Hiring 101 for start-ups: key legal considerations
With any start-up, you’ll likely want to build a diverse and skilled team to bring your vision to life and to complement your own skill set as soon as you can. This article explores some of the key points you’ll need think about as a first-time employer, to ensure that you’re legally compliant and that your business is protected.
1. Classification risk – employee, worker or consultant?
Whether someone is your employee is a matter of substance. You may hear this called the ‘classification risk’. In the UK, there are “employees”, “workers” and “consultants”, and the employment rights and tax treatment that attach to each varies. Establishing which category an individual falls into can be tricky and consideration should be given to various factors. For example, whether an individual is required to perform work personally, how much control you exert over them and whether they can provide a substitute in their place, will all go towards determining that individual’s employment status. Generally speaking, the less freedom an individual has over how and when they work, the more likely it is that they’ll be employees.
Investors will be keen to see that you’re managing this risk and that you’re taking it seriously, as it goes towards some fundamental matters, such as accounting for tax, enforceability of terms and ownership of work product. (Generally speaking, IP created by an employee in the course of their employment belongs to the employer, whereas the contract will determine the position for contractors.)
2. Your obligations before you hire
Before you even hire an employee, you must carry out certain actions. For example, you’ll need to ensure that the person you’re hiring has the right to work in the UK, you’ll need to consider your obligations to HMRC (including being established as an employer for payroll purposes) and you’ll need to ensure that you have minimum pension arrangements set up. It’s also important that you have employers’ liability insurance in place; it’s a criminal offence not to. Many new businesses outsource these tasks to payroll agents or accountants.
3. Employment contracts and policies
You’ll need to provide the new employee with an employment contract and ensure you have appropriate employment policies in place. These are required for compliance and “best practice” purposes, but they also help to protect the business. As such, you’ll need to consider IP, confidentiality and restrictive covenants (such as a non-compete provision). Not having these arrangements clearly documented can leave a business exposed, especially if an employee decides to leave to join a competitor; in such a case, you might have limited recourse against them if they try to damage your business. If you’re hiring a contractor, rather than an employee, you should put in place a consultancy agreement.
4. Understanding statutory employment rights
If someone is an employee, they’ll have the benefit of employment statutory rights. These are voluminous and include, for example, protections/rights in respect of dismissal, discrimination, sick pay, annual leave and family leave. Our employment team continue to monitor developments around employment rights, sign up to our employment law newsletter.
5. Additional requirements for international hires
If you’re looking at international hires, you’ll need to jump a few extra hurdles. For example, you’ll need to consider the tax, immigration and regulatory issues of operating in another country, which employment laws apply and any data protection implications (especially where personal data is being transferred to another country). You may explore employer of record arrangements, but if doing so you’ll need to check these carefully. In particular, you should consider whether the company has IP ownership and recourse against the individual where appropriate, and whether there are any issues with such arrangements from a local law perspective.
6. Incentivising your employees
In terms of incentivisation, it’s typical for start-ups to use a mixture of cash and equity-based compensation (a 10% option pool isn’t uncommon). Read more about the options available.
7. Founder arrangements
Finally, it’s always worth sense checking your founder arrangements. Are these papered, and should they be? It’s sensible to cover off that IP is owned by the company (rather than by the creator). You may also wish to have provisions in place covering what will happen if a founder calls it quits, and how to deal with confidentiality. That said, you should be conscious that investors will have their own requirements and so you’ll need to balance the possibility of replacing documents with how much time to spend on this at the outset.
Conclusion
Building your team, by hiring employees, is an exciting milestone for a start-up but it comes with legal and practical responsibilities that can’t be overlooked. From classification risk to contracts, compliance is key to protecting your business and reassuring investors.
At Forsters, our Corporate, Employment, and Immigration teams work together to provide start-ups and growing businesses with tailored advice on everything from structuring founder arrangements to managing international hires. Get in touch to find our how our expert guidance can help protect and grow your business.
This note reflects the law as at 12 December 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
