to accept new assignments;
• a self-employed person usually has a wide discretion to send someone else to do the job but an employee must do the work themselves; and
• the wording of the contract is important but is not the end of the story; courts, employment tribunals and HMRC will look at the actually working relationship to determine employment status.

Steps to becoming an employer

If you have decided to employ an individual, you need to get ready and set yourself up as an employer:

Before recruitment

• Work out the role that you want the employee to perform. Although it may sound obvious, this will help target your recruitment and ensure the employee understands the expectations. You can build in flexibility so that the role can develop later but the job description should reflect this.
• Investigate funding, depending on the seniority of the role, it may be worth looking into government apprenticeships or training schemes.
• Determine the budget for the salary, including the on-costs which include tax, National Insurance and pension contributions, as well as any benefits that you wish to offer. Make sure you comply with national minimum wage legislation. This should be done before getting into negotiating a pay package with a candidate.
• Consider if you will need to check the individual’s criminal record through the Disclosure and Barring Service. Depending on the nature of the role this may require a standard or enhanced search.

Before they start

• Register with HMRC as an employer before employment starts to obtain a PAYE number. This must be done no earlier than two months before the employee starts and the Government recommends allowing 30 days for this process.
• Get employer’s liability insurance that meets the legal requirements and is in place when employment starts or risk being fined.
• Make arrangements for payroll. These can be through paying a payroll provider or using payroll software yourself that meets HMRC’s reporting requirements.
• Make arrangements for pension auto-enrolment if the employee is aged between 22 and state retirement age and earns over £10,000 a year. Contributions are paid by the business and also come out of the employee’s earnings.
• Ensure the place of work is safe and that extends to arrangements for working from home, to ensure that you comply with health and safety legislation.
• Check your arrangements for data processing so that you meet your obligations under data protection law when collecting, storing and processing information about your employee. Businesses are expected to explain to their staff how they handle such information, usually in the form of a privacy statement.
• Carry out the necessary pre-employment checks. These will vary according to the role but include checking that the employee has the right to work in the UK or your business risks being fined.

Key legal documents

Your contracts of employment need to be personal for your business and should be clear. These are the backbone of the employment relationship. The contract needs to be provided by the first day of employment .

Consider what policies to put in place. We can discuss with you what policies would be appropriate for your business and prepare these for you. These make expectations clear to employees. It is a legal requirement to set down in writing the rules for disciplining and raising grievances. Complying with appropriately drafted procedures will reduce the risk of increased damages if the employee brings certain tribunal claims.

Keep your contracts and policies under review, as your business will continue to evolve and you will need to stay up to date with changes in employment law so that you do not fall foul of your legal obligations.

How we can help

We have helped many businesses get started as employers. We will carefully consider your requirements and ensure that you are starting out as an employer from the best position possible, in terms of contracts, and policies and procedures. We can also advise you on engaging the individual as a self-employed person or employee. This should help minimise the risk of claims and lay the foundations for good working relations with your new staff.

For further information, please contact Jessica Gowar in the employment team on York 01904 716000, Wetherby 01937 583210 or Malton 01653 692247 or email jessica.gowar@warekay.co.uk