Employment Law for Tech Start-ups: Scaling Teams Across Europe
In this column, we asked Travers Smith to outline the key legal issues from an employment law perspective that software start-ups should be thinking about.
The result is a comprehensive toolkit focusing on hiring, managing, and dismissing employees. This column focuses on the UK, with future countries to follow.
Do I need a UK entity to hire people in the UK?
No, you don’t need a legal entity in the UK to employ people. It is possible to hire staff from a legal entity incorporated in other jurisdictions.
Do I need to register as an employer?
Yes, all new employers must register with HM Revenue and Custom. It can take up to four weeks to complete this process.
What do I do about payroll?
Deductions from salary will need to be made for income tax and National Insurance contributions, and so you will need to run payroll. However, payroll can be operated from a third party on an employer’s behalf.
Do I need any insurances?
Yes, all employers must have employer’s liability insurance in place from the moment they become an employer. This is important as it is a criminal offence not to have this in place.
Are there different types of employees or workers?
Yes, in the UK, we have employees, workers and self-employed. An employee is someone who has a contract of employment and they have the full range of employment rights, including the right to claim unfair dismissal, and rights to minimum wage, holiday, pension, and protection from discrimination (more on this later).
At the other end of the spectrum are self-employed individuals, such as contractors or consultants, and they only benefit from protection from discrimination but have no other employment rights.
Workers are a sort of hybrid category. A worker is a person who does not have a contract of employment, but also is not self-employed, i.e. when they carry out an assignment they are not supplying their services to clients of their own business. For example, someone on a zero hours or casual worker contract will often be a worker rather than an employee. Workers benefit from certain statutory protections, including minimum wage, holiday and pension, but the full range that employee’s benefit from, for example, they can’t claim unfair dismissal. Following the recent UK general election, the new government is proposing that all workers will enjoy the same rights as employees. This would mean that there would be two types of worker status – workers and self-employed. Workers would benefit from the full range of employment rights, and self-employed individuals would be protected by discrimination laws, as they are now. It is also proposed there would be some additional new rights for self-employed individuals as well, such as the right to a written contract. These proposals will be subject to consultation in due course.
Can I carry out background checks on a potential employee?
Yes, background checks are quite common in many sectors, and they are a requirement for some financial services regulated roles. Checks typically include references, credit checks and criminal record checks, and there are certain data protection requirements, especially around criminal record checks, which employers need tocomply with.
In addition, all employers are required to carry out specific “right to work checks” to make sure that anyone they are employing has the right to work in the UK. These checks need to be done for all new recruits, regardless of nationality, to avoid the risk of discrimination. This is important because employing someone illegally is a criminal offence, with a fine of up to £60,000 per illegal worker. Employers have a defence if they carry out the correct right to work checks, and document these properly, before the employee starts work.
Will I be able to get a reference from the employee’s former employer?
Other than in the financial services sector, there is no general requirement on an employer to provide a reference for a former employee, but in practice most employers do. Usually, they will only confirm the employee’s job title and dates of employment. This is because if the employer does provide a reference it has a duty to make sure it is accurate and not misleading.
Do I need to provide a written contract? If so, what should it contain?
Yes, employers are required to give each worker certain written particulars of employment on day one, including details of their job responsibilities, notice, pay, hours and holiday. These details don’t have to be set out in a formal contract but in practice they almost always are, and that contract will usually include other protections for the employer such as confidentiality and for more senior employees, post termination restrictions such as non- compete and non-poaching provisions.
Are non-competes enforceable?
Non-compete restrictions are enforceable if they are no wider than necessary to protect the employer’s interests. They must be no wider than necessary in terms of the scope of the restriction (such as geographical area andthe areas of the business which are covered) and also the period of the restriction. The longest that has been permitted in case law is twelve months, but in many cases only three or six months would justifiable. There is
no requirement to pay the employee during the period of the non-compete restriction. Because non-compete restrictions can be difficult to enforce, employers will often rely on other post-termination restrictions as well, such as non-poaching of clients and teams.
What pay and benefits do I need to provide?
All workers are entitled to the minimum wage. This varies by age, but the current rate for employees aged 21 and over is £11.44 per hour. There are separate lower rates for younger workers and apprentices. The rate increases every year in April. The new Labour government intends to increase the rate of the national minimum wage to better reflect the cost of living, which may mean a greater increase in April 2025 than the usual annual uprating. In due course the higher rate of the national minimum wage will be extended to workers aged 18 and over.
Employers are required to enrol all workers who earn at least £10,000 a year, into a pension scheme, meeting certain requirements. The minimum contribution for an employer is 3%, and the worker must pay in 5%. Workers can choose to opt out of the pension if they want, but the employer can’t encourage or incentivise them to opt out. This is referred to as auto enrolment and it was brought in in 2012, to give all workers the opportunity to save into a pension and has been quite successful with over 85% of workers now enrolled in a pension.
Aside from pension and statutory holiday, there are no specific requirements to provide benefits but in practice it is common for employers to provide certain insured benefits, for example, life insurance and private medical insurance.
How much holiday are workers entitled to take?
The minimum statutory holiday under the Working Time Regulations is 5.6 weeks per year, which works out at 28 days for someone who works a 5-day week. In practice many employers offer more holiday, particularly for senior employees, typically 5 weeks plus public holidays. There are 8 public holidays in the England and Wales (more in Scotland and Northern Ireland), so this amounts to 33 days for someone who works a 5-day week.
And are there any rules around hours of work and overtime?
There is a 48-hour limit on average weekly working time, and employers also have to provide certain minimum rest breaks and daily and weekly rest periods. There are certain exceptions to the 48-hour weekly limit, including for managing executives who can organise their own working time. This is often used for example for company directors and other senior managers. Also, it is possible for employees to opt out of the 48 hour limit, and some employers require all employees to do this, although they must be allowed to opt back in if they want to.
There are no specific rules governing overtime. This is a matter for agreement between the employer and employee and will often be covered by the employment contract.
Do workers have a right to work flexibly?
There is no right to work flexibly, but employees have the right to request flexible working, for example part-time hours or hybrid working. If an employer receives a request it needs to consult the employee about it and can only reject the request for certain specific reasons.
The new Labour government has pledged to make flexible working the default position for all roles, unless the employer can justify otherwise. It is unclear how this will work in practice, but it is likely to be more difficult for employers to justify refusing a request to work flexibly.
Do workers have any right to take time off for family friendly reasons?
Yes, there are specific statutory requirements in the event that someone qualifies for maternity leave, paternity leave, adoption leave or shared parental leave, which are all types of leave taken during the child’s first year. For example, mothers are able to take up to one year of maternity leave, and may be eligible to receive statutory maternity pay for up to 39 weeks. There is also a right to unpaid parental leave which allows a parent to take up to 18 weeks’ leave per child, up to the child’s eighteenth birthday.
What happens if my employee is sick?
Most employees (and some workers) will be eligible to receive statutory sick pay whilst they are off sick. It is paid at a flat rate, currently £116.75 (increases each April), and is payable for up to 28 weeks.
What are the classes of protection under discrimination laws?
As well as employees, workers and self-employed individuals, discrimination laws also protect agency workers and partners, and job applicants as well. Discrimination laws cover discrimination and also harassment and victimisation on grounds of sex, race, disability, age, sexual orientation, religion and belief, and also pregnancy and maternity, gender reassignment, and marital status.
Compensation for discrimination and harassment claims is unlimited and is based on the individual’s financial losses, so the amount will depend on how much they earn and how long they will be out of work. The individual can also claim an amount for injury to feelings, which can be anywhere between about £1000 and £56,000 but typically awards will be in the region of £10,000 to £20,000.
From this October there is going to be a new positive duty on employers to take reasonable steps to prevent sexual harassment in the workplace. And if they don’t then they can face an uplift in sexual harassment compensation of up to 25%, if an employee brings a successful claim.
In order to reduce the risks of a successful discrimination or harassment claim, employers should ensure they have an appropriate diversity policy and that all staff receive diversity training.
Are there any rules around whistleblowing?
Yes, any employee who is dismissed for speaking up, or otherwise suffers as detriment for speaking up, can bring a claim for whistleblowing. The potential compensation if they are successful in that claim is unlimited (but is based on their financial losses). There is no minimum service requirement, so anyone can bring a whistleblowing claim regardless of how long they have been employed.
There is no requirement for employers to have a whistleblowing policy and process, except for certain large financial services firms. In practice, most employers do have a whistleblowing process in place, to encourage employees to raise any concerns internally.
Do I need to give notice to terminate the worker’s employment?
Yes, if an employer wishes to terminate an employee’s employment, there are minimum notice requirements that the employer must give. The notice period increases as the employee’s length of service increases, broadly being one week’s notice per complete year of service subject to a minimum of one week and a maximum of 12 weeks. The minimum notice period that an employee has to provide is one week. However, it is common for contracts to provide for a longer notice period.
Do I have to allow the worker to work their notice?
This will depend on what the contract says, but it is common for contracts to contain a right for the employer to put the worker on garden leave (i.e. where they spend time at home, “in the garden”, for their notice period) or to pay in lieu of their notice period.
Do I need to follow a process before dismissing an employee?
If an employee has at least two years’ service they can claim unfair dismissal, and to defend this the employer needs to show that they had a fair reason for dismissal, for example misconduct or poor performance or redundancy, and that they followed a fair procedure. For example, a redundancy process will require consultation with the employee and consideration of suitable alternative roles. A conduct or performance dismissal will usually involve meetings with the employee, with warnings and sufficient opportunity to improve.
Compensation for unfair dismissal is based on financial loss but is capped at the lower of one year’s salary and £115,115. There is also an additional basic award based on age and length of service, which is a maximum of £21,000.
It should be noted that even if an employee does not have two years’ service, dismissal without any process could involve legal risk, as the employee may claim the dismissal was for some other reason like discrimination or whistleblowing, for which there is no service requirement to bring a claim.
The new Labour government is planning to remove the two year service requirement for unfair dismissal claims, which will mean that employers would need to ensure they have a fair reason and fair process for all dismissals, regardless of how long the individual has been employed.
Do I need to pay any severance on termination of employment?
Other than in circumstances of redundancy, there is no requirement to pay any severance. However, the worker may be entitled to a payment in respect of their notice, and if you don’t have a fair reason for dismissing and/or having followed a fair process, then you may need to offer some additional compensation to prevent a claim being brought.
Is it possible to settle employment claims?
Employment claims can be settled under a settlement agreement which has to meet certain requirements, including the employee getting independent legal advice on the agreement, to which the employer would usually pay a contribution.
By Ailie Murray
20 August 2024
Partner, Employment & Business Immigration
+44 (0)20 7295 3670
Commentaires