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Posted by Tom West on Dec 14th, 2018 | Running a business
Taking on an employee is a huge responsibility and, especially in smaller firms, employees have a huge impact on a business. This can either be positive or negative. Taking on an extra pair of hands can increase your productivity and help you offer more services to your clients.
Unfortunately, if things go wrong, you could end up damaging business relationships and being massively out of pocket.
The good news is that you can limit the chances of this happening with some good old-fashioned due diligence.
This article will help you decide whether or not you really need an employee at all and, if so, whether to recruit someone on a full or part-time basis. You’ll learn the basic legal requirements or best practice about being an employer, and get tips on how to find the best candidates.
There’s a lot of helpful info here, but if you don’t have the time to read this now, why not download our PDF guide and read it later?
Although every situation will be a bit different, here’s a list of pros and cons for you to consider before going on the hunt for a new employee. Note that this section focuses on permanent employees – we’ll get onto hiring contractors later.
Offloading responsibilities increases your productivity, and with someone else to share the workload, this means you can get more done (in theory).
Not everyone can be amazing at everything. Taking on an employee with skills that complement your own offers more value for money to your clients.
Working by yourself can get pretty lonely sometimes. Having someone else around also gives you a second opinion on work and someone to talk over problems with.
In a one-man-band, if you’re out of action, the whole business grinds to a halt. You can get an employee to at least keep important aspects of the business ticking over until your back to work.
Expenses for hiring employees, and all the costs associated with employing them, can be offset against your profits to reduce your tax burden. You may also be eligible for Employment Allowance – which could reduce the amount of Employer’s National Insurance contributions you’ll need to pay.
Working closely with someone often means you’ll have the chance to pick up some new skills – becoming an employer can also be a chance to learn.
You’ll need to pay your employee the National Minimum / ‘National Living Wage’ – that’s a given – but also consider that you’ll need to make regular wage payments regardless of your company’s financial health, which could cause problems. We’ve got an article about how much it costs to hire an employee that gives you all the facts you need.
Depending on your situation, you may need to hire out office space once your team grows. As an employer, you’re also responsible for providing adequate equipment to employees.
If you want to get the most out of your employee, you’ll need to invest time and money into job adverts – maybe hiring recruiters, and potentially even training courses. This will be an extra cost for every new employee who joins your business.
Being an employer brings with it a host of administrative duties, like completing payroll, which will take up your time. Make sure you factor this in, if you have an accountant like Crunch this can be done for you, easing your administrative burden.
Like it or not, when you hire an employee, you relinquish some control over your company. Despite best intentions, mistakes could be made that aren’t your fault, and you must accept this.
You have a number of legal responsibilities for your employee, such as setting up a PAYE scheme and making National Insurance contributions. Due to recently implemented auto-enrolment laws, you’ll also need to look at finding a pension provider for your business.
If you’re still not sure about hiring a permanent employee, you’ll be glad to know that there’s another option.
Hiring a contractor or freelancer can be a good middle ground if you feel you need more help, but if the commitment to a permanent employee seems too great at the moment. You can usually find them on freelancer job sites.
Here are some of the pros and cons of choosing this option.
You can hire contractors and freelancers by the hour or day, which means you’ll only pay for the work that needs doing. This also makes it easier to end the arrangement if it’s not working out.
Self-employed workers are temporary, which means they’re often available to start work in shorter time frames, if not immediately.
Contractors and freelancers are often extremely proficient in particular fields, which makes them a better choice for niche tasks, or those that require a fast turnaround.
There’s no need to set up PAYE arrangements for contractors; you don’t have to make National Insurance contributions, and you don’t need to provide a pension.
Paying for work by the hour is inherently more costly than paying set monthly salaries, making contracted workers a poor long-term solution.
If a job is taking longer than you thought it might, and costing more than you expected, there’s not really anything you can do apart from ditching the whole thing, or pushing for it to be completed on time.
With a permanent employee you might be able to occasionally get them to do odd jobs or help with other things around the business. Contracted workers have one set job, and have no obligations outside of this.
Flexibility goes both ways. In the same way that it’s easier for you to fire a contracted worker, it’s as easy for them to leave, which could leave you in lurch if the project they’re helping with isn’t finished.
IR35 is a tax law introduced to combat tax avoidance by workers supplying their services to clients via an ‘intermediary’ (such as a limited company) who would otherwise be an employee.
If IR35 applies to your contract, it means you pay the same Income Tax and National Insurance Contributions (NICs) as you would if employed directly, rather than contracted to work through your limited company. HMRC can go back up to six years and evaluate past contracts to see if the legislation should have applied.
For more information on IR35, check out our comprehensive IR35 hub for more information. From here, you can discover all of our IR35 articles, our IR35 guide and access any further support you require from expert accountants.
If you’re thinking of getting some extra help from a contractor or freelancer to deal with a big job then a little planning could help avoid problems further down the line. Working with freelancers can be a tricky business if you’ve never done it before.
The first thing to know is that a lot of the more complex employment legislation that applies to UK workers (National Minimum Wage, Working Time Regulations etc.) don’t apply to genuine freelancers. It’s vital to know exactly what their employment status is before you start signing them up, lest you neglect their workers rights.
Be clear with them – what do you need them for? How long will the work take? Will there be an ongoing requirement for the job, or is it a one-off? Will they need to work in your office or can they work remotely? Remember to be specific, honest and clear about your needs.
It’s not all about you, though – make sure you listen to the freelancer’s needs, too. They may have their own ideas that you, your business and the project in question could really benefit from.
Make sure the agreements you make are in writing. Whether you draw up an official contract, put it all in an email or write it on A4, you need to have a point of reference in case something goes awry.
Finally, make sure you communicate with them during the project. Schedule regular meetings/briefings, ask how they’re finding the work and discuss any ideas the two of you may have about improving the project. It’s important not to come across as an overbearing boss that doesn’t trust your freelancer to work independently, of course, but communication is key.
Hiring the wrong person can lead to poor performance, unnecessary training costs, wasted management time and low morale. Here are a few tips on how to get it right first time:
The first thing to do after deciding to hire an employee is to determine exactly what you want them to do. Think carefully about the tasks you need done and start writing a job advert. This should contain:
You can also include a short, search engine-friendly description – but make sure it’s free of any jargon or technical words.
Try to come up with a recognisable, commonly searched title. Think ‘Software Engineer’ over ‘Technical Evangelist’.
According to Guardian Jobs, using a town or postcode gets job adverts triple the response of those that only specify a county or region.
This doesn’t have to be included – you can just put “depending on experience” (DOE) or “negotiable” – although be aware that if you’re advertising online, job seekers are increasingly including salaries in their searches.
This part should be less search engine focussed and more attention-grabbing. You could re-title the section “An amazing opportunity” or whatever you want, and use more descriptive and flamboyant language.
This should include what experience you want, and what personal traits you expect. Use the second person when describing your ideal candidate: “you will be”, “your experience” etc. This engages the reader more, because it helps them visualise themselves in the role.
This is where you have to sell yourself. Ask why someone would want to work for you, then write it down. Stress what’s unique about the opportunity, and what makes your company special. You should also include website and social media links in this section.
The advert should prompt an action. Be very specific about what you’re expecting candidates to do, especially if you’re setting a task alongside the application. You might want to include an application form, where you can ask some more in-depth questions of the candidate. This can also be a solid base for an interview.
Note that it’s against the law for an employer to discriminate on grounds of age, race, sex, marriage, disability, sexual orientation, or religion. All stages in the recruitment process must treat everyone equally. This includes making sure that job descriptions don’t include unnecessary or marginal requirements that might exclude people based on any of the the above criteria.
Here are some great places to look for candidates.
The JobCentre provides a free nationwide recruitment service. To advertise your role for free, visit the government’s website.
If you have the spare cash, you could hire a recruitment agency to help you on your search. Be wary, however, that they usually charge a percentage of the employee’s salary as a finder’s fee.
Local authorities and chambers of commerce are a great resource for advertising your job. They often operate local jobs boards, and can help promote the role on social media.
Print advertisements cost a relatively small amount these days and, if you choose the right publications, can be very effective. Be specific. Try local newspapers or specialist magazines.
There are hundreds of job sites out there nowadays – we’ve compiled a list of some of the best ones! Think about what kind of candidate you want to attract, and choose your platform accordingly.
Advertising your position is an absolute must if you want to maximise your reach. LinkedIn is especially useful for this, as it’s designed for professionals, and has lots of handy recruitment features. You can learn more with our Social Media Marketing for Beginners guide.
While there are other methods of selection available (such as presentations, assessment centres, psychometric testing, numeracy testing etc), interviews are generally the most popular due to cost and ease of organising.
You can use the interview to properly test the candidate’s’ knowledge, and also to get a better feel for whether or not you’d enjoy working with them.
Remember, it’s not just the candidate under scrutiny. The interviewee will also form impressions of you and your business based on the interview, and if you’re not careful, you could end up putting off your dream hire.
Interviews need planning to make sure they run smoothly. Here are a few things you can do:
It’s really useful to take notes throughout the interview and to write up a short summary of your feelings just after the candidate leaves to help you justify why you have chosen (or not chosen) someone for the role. You might choose to use a shortlisting grid/tick boxes to help you decide.
Be wary, however, that candidates have the legal right to request notes made during interviews in certain circumstances. References can be used to check up on a candidate’s work history and suitability. However, you may not contact the candidate’s current employer without their permission.
Also be wary that this is all second-hand information, and more weight should be placed on what you learned first-hand during the interview.
Depending on the sensitivity of the role, you may want to consider pre-employment screenings such as financial or criminal record checks. Of course, you would need permission from the candidate before carrying these out. Make sure you have second and perhaps even third choices, in case your first choice turns you down.
Giving a courtesy call to unsuccessful applicants is just plain decency, but may also make it more likely for your second choice to say yes, if they’re needed.
Before your new employee starts working for you, preparations must be made. You have to gather information, establish a contract and make sure you’re aware of all the statutory rights given to employees.
This section will cover the legal nature of your employment relationship, going over the basics of what should be included in a contract, and what statutory rights your employee has.
Be aware, however, that this section is not intended to be a precise statement of law; nor will it cover every legal detail – we would encourage you to seek professional legal advice for putting together your first employment contract.
An employment contract is made when an employee agrees to an offer of employment in return for wages. Nothing needs to be written down for the rights to exist. Some rights begin from the moment the offer is accepted, and others when the employee starts work, or when they have worked for you for a set period.
Although verbal contracts are enforceable, it’s useful to have the agreement in writing to minimise potential disputes. The Employment Rights Act 1996 also requires employers to provide a statement of the main terms of the contract within the first two months of employment.
The following details must be included in this statement:
If you require your employee to work outside for more than one month, the statement must also include:
We’ve got an article on written statements and contracts with more detail.
The HR Kiosk – a Human Resources Consultancy for small businesses
A number of employment rights come from acts of Parliament, rather than the employment contract. These include, but are not limited to, the right:
On grounds of age, race, sex, marriage and civil partnership, disability, sexual orientation, pregnancy and maternity,gender reassignment or religion and belief. Read our article about equal opportunities and discrimination for the more details.
As long as it can be shown that they are doing work of equal value (more to follow in the next section).
Most employees can take you to an employment tribunal if they’ve worked for you for over two years. There are also a number of situations that do not require the two year’s service, including if the candidate has been discriminated against, fired for participating in trade union activities, or because of pregnancy.
Every employee is entitled to receive notification of how their pay is made up.
All pregnant women have the right to time off for antenatal care, the right to 52 weeks of maternity leave, and the right not be dismissed because of her pregnancy.
Qualifying employees are entitled to Statutory Maternity Pay for 39 weeks. This is not the same as normal basic pay, however some employers offer enhanced payments.
Fathers have the right to two weeks paid paternity leave once the baby has been born, as long as they’ve served 26 weeks and notify you by the 15th week before the baby is due.
Since 2014, mothers, fathers and same-sex partners are now able to share shared parental leave, entitling the father to an additional 26 weeks’ leave, as long as the mother has gone back to work.
The government offers some support for companies such as offering advances on statutory payments to employees.
When matched with a child for adoption, employees have the right to 26 weeks of paid leave and 26 weeks of unpaid, providing they’ve been working for you for over 26 weeks.
Statutory Adoption Pay for eligible applicants is the same as maternity pay – 39 weeks.
Mothers and fathers can both take 18 weeks unpaid leave for childcare up to the child’s 18th birthday, as long as they’ve worked for you for over a year.
A reasonable amount of unpaid leave (time off for dependents) can be taken to deal with an emergency involving a dependent.
Any employee has the right to apply for flexible working conditions if they have worked for you for 26 weeks continuously. You’re not legally obligated to accept the application but it must be taken into reasonable consideration.
Employees must be given a notice period before their employment ends. The statutory redundancy notice periods are:
If your employee has worked for you for at least two years, you have a responsibility to pay them redundancy pay. You also need to show you’ve been fair when selecting them for redundancy, and need to hold a consultation so they understand what is happening.
Usually limited to 28 weeks. You can find out the current rate here.
Including jury service, trade union activities, to study (if aged 16 or 17) and medical treatment.
Including the right to participate in union activities and not to be expelled or unjustifiably disciplined for their participation.
Provided they have two year’s service (or one year if they started before 6 April 2012).
This changes frequently. Check our rates page for the latest figures.
Workers are entitled to 5.6 weeks paid leave per year, to rest periods and in-work rest breaks and health assessments in certain circumstances. This includes bank holidays.
Statutory minimum holiday allowance is 20 days plus eight bank holidays (prorated for part time employees).
The government advise that you need to get Employers’ Liability Insurance as soon as you become an employer. This policy covers costs that arise from claims made by any of your employees while at work, up to the amount defined in your policy schedule.
Failing to get Employers’ Liability Insurance in place will get you in big trouble with the Health and Safety Executive (HSE). For each day that it’s legally required and you fail to have cover, you can be fined £2,500.
For more information, check out our article ‘What is Employers’ Liability Insurance?’
The situation is a little different if you’ve chosen to take on a freelancer or contractor instead of hiring an employee. The relationship is generally a lot more flexible, but it’s still a good idea to get everything in writing, to avoid disputes down the line.
Just like employee contracts, you should always include the the names of all parties involved and the start date of the contract. However, there’s no need to include anything about pensions, holiday leave, or sick leave. In fact, you should avoid including any of these, as their presence might cause an IR35 Investigation.
On the other hand, there are some extra terms that you should include, which wouldn’t normally feature in an employee contract.
Define precisely what services you expect to be provided and in what timeframe. Failing to do so may lead to the contractor disputing the amount of work they were expected to do, or demanding a higher rate.
State that the contractor must complete the project to fulfill the contract. This means that if for some reason the contractor does not complete the project, you will have a legal document to point to so you can deny payment.
This is the section that will help you avoid those pesky IR35 investigations. Make sure it is abundantly clear that the contractor is being hired as an independent entity, and not an employee of yours.
This can be in the form of an hourly rate, day rate, or an overall project cost. State definitively whether there will be conditions in which you will pay more and, if so, what those conditions will be. This means that the contractor won’t be able to raise their rates on a whim.
Most contractors expect to be paid upon completion; however, if you’re entering into a big project you may wish to offer a percentage up-front, for example 50% upon acceptance of the proposal, and the remainder upon delivery. Large projects can also be paid for in stages, for example 20% after each of five predetermined review dates. Speak to the contractor about how they would like to be paid and come to an agreement.
Normally, intellectual property rights will stay with the contractor until they’ve been paid for the work. To cover yourself from possible disputes, you should state in the contract that the rights will be transferred to your company upon completion of the project.
For the most part you’ll want exclusive rights to the contractor’s work, but very
occasionally a project may call for a special licensing set-up. Remember, you should always consult an expert if you wish to create a contract with specific, complex clauses. Although this could be costly, once you have a cast-iron contract in place you can use it as a blanket contract for all your contractors.
If you’re no good at coming up with the appropriate terminology, we’ve put together some contract samples for you to use and make your own.
How much you pay your new employee is a crucial decision. It can be expensive and will also potentially affect what sort of employees you attract, and how they work.
It seems obvious to say that you should only pay what you can afford, but it’s not as simple as that. Low pay will potentially bring in low amounts of talent, and can seriously affect the morale of your staff. You should also make sure you’ve thought about more than just the annual salary, for example, any extra you’ll spend in benefits, pension packages, travel etc.
If you don’t offer a decent salary, you’ll put off candidates with more experience. If you offer too high a salary, those with less experience may not have the confidence to apply. To strike a balance, find out what the ‘going rate’ for your position is by searching for similar positions at other companies.
It’s important to set a fair wage for the work you expect to be done, otherwise this can create a lot of conflict, and could ultimately result in you having to rehire too often. Pay isn’t the only thing affecting job satisfaction though, so think about what else you could offer to make your company a great place to work; for example, flexible working or equity in the company.
As we’ve already outlined, you must pay your employees the National Minimum/‘National Living Wage’. If you’re planning to hire more than one employee the law requires there to be equal pay and conditions for men and women doing work of equal value.
Keep in mind that HMRC are cracking down on employees that don’t pay minimum wage, and if you’re caught short you could face a large fine and be put on a public blacklist.
There are three ways you can offer payment to employees, either based on their time worked, based on their performance, or a combination of the two.
With this system, pay is directly related to the amount of time worked. This can either be worked out as an hourly, weekly, monthly or annual wage. The rate can vary depending on the situation to give more incentive for overtime or shift work.
The advantage of this system is its simplicity – it’s easy and cheap to administer. However, its weakness is that there’s no direct link between pay and performance, which means you might have to spend more effort on supervision.
The obvious advantage of this is that employees are encouraged to work harder to increase earnings. The downside, especially for a small firm, is that this takes more time and money to administer.
Different kinds of performance-based pay will suit different types of jobs. For example, a target-based bonus will suit sales executives, but something more quality-specific would be more suitable for copywriters or graphic designers.
Problem with quality-based performance pay is that it’s inherently subjective, and can therefore lead to disputes.
To get the best of both worlds, you may want to consider paying a basic rate according to time worked, with added incentives. This could either be directly work-related, or you could set up a share incentive scheme.
By either giving employees shares in your company, or offering them for purchase, you can encourage staff involvement with the company. This works especially well in smaller companies, as staff can really see first-hand how their contribution affects business.
Please note that with all three systems the employee must still earn at least the minimum wage.
You can either pay your staff cash-in-hand, or via bank transfer. The latter should always be preferred, as there are fewer security risks, and the process can be automated using payroll software, making payments easier to administer. Click here for a list of free payroll software. At Crunch as well as great accounting advice our online software can help with payroll for employees find out more about how we could help your company.
Although rare nowadays, it could be that your employee doesn’t have a bank account, or for some reason would prefer to be paid in cash. You should be aware that if your employment contract says payment can be made in cash, it would be an illegal breach of contract if you forced payment by bank transfer.
All employees are entitled to an individual written pay statement on or before the time they are paid. The statement must show gross pay and take-home pay, with amounts and reasons for all variable deductions.
Even if you only have one employee, keeping an up-to-date records system is an absolute must.
You can keep this information in a card system, or digitally. However, be aware that this must be in compliance with the UK Data Protection Act 1998, and GDPR rules and that users of some sensitive digital information must register with the Information Commissioner. Find out more at ico.org.uk.
You need to register as an employer with HM Revenue and Customs (HMRC). You can do this up to four weeks before you pay your new staff.
Before your employee starts work, you should make sure you have a system of rules in place and written up in a document to hand out to new starters. Your rules should cover the following:
This should state what includes minor misconduct, such as persistent lateness, which may lead to disciplinary action; and what includes gross misconduct, such as stealing, which may lead to dismissal.
This should cover the procedures in place for when an employee will be absent, including who should be notified and when, and when a doctor’s note will be required.
This should include information like whether an employee must stick to a dress code, whether they need to clock in and out, and whether their work will be subject to any standards reviews.
Are employees allowed to use company telephones and computers for personal matters? Are they allowed to be in company premises after working hours?
Who should be alerted of any change of status, including change of address, name and marital status?
You should also have a disciplinary and grievances procedure in place, setting out what happens when an employee is disciplined, and how they should go about making official complaints.
As an employer you could face a £20,000 fine if your new employee doesn’t have the correct documents prior to their first day of employment.
All employers have a legal obligation to check that all their staff have a legal right to work in the UK before they can employ them.
The member of staff must show the company an original document – as outlined in this list from the Gov.uk site.
If a member of staff ceases to be entitled to work in the UK whilst in employment the employer may have no option but to terminate their employment.
There’s no legal requirement to have a period of probation, however they can often useful for both employee and employer to work out if they have made the right decision and fit with company and role.
The final step before letting your new recruit through the door is to set out an induction day and plan any training that might need to be done.
Induction day should focus on helping your new employee get to grips with everything quickly, so they can start to become an effective member of the team. Particular allowances should be made for those returning to work after a long time off, or those starting work for the first time.
New recruits will want to know a lot about your company, so might want to consider having an information pack ready, including details on health and safety, copies of their contract, a statement of company rules and the location of building facilities etc.
First impressions count, so make sure you do everything you can to make your new employee feel at ease.
You can read details about incentivising staff with a bonus scheme here.
When you (inevitably) become so successful that you need to take on an employee yourself, you’ll find that management is pretty tricky and there’s a real risk of the hater becoming the hated, if you’re not careful.
There are a lot of things that influence how much you enjoy your job, but one of the most important is how you get on with your boss.
So how can you avoid losing the respect of your employee?
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