Building a Team: Employees and Contractors

Growing from a solo founder to a team is one of the biggest leaps a small business makes. In the UK, it also brings a substantial set of legal responsibilities - from payroll and pensions to right-to-work checks and employment contracts.

Before you make your first hire, you need to register as an employer with HMRCso you can operate PAYE (Pay As You Earn) and report employee earnings through Real Time Information (RTI). You will also need employers' liability insurance - it is a legal requirement under the Employers' Liability (Compulsory Insurance) Act 1969, and you can be fined up to 2,500 GBP for every day you employ someone without it.

You must carry out a right-to-work (RTW) check on every new hire before they start work. For British and Irish citizens with valid passports, you can either carry out a manual document check or use an Identity Service Provider for a digital check. For individuals who prove status through a share code - including people using the online service with a biometric residence permit, biometric residence card, or frontier worker permit - you must use the Home Office online service. Getting this wrong is not just an administrative slip - employing someone who does not have the right to work in the UK can result in a civil penalty of up to 60,000 GBP per illegal worker.

The first strategic question to answer is whether you actually need an employee, or whether a contractor or worker arrangement is more appropriate for what you need done.

Unlike many other countries that draw a simple line between employee and contractor, UK employment law recognises three categories of worker status: employee, worker, and self-employed. The distinction matters because each category carries a different bundle of rights and obligations.

The category someone falls into is determined by the reality of the working relationship, not by what you call the arrangement in a contract. Courts and tribunals look at factors such as the degree of control, whether there is mutuality of obligation, and whether the individual can send a substitute.

UK employment law provides a baseline of statutory rights that you cannot contract out of. The main framework is the Employment Rights Act 1996, supplemented by legislation on equality, health and safety, data protection, and working time.

Historically, some rights only kicked in after a qualifying period. However, the Employment Rights Bill (introduced in October 2024, with key provisions expected to take effect from 2026) significantly expands day-one rights. Under the proposed changes:

• Unfair dismissal protection becomes a day-one right, though employers will still be able to operate a statutory probationary period (expected to be up to nine months) during which a lighter-touch fair process applies
• Statutory sick pay will be payable from day one of absence (removing the current three waiting days) and the lower earnings limit will be removed
• Paternity and parental leave become day-one entitlements
• Flexible working is already a day-one right (since April 2024), and the Bill strengthens the duty on employers to reasonably accommodate requests
• Zero-hours contracts will be reformed, with workers given the right to request a guaranteed-hours contract reflecting their regular working pattern

Every employee is entitled to a written statement of employment particularson or before their first day of work. This must include their job title, pay, hours, holiday entitlement, notice period, and other key terms. Failing to provide one can result in a tribunal awarding the employee between two and four weeks' pay in compensation.

You must pay at least the National Minimum Wage (NMW) or National Living Wage (NLW) to all workers and employees. From April 2025, the NLW rate for workers aged 21 and over is 12.21 GBP per hour. The rates by age band are:

• 21 and over (NLW): 12.21 GBP per hour
• 18 to 20: 10.00 GBP per hour
• Under 18: 7.55 GBP per hour
• Apprentice rate: 7.55 GBP per hour (for apprentices under 19 or in their first year)

These rates are reviewed annually by the Low Pay Commission. HMRC actively enforces NMW compliance and can issue penalties of up to 200% of the underpayment (capped at 20,000 GBP per worker). Employers who fail to pay the minimum wage can also be publicly named. Make sure you account for all working time - including mandatory training, time spent opening up or closing down, and travel between assignments - when calculating whether you are meeting the minimum.

While the written statement of particulars is the legal minimum, a well-drafted employment contract goes further and protects both you and your employee. Key elements to include:

• Job title and duties: define the role clearly, but include reasonable flexibility so duties can evolve
• Salary and benefits: state gross salary, payment frequency, pension details, and any discretionary benefits
• Working hours and location: set out normal hours, any overtime expectations, and whether the role is office-based, remote, or hybrid
• Holiday entitlement: the statutory minimum is 5.6 weeks (28 days for full-time), but many employers offer more
• Probationary period: typically three to six months, with shorter notice during probation
• Notice periods: must meet the statutory minimum but can be longer by agreement
• Restrictive covenants: non-compete, non-solicit, and non-dealing clauses must be reasonable in scope, duration, and geographic area to be enforceable. The Employment Rights Bill proposes a statutory cap of 3 months on non-compete clauses
• Garden leave: a clause allowing you to require the employee to stay at home during their notice period while still being paid - useful for protecting sensitive business information
• IP assignment: confirm that IP created during employment belongs to the company
• Confidentiality: obligations regarding business information, both during and after employment

If you engage self-employed contractors, a written contractor agreement (sometimes called a consultancy agreement or services agreement) is essential. It protects both parties and is also evidence of the nature of the relationship if HMRC or a tribunal ever queries the arrangement.

Key clauses for a contractor agreement include:

• Scope of work and deliverables: define the project, milestones, and acceptance criteria
• Payment terms: fixed fee, day rate, or milestone payments - plus invoicing requirements and payment timeline
• Substitution clause: a genuine right to send a substitute is a strong indicator of self-employment. If the contractor must personally perform the work, this points toward employment
• Control: the contract should make clear that the contractor controls how and when they work, and is not subject to the day-to-day direction of your business
• Mutuality of obligation: avoid committing to provide ongoing work or requiring the contractor to accept it
• IP assignment: unlike employees, contractors retain IP in their work by default - include an express assignment clause
• Insurance and liability: require the contractor to hold their own professional indemnity and public liability insurance
• Termination: set out how either party can end the engagement and what happens to work in progress

Review each contractor engagement against the IR35 framework. If the contract does not reflect the reality of how the work is performed, neither the contract nor an IR35 status determination will protect you.

Under the Pensions Act 2008, every UK employer - including businesses with just one employee - must automatically enrol eligible workers into a qualifying workplace pension scheme. An eligible worker is someone who is aged between 22 and State Pension age and earns more than 10,000 GBP per year.

The minimum total contribution is 8% of qualifying earnings, split as:

• Employer contribution: at least 3%
• Employee contribution: at least 5% (including tax relief)

“Qualifying earnings” are earnings between a lower limit (currently 6,240 GBP) and an upper limit (currently 50,270 GBP) per year. Employers can choose to calculate contributions on total earnings instead, provided the minimums are still met.

You must choose a pension provider and set up the scheme before your duties start (typically the day your first eligible worker begins employment). The Pensions Regulator can impose escalating fines for non-compliance - starting at 400 GBP per day for small employers.

Workers can opt out of auto-enrolment, but you must re-enrol them roughly every three years. You are prohibited from encouraging or incentivising workers to opt out.

Beyond the employment contract, there are several policies and obligations you should have in place from day one.

Right-to-Work Checks

As mentioned above, you must verify every employee's right to work in the UK before their first day of employment. Carry out checks consistently for all candidates - applying checks selectively can expose you to discrimination claims under the Equality Act 2010.

GDPR and Employee Data

As an employer, you collect and process significant amounts of personal data - names, addresses, bank details, health information, performance records, and more. You must comply with the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act 2018. In practice, this means:

• Having a lawful basis for processing employee data (usually “performance of a contract” or “legal obligation”)
• Providing employees with a privacy notice explaining what data you collect and why
• Keeping data secure and only retaining it for as long as necessary
• Being transparent about any monitoring of work devices, email, or internet usage

Health and Safety

Under the Health and Safety at Work etc. Act 1974, you have a duty to ensure the health, safety, and welfare of your employees so far as is reasonably practicable. If you employ five or more people, you must have a written health and safety policy. All employers must carry out risk assessments, provide adequate training, and maintain safe premises and equipment.

For businesses with employees working from home or in a hybrid arrangement, your health and safety obligations extend to the home working environment - you should carry out a workstation assessment and ensure the setup is suitable.