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The Pitfalls of Hiring for Small Business.

Date: 02/12/2015 | Employment & HR, Blogs

As a solicitor specialising in employment law, I advise businesses of all sizes from well-established businesses experienced in employee relations to new owner-managed businesses taking their first steps into their chosen field.

My experience has shown that different types of businesses face specific types of problems. This is absolutely true of start-up businesses. For example, how should a start-up business deal with an unexpected employment tribunal claim, unforeseen maternity obligations or a former employee soliciting their valuable client base?

With this in mind, I thought it would be useful to look at two important employment issues that I consider owners of any new start-up business should have in the forefront of their mind: Employment Status and Protection of Assets.

Employment Status.
In short, employment status is used here to describe the nature of the relationship between an individual (someone working for or with your business), and the business that engages that individual (you).

The main types of employment status are (i) employee, (ii) worker and (iii) self-employed consultant.

The prevailing legislation defines an employee as: someone who works under an employment contract. I agree that this definition might not be particularly helpful in understanding what makes an employee an employee. For more on this point continue to read on!

However what is important is that an employee has a greater ‘basket’ of employment rights when compared with workers and self-employed consultants. The rights which apply exclusively to employees include statutory sick pay, statutory maternity leave/pay and protection against unfair dismissal, amongst others.

A worker is an individual who works under either a contract of employment or under a contract where that individual undertakes to do or perform personally, any work or services for another party where that other party is not a client or customer of the individual. Again, not a particularly helpful definition!

A worker does not have as many rights as an employee. However, the core rights to which workers are entitled to include the right to be paid the national minimum wage, the right to a statutory minimum level of paid holiday and the right to a statutory minimum length of rest breaks amongst others. These rights are also enjoyed by employees.

Self-Employed Consultant. 
There is no legal definition of a self-employed consultant. Generally speaking, a self-employed consultant is an independent contractor who is engaged to provide specific expertise for a particular project. Consultancy is a valuable commercial tool for any business, particularly start-up businesses. It allows businesses to access a particular skill or expertise that is not currently present within their own business, without the need to spend time recruiting or training employees or workers. Consultancy is a more commercial and flexible relationship than employment, which makes it ideal where a business has a limited need for the skills or expertise that a self-employed consultant provides.

As consultants are genuinely self-employed they are neither employees nor workers. Consequently, the employment rights of a self-employed consultant are limited. However, a self-employed consultant is entitled to protection for their health and safety and in some cases protection against discrimination.

So why does employment status matter? 
It matters because an individual’s employment status will determine their rights and perhaps more importantly the employer’s responsibilities in relation to that individual. Start-up businesses who take on new recruits will often do so without giving much thought to the status of that relationship. Often the primary concern of a business (and understandably so) will be the bringing in of additional resource to deal with an expanding workload.

For example, a business could take on an individual on what they regard is a self-employed basis only to find that the individual is able to argue that they are in fact an employee. And as such, have obligations which the business may not have envisaged, for example, obligations relating to maternity leave. This can be an unwelcome surprise, particularly when a business has not budgeted for things such as statutory sick pay, holiday pay and more. And in more extreme cases a business could be faced with an unforeseen and costly employment tribunal claim!

Another point worth highlighting is that an employer is vicariously liable for acts done by an employee in the course of their employment. In short, the business is responsible for the actions of its employees.

An employer is vicariously liable for acts done by an employee in the course of their employment. In short, the business is responsible for the actions of its employees.

In most cases, vicarious liability is unlikely to extend to self-employed individuals. Furthermore, an employer is required to take out employer’s liability insurance to cover the risk of employees injuring themselves at work. Self-employed individuals may not, in every case, need to be covered by this insurance. So in short, employment status matters.

What type of employment relationship is right for you? 
It is important for any new start-up business to think carefully about the type of employment relationship that they want to engage in and then document this accordingly. For example, if the business needs to take on someone with specialist skills to complete a project of short duration then it is probably best to go for the option of a self-employed consultant. Conversely, if the business is looking to take on someone on a long term basis then taking on an employee is more likely to be appropriate. There will, of course, be a number of things to think about before making this decision.

In every case, it is essential that there is documentation in place which clearly defines the nature of the relationship and the rights and responsibilities of both parties. This could be in the form of a contract of employment or a self-employed consultancy agreement. Whilst the paperwork will not by itself determine the true nature of the relationship, it will go a long way in demonstrating the employment arrangement intended by the parties.

The reality of the relationship matters too! 
Importantly, just because someone is described as a self-employed consultant, does not mean that they are a self-employed consultant. This is the same where employees and workers are concerned. The label given to the relationship, whilst relevant, will not be decisive. The courts will always look at the true nature of the relationship. If the relationship has changed, perhaps over time, then it is possible that the courts will find that someone who started work as a self-employed consultant has become an employee or a worker.

Importantly, just because someone is described as a self-employed consultant, does not mean that they are a self-employed consultant.

As such it is not only important to document the status of the employment relationship but to follow this in practice too.

So how do you distinguish one kind of employment relationship from another? 
I do not intend to cover the legal distinctions between each type of employment relationship in detail. However, I would say that drawing distinctions can be a tricky exercise as the lines between each, often become blurred. In my view, it is best and usually essential to take advice on this issue. The courts have developed a number of tests to determine what an employee is and have identified the following as key indicators of an employment relationship:

  • An agreement exists to provide the individual’s own work or skill in the performance of service for the employer (personal service) in return for a wage or remuneration (mutuality of obligation).
  • There is control of the individual by the employer (control).

When it comes to the definition of a worker, the courts will effectively lower the pass mark, so that those who fail to reach the high mark necessary to qualify as employees may still qualify as workers. Furthermore where an individual is a self-employed consultant, but there are some factors which point towards employment, it may be possible for them to qualify as a worker, even though they do not reach the higher pass mark to qualify as an employee.

In many situations, the employment status of an individual will be clear. Unfortunately, this is not always the case. The matter of employment status may appear complex and the truth is, it can be! What matters most is that a new business gives serious consideration to the type of relationship it enters into with those that will carry out work on its behalf, and documents the relationship accordingly.

Protection of Assets. 
The second issue that a start-up business needs to consider is the protection of its assets.

The greatest asset of any business is more often than not its information and knowledge – whether it is a list of key customers, its specialist IT systems, key employees or trade secrets. Given the importance of these key assets, it is unsurprising that many employers go to great lengths to protect them. However in my experience, start-up businesses can be so focused on growing the business that they frequently overlook the protection of these assets – usually until the information is taken or misused, for example by a former employee or consultant.

Start-up businesses can be so focused on growing the business that they frequently overlook the protection of these assets.

I know that it is extremely difficult to keep the key assets of any business completely confidential. Those that carry out work for a business will normally require access to confidential information in order to effectively carry out their work, even those out with the inner sanctum of the business! That said, there are a number of steps that businesses can take to protect their key assets and in so doing prevent employees or other individuals engaged by the business from misusing them.

So what steps can be taken? 
I would recommend that businesses ensure that those that carry out work on their behalf are signed up to carefully drafted confidentiality provisions. The general law offers little in the way of protection when it comes to the confidentiality obligations of those that have left the business. As such it is crucial that businesses incorporate confidentially protections within their contracts or put in place separate non-disclosure agreements. Linked to confidentiality is the issue of intellectual property rights. Intellectual property can be extremely valuable to a business and so it pays to protect it.

It is also crucial to think carefully about restricting the actions of those that are engaged by the business after they have left. Employees, workers, and consultants may have acquired knowledge of technology, key client data and strategic information about the employer’s business and may try to use this information for the benefit of their new employer or their own business.

The need for effective restrictions after termination is essential for those businesses that have something worth protecting, not least start-up businesses.

Again, restrictions can be built into the employer’s contracts but care will need to be taken in the drafting of such restrictions to ensure that they are not unenforceable!

You could be forgiven for thinking that addressing these issues would be an expensive exercise. However, this will not normally be the case. Importantly, and perhaps surprisingly, dealing with these issues can be inexpensive and this is certainly true when compared with the costs of failing to deal with these issues at all.

The first step for a start-up business is to think carefully about the most appropriate employment relationship required for the work that is to be carried out.

The second step is to properly document the nature of the relationship in writing, usually in a contract. The contract, and where appropriate the non-disclosure agreement, should cover:

  • the status of the employment relationship between parties;
  • confidentiality provisions which are clearly drafted;
  • the protection of intellectual property rights; and
  • post termination restrictions which focus on protecting the key assets of the business.

Such a contract can usually be prepared for between £300 and £500 and will usually be regarded as money well spent. The third (and equally important) step is to act in a manner consistent with the employment relationship that has been documented. If a business fails to do this, it may be faced with unexpected obligations and unwelcome costs that it did not envisage.

The third (and equally important) step is to act in a manner consistent with the employment relationship that has been documented.

I understand that for any start-up business it’s the growth and development of that business which matters most. However, it is important that careful thought is given by the business to the relationships it has with its people and the employment matters that flow from this. In my view, it may just be the best investment a start-up business will ever make!

This blog was first published on 1st December 2015 on the Katana Code website.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought The before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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