Do Startups Need Employment Contracts?

Employment contracts are important to all businesses but they are often overlooked by startups that are focused on trying to get off the ground. Employment contracts should be considered one of the fundamental building blocks when setting up a business.

Startup companies can experience bouts of rapid expansion, particularly following investment, so having roles set out formally early on is a good way to avoid issues in an area of law that is highly regulated. In addition, the clarity brought from setting out expectations and obligations at the start means potential disputes between employer and employee can be minimised.

What should be in Employment Contracts?

An employment contract’s basic features include the rights, responsibilities, duties and employment conditions for both the employer and employee. Although these may be classified as the terms of the contract, it is important to acknowledge that an employment contract does not have to be written down to exist. Also, employees gain a host of statutory rights under various pieces of employment legislation such as the Employment Rights Act 1996, which do not need to be explicitly referred to.

Employment contracts may arise orally and may be accepted as soon as the employee communicates their acceptance to the employer’s offer. This can be implied if an employee starts work and is remunerated for that work by the employer. Despite this, it is advisable to write the contract terms down to avoid any disputes arising out of contractual ambiguity in the future.

Why this Matters for Startups in Particular

Startups by their nature can emerge from informal arrangements between different individuals or through incorporated entities without specific roles being set out in employment contracts. Startups should therefore be particularly wary of oral arrangements unexpectedly turning out to be legal contracts of employment.

In such circumstances, the employer might be found to be bound by various statutory and implied terms it might not have actually envisaged. Indeed, many startup employees begin work only to find themselves taking on a variety of responsibilities not originally agreed to. Creating exposure to such legal uncertainty is unnecessary as these developments are natural in that type of business environment and can be easily managed through an employment contract. 

Legal Obligations to Employees with or without Employment Contracts

Even if an employment contract is not put in place, all employers must provide their employees with a written statement of employment particulars within two months of the employee commencing their employment (if the employment period lasts at least one month). The statement must inform the employee of the main conditions of their employment as well as providing information about the length of employment, notice periods, pensions, and the grievance procedure.

These written statements of terms should also include the terms making up the core or nature of the job. Statements should make clear the name of both employer and employee, the dates of employment, where the employment will take place, remuneration and working hours, holiday period details, and both the job description and job title.

Absence of Employment Contracts

When no employment contract is signed, an employer will have difficulty enforcing such matters as:

• restrictive covenants – preventing the employee from moving to a competitor immediately after the contract of employment ends or the employee designing products or services during the term of the employment contract outside work hours; and
• policies and procedures – there will be no clear grounds to tie the employee to the companies disciplinary and grievance procedure. This has the effect of making it difficult to sanction conduct contrary to company policies, as such IT systems usage policies and social media policies.
• Enhancing intellectual property protection, by inserting notice provisions in the event that the employee intends to moonlight with a closely related business.

Our London solicitors prepare and advise on employment contracts and provisions which may be used to enhance protection to properly manage employment relationships and safeguard business assets, including restrictive covenants.