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As early-stage businesses grow, employment-related risks often begin to surface. With each new hire, the business becomes subject to an increasingly complex web of employment law obligations.
This article outlines the key areas of employment law that founders should consider as they transition from a start-up to an established employer.
1. Employment Contracts
At the earliest stage, it is common for handshake agreements or generic templates to be relied on. While this may suffice in the short term, as the workforce grows, the absence of clear, legally compliant employment contracts can pose a significant risk.
All employees and workers are entitled to receive a written statement of particulars before or on their first day of employment. These documents should clearly set out key terms of employment, including pay, hours of work, place of work, notice periods, holiday entitlement and other benefits.
For scaling businesses, it is essential that contracts include robust intellectual property (IP) clauses, particularly where employees are involved in product design or software development. Without express IP assignments, there is a risk that valuable assets created by employees may not legally belong to the company.
Restrictive covenants are also very important for protecting business interests as senior staff are recruited. Non-compete, non-solicitation and confidentiality clauses must be carefully drafted to be enforceable.
2. Staff Handbooks and Workplace Policies
As a business scales, workplace policies become increasingly necessary. While these documents are not always legally required, they provide clarity, support consistent decision-making, and can be critical in defending claims.
Start-ups should consider implementing a Staff Handbook, containing core policies such as:
- Disciplinary and grievance procedures (a legal requirement for all employers under the ACAS Code of Practice);
- Health and safety (a legal requirement for all employers with 5+ employees);
- Equality, diversity and inclusion;
- Anti-harassment;
- Sickness absence reporting; and
- Flexible working policies.
Clear, accessible policies can help create a positive workplace culture and reduce confusion. As the business grows, regular policy reviews are advisable to ensure documentation keeps pace with legal developments and employee expectations.
3. Worker Status and Contractor Risk
Start-ups often rely on independent contractors, freelancers or consultants. This normally offers flexibility and lower upfront costs but also comes with legal uncertainty.
It is important for founders to have a grasp of the distinction between employee, worker and self-employed contractors. Courts and tribunals will look beyond the contract to assess the nature of the relationship. Factors they will consider will include:
- The level of control the company has over the individual;
- Whether there is a mutual obligation to offer and accept work; and
- Whether the individual can send a substitute.
Misclassifying individuals can result in unexpected claims for holiday pay, minimum wage, unfair dismissal and pension contributions.
Businesses should also be alert to the tax implications, particularly under the IR35 rules, which place an obligation on companies to assess the tax status of contractors working through personal service companies.
As the workforce formalises, companies may want to consider transitioning key contractors to employment contracts where appropriate and taking advice on status to minimise risk.
4. Recruitment, Onboarding and Data Compliance
Scaling businesses often need to hire quickly, but there are risks in doing so. It is important early-stage employers comply with equality legislation, right to work checks, and data protection requirements when recruiting. Key points to be aware of include:
- Discrimination law applies from the date a role is advertised. Employers must ensure job descriptions, selection criteria and interview processes do not disadvantage candidates on protected grounds (e.g. age, race, disability).
- Right to work checks must be correctly carried out on all employees before they start. Failure to comply can result in a civil penalty fine of up to £60,000 for each illegal worker and, in the worst cases, criminal sanctions.
- UK GDPR imposes obligations on how data is collected, stored and shared. Employers should provide a privacy notice and ensure appropriate retention and deletion policies are in place.
Investing in appropriate systems and training can help mitigate the risk of non-compliance.
5. Pay, Working Time, and Statutory Entitlements
Start-ups often attract talent with equity, but this should not come at the expense of legal entitlements. All employees and workers in the UK are entitled to minimum standards around pay and working time. Issues to consider include:
- National Minimum Wage compliance, particularly for interns and junior staff. The National Living Wage for workers aged 21 and over increased to £12.21 per hour on 1 April 2025. The National Minimum Wage for 18–20-year-olds is now £10.00 per hour, and for those under 18 and apprentices, it is £7.55 per hour.
- Working Time Regulations, which govern hours worked, rest breaks, and paid annual leave.
- Statutory leave and pay, such as maternity, paternity, neonatal care, and shared parental leave, must be provided where employees meet the eligibility criteria.
The takeaway
Employment law is often sidelined during the early growth stages of a business and failing to address it proactively can lead to significant disruption later on. Whether it is ensuring your contracts are fit for purpose, managing contractors properly, or creating inclusive and compliant hiring practices, putting the right frameworks in place at an early stage offers long-term benefits.
A legally sound employment infrastructure supports not just compliance but culture, retention, and scalability. For high-growth businesses looking to attract investment, credibility with employees and investors alike will depend in part on the strength of your people practices.
If your business is entering a new phase of growth and you would like advice on employment law risks and opportunities, the Michelmores Employment team would be happy to assist.
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